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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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{ 12 comments… read them below or add one }

Atanas March 4, 2012 at 7:07 pm

Excellent article Oliver – great fun to read.

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Euan Finlayson March 6, 2012 at 11:18 pm

I am so happy to read your well informed article. Indeed, it is only the stupid morons such as yourself that keep the narrow minded pessimests away from interesting, knowledgable and cultured investing. It keeps the prices of liquid gold affordable before REAL investors take notice.

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Marc March 7, 2012 at 4:55 pm

Oliver, am I to understand you don’t believe whisky is a viable investment at all? You don’t think it’s possible to buy a selected bottle, hold onto it for 10 years and then sell it on for a respectable profit?

There has been too much talk of whisky investment lately for my liking, but apart from the need to read between all the marketing fluff (from both sides), I think investing in whisky can produce returns if you know what you are doing, and I see it often.

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Oliver Klimek March 7, 2012 at 6:53 pm

Glad you bring up this question, Marc. I am NOT opposed to the kind of investment you mention. My gripe here is that investment in whisky is encouraged with arguments that make it look more glamourous than it actually is.

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Marc March 8, 2012 at 8:36 am

You mean they are MARKETING?? Heavens no! ;) Of course companies involved in whisky investing are going to… encourage whisky investing, and are going to make it look more glamorous than it is, as does every business, as it is their livelihood.

I think their has been a contamination of whisky-as-an-investment topic by the most-expensive-whisky-race some of the distilleries are running. Forget about the imbecilic ultra-expensive 2-of-1 kind releases when talking about investment, I mean lets be honest, the individuals buying those are not doing it as an investment no matter what they say.

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kallaskander March 8, 2012 at 12:21 pm

Hi there,

seen from the viewpoint of an international drinks giant there is not enough investment in whisky nor vodka at all!

Just think of the millions of litres you could sell additionally to your normal business if only more people would buy whisky as an investment. Never to be drunk, bottles never to be opened.

That would rid the whisky business of one or two inconveniences such as quality or the need to mature whisky for longer times. You know your ware is sold, the money is quickly made what comes in the future is none of your concern… if prices go up or down – your profit is made.

If only whisky investments could be the same as real estate speculation. You know buying casks of whisky with the expection somebody will someday build a hotel on them… ah, no I’m mixing things up but you get my drift.

Ok, enough sarcasm. What really is missing in all this discussions about whisky as an investment is the mentioning of risks.
The discussion itself is already bearing fruit. More and more often customers ask me how to go about buying whisky as an investment – bottlewise. All are more or less disappointed when I tell them that they are too late. The boom already is here. You should have started 10 years ago when prices were down.
No one knows how long the boom will last even if prices at the moment have only one way of development. Up.
But if you try to enter the fray you need a lot of money because the entry level already is high and much patience – and if you buy now but the prices go bust tomorrow at least you have always 40% minimum. Not a bad interest rate compared to a bank anyway and if all goes downhill you can drink your investments.
And the last question I ask will be investers is “If you think I know how to get rich this way – why do you think am I still here?”.

Greetings
kallaskander

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Marc March 8, 2012 at 1:02 pm

I think the risks are intrinsic just as any investment portfolio. I disagree that it is too late, there are plenty of bottles being released for reasonable prices that are sure to see solid appreciation. Are these bottles in the “top 10″ category, problem not, because their gains will be realised long-term and not just flipping a bottle that has been made for investors- which is not the same as investing! Some bottles that come to mind that have been purchasable over the last 3-4 years that are doing/will do well: Kilchoman initial releases, Chichibu The First, Glenfiddich Snow Phoenix, Ardbeg Committee Releases… etc. etc. A bottle does not need to cost 1000s, or even 100s, of pounds to be investment material, that isn’t the idea.

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Oliver Klimek March 8, 2012 at 12:50 pm

Keith Wood just published his take on Investment Grade Scotch on his Whisky Emporium site. It doesn’t differ too much from my personal view.

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Keith March 8, 2012 at 1:12 pm

Thanks for adding the link Oliver and yes, we basically agree when it comes to forcing investment potential, but in his comment above; Marc makes an excellent point which I only touch upon in my own article. Whisky as an ‘investment’ or what some call speculation is a long-term strategy based upon ‘normal-priced’ bottles which become desirable to the general market over a period of time, which I tend to see as 10-20 years! The idea of buying the latest in-vogue bottling (perhaps a Feis Ile special for example) and listing it for auction or sale immediately at a crazy profit is not what I am talking about and most certainly not ‘desirable’ in my opinion. There is also an inordinate amount of luck involved in the process!

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Andy Simpson March 8, 2012 at 1:44 pm

For absolute clarity (from 2008 – Q4 2011) –
The bottom 10 performing bottles have lost 73%
The bottom 100 have lost 55%
The bottom 250 have lost 45%

My personal rules are –
– NEVER invest what you cannot afford to lose (read drink!)
– Love whisky…. or at least like it. If the market ever crashes at least you’ll have some fantastic drams.
– Patience is key. Whilst short term gains are possible, I always look to 10 – 20 years for a return.

Like anything, you have to really, really understand both the primary and secondary markets for this to work. If you don’t understand the market, pick the ‘wrong’ bottles or get impatient then you will lose money, full stop, end of. I’ve always said that in a myriad of more detailed articles I’ve written and also presentations I’ve delivered. Plenty of which are on the Whisky Highland press/PR page.

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Kelly March 16, 2012 at 11:50 pm

Andy….. I just about ripped you a new one… but then I read more carefully… and you said “bottom 10,100,250″ … I read it as… the top 10,100,250 :P guess I’m just tired today…

Anyways… great special event at the Nth…. it was full of knowledge… ran a wee bit longer… haha but it sure was packed full of great knowledge :)

I was in the back row listening intently… but, did you know who was the guy sitting in the front row wearing the bandana and sporting the white scruffy beard?…. I do…. ;)

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Kelly March 16, 2012 at 11:44 pm

lol…. while people find time to find fallacies about investing in whisky or picking apart another articles “problems” regarding investment grade whisky… I’ll continue to reap the rewards of 50-75-100% ROI’s…. lol

Cheers :)

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