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How To Blow Whisky Bubbles

by Oliver Klimek on March 4, 2012

Whenever there are tough times on the financial markets, people with well-filled bank accounts are looking for supposedly safer ways to increase their wealth. So it is not really a suprise that also collectable whisky moves into the focus of financial investors.

Not long ago I have mentioned the dispute between Ian Buxton and Dominic Roskrow over this issue. Now a joint press release by a company called Whisky Highland and PR consultants Weber Shandwick tries to make whisky look attractive for investors by suggesting mouth-watering profits.

The Dalmore Wooing The Rich

One whisky producer seems to be particularly keen on having a go at the Deep Pockets: Glasgow based Whyte & Mackay with its flagship brand Dalmore. Dalmore have been issuing countless of ultra-high priced luxury bottlings since the company was taken over by Indian Vijay Mallya’s UB Group in 2007. Sirius, Oculus, Zenith, Candela, Eos, Astrum… I am sure I have forgot to name some. In his article, Ian Buxton mentions Whyte & Mackay directly addressing potential investors with growth figures similar to those in the aforementioned press release. Does it surprise anyone that Weber Shandwick is involved in PR work for Whyte & Mackay?

Mr. Mallya’s ventures aren’t doing spectacularly well. His Kingfisher Airlines has serious financial problems, and just a few days ago, the UB Group openly discussed selling a 49% stake in Whyte & Mackay to be able to pay off some of their massive $4 billion debt.

The acquisition price of £595 million was pretty much on the expensive side, as Krishna Nukala already analyzed in 2007 in an E-pistle for the Malt Maniacs. You don’t slaughter the cow you have been milking for no reason, so obviously W&M has not been generating the profit the owner had hoped for and which would have justified the payment of such a high price. Even the effort of squeezing as many pounds sterling as possible out of the casks in Dalmore’s magnificent old stock was not enough to make the investment truly worthwhile; probably also the lighthouse effect of those luxury bottlings on the sales of the more affordable Dalmore core range was not as strong as originally envisioned.

The call for investors to buy into the whisky market – of course with a big special mention for The Dalmore – has to be seen in this light.

Questionable Arguments

The Whisky Highland press release advertises whisky as an investment with an even better growth potential than gold which has delivered quite a performance in recent years.

Whisky outperforms gold as IGS market enjoys meteoric rise

The market for Investment Grade Scotch (IGS) is continuing to outperform other alternative investments and commodities, according to new figures to be released today by whisky valuation experts, Whisky Highland.

Four year figures, from 2008 to the end of 2011, will reveal that an investment in the top 10 performing whiskies would have achieved a gain of more than 400%. An investment in the top 100 would have returned a 245% gain, whilst the top 250 would have returned 180%.

In comparison, gold, which has experienced a renaissance in recent years, has risen 146% over the same period, and diamonds by just 10%. Compared to the gains accrued by some other stocks and commodities, the returns from whisky begin to look very attractive.

……

Last year, a bottle of The Dalmore 62 was sold at Changi Airport in Singapore for a world record £125,000, following on from the sale of a bottle of Dalmore 64 in Harrods for £120,000. The most expensive bottle ever sold at auction is a bottle of Macallan 64 year old ‘Cire Perdue’ which sold at auction in the US for $460,000

Some of the rare and limited bottlings from the top performing distilleries such as The Dalmore and Macallan are achieving eye-watering returns at auction, outperforming most other forms of alternative assets.”

Taking a closer look, chances may not be quite as rosy as suggested. Can six-digit prices whisky producers demand in shops for their most expensive bottlings really indicate the investment potential of such whiskies? The press release does not demonstrate any examples of such expensive bottles actually being sold by investors for significantly higher prices than they had originally paid for. And not a single word mentions the fact that the Cire Perdue – a singular bottling – was put on auction by Macallan themselves with 100% of the result going to a charity, a fact that undoubtedly has contributed to the staggering price. Some very big numbers are mentioned here that may lead investors to believe they too might be able to sell a bottle of their Investment Grade Scotch (what a term….) for such prices. But it is not mentioned that in general whisky auctions operate in a significantly lower price range.

The increase in value of the best performing whisky bottles on the collector’s auction market is compared to a single commodity – gold – here. The conclusion that ‘whisky outperforms gold’ is a blunt generalization because the advertised performance does not reflect the entire market. In the same manner you could pick the best performing stocks on the London or New York Stock Exchange, and you may well find out that they have outperformed gold too. Would anyone seriously draw the conclusion that stocks in general have outperfomed gold?

This chart from the Whisky Highland website shows that the increase of actual auction results for a portfolio of Dalmore and Macallan bottles from 2008 to 2011 is only 60% (Dalmore) and 40% (Macallan). Clearly those sets of bottles have not outperformed gold. Even top performing Balvenie just reaches an increase of 115% compared to gold’s 146%

Only if you manage to pick the best performers when investing your money, you will be able to rake in massive profits, but of course this is true for any market. But how to find out what will perform best in the future? Doodle reading perhaps? The large number of private persons and investment companies having gone bankrupt because of bad investments tells us that there is no foolproof investment. Whisky Highland actually mentions the risks involved with investing in whisky prominently on their website. The press release sadly lacks this kind of essential information.

You should always be very careful if you are presented with investments suggesting extraordinary returns, especially if you are not familiar with the market. Or you have to be very clever.

How To Make Money With Whisky Investments

  1. Make sure you have a decent amount of cash at hand.
  2. Analyze the historic results of all whisky auctions and pick the best performing bottles.
  3. Buy as many of these bottles as you can afford, but make sure you pay more for them than the previous auction prices.
  4. Publish the performance of your bottles and encourage as many people as possible to invest their money in them.
  5. Enter your bottles into whisky auctions.
  6. Go back to step 2

Of course this only works as long as you can find new investors. The new investors will pay the profits of those who have joined before. When the bubble finally bursts you should have earned enough that you don’t have to care too much about that. And should you happen to actually like whisky you can even still drink your commodity.

Update 7th/8th March:

I received a complaint from Whisky Highland that the article suggested purposeful misleading of investors on their part. I acknowledge that some passages could have been interpreted in this way, even if it never was my intention to accuse the company of doing this. I have changed these passages, but I have also substantiated my criticism of the statements contained in this press release.

Picture via Stellajo1976@flickr - Credits go to the Malt Maniacs for alerting me to this topic.

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