Ella Lister analyzes fine-wine auction news for the first quarter of 2010, paying special attention to an artistic offering in New York, and questioning whether auctions or other sources offer the best value

For centuries, wine has been an instrument for profit. Over the past 900 years, London has been a trading hub for Bordeaux. The trade is now global, covering fine wine of all sorts, and the market has become much more sophisticated. But wine itself remains the same in its uniqueness: It is a product of the time, care, and experience invested in its creation; it is available in different varietals, styles, and vintages; its lifespan is longer than most perishable goods, but it is less durable than art or land; and it affords its drinker a singular enjoyment, varying in nature according to the individual's tastes, surroundings, and state of mind. Despite these exceptional qualities-or perhaps because of them- wine is not only a source of great pleasure for the drinker; it is also an interesting opportunity for the investor.

This can be problematic for Bacchus-fearing enophiles who despair of its use and abuse. Is a house for living in and a place to gather memories, or a buy-to-let venture? Is art a source of personal inspiration and delight, or a long-term investment with a good dose of cachet? Desire to invest in assets is unavoidable, so in an increasingly competitive environment, how can we make the most of our wine purchases, whether staunch drinkers or serious investors?

I promised in the last issue to explore the question of value. Depending on the ultimate purpose of the acquisition, value can be found in diverse forms and from various sources. As we shall see, the mainstream, reputation-driven, somewhat conservative market may well meet the needs of most. But there are also more adventurous and creative options for those not bound by investment criteria or required rates of return, which in their (less established) turn may prove the source of gainful, if unsolicited, returns.

Harmony

Sitting in the dappled sunlight of Bryant Park, throngs of tooting yellow taxis on all sides, I am reminded of the buyers of the first lot at the previous night's auction at the Whitney Museum of Art in New York. Don Bryant and his wife Bettina, of Bryant Family Vineyard in Napa, paid a hammer price of $20,000 for the seven double magnums of 2007 Ornellaia each labeled with original artworks spelling out the word "happily." Lots two and three were to spell "ever" and "after" respectively, the entire phrase representing the vintage's theme of l'armonia (harmony), as interpreted by artists Ghada Amer and Reza Farkhondeh. Lots four to seven each comprised one Impériale (6 liters) of the same wine, and the last lot, a Salmanazar (9 liters), featured a handembroidered painted label. In total, $157,000 was raised for the Whitney's Conservation Department, thanks to Ornellaia's groundbreaking Vendemmia d'Artista project. The project was born, explains Giovanni Geddes da Filicaja, CEO of Tenuta dell'Ornellaia, when the winery "decided to choose artists who could represent the character of the vintage." The project, he continues, is designed to reestablish "Renaissance patronage of the arts in a modern key, while forging a bond between art and wine." An example of a virtuous circle at work: The art adds significant investment value to the wine (the Salmanazar fetched approximately 20 times the market price of its equivalent 12 bottles), and the proceeds benefit the arts.

The ritzy guests were gathered for their love of wine and art (and presumably the size of their pockets). Italian wine expert Gelasio Gaetani d'Aragona told me he had agency to bid on Donald Trump's behalf up to $200,000-and sure enough he walked away with the Salmanazar of 2007 Ornellaia for $45,000. The priciest lot of the evening also included a trip for four to the 97ha (240-acre) estate on the Tuscan coast. Happy holidays, Mr Trump! Other invitees included Tara and Michael Rockefeller, Massimo and Chiara Ferragamo, and actor Alan Rickman. With such an illustrious audience, no wonder all of the eventual buyers were in the room, outbidding Internet hopefuls. The atmosphere of the futuristic dining area was subsequently one of great excitement, with applause and gleeful whooping as each lot fetched a healthy, charity-fueled price amid the greenerylined walls and the oversized ceiling lights hovering above like spacecraft. "Is that true?" marveled Sotheby's auctioneer Jamie Ritchie, as a bid came in at $16,000 for the penultimate lot, a single Impériale.

Tenuta dell'Ornellaia's winemaker Axel Heinz was very happy with the results at the end of a nerve-stricken dinner. It was he who chose the theme l'armonia to symbolize the 2007 vintage, "very seamless, elegant, and refined." The 2006 vintage, the first in the Vendemmia d'Artista series, named l'esuberanza (exuberance), was "almost the exact opposite," according to Heinz, "almost a bit excessive." Heinz wanted to use the phrase "golden cut" to denote the balance of the 2007, "where nothing sticks out," but the Renaissance reference was deemed too fiddly. If Heinz struggled to find the right word to sum up this soft, seductive, spicy wine, then the appointed artists certainly found a beautiful outlet through which to express the wine's equilibrium, despite claiming not to have tasted the 2007 vintage until the day before the auction. "I'm not a very big wine drinker to be honest," Egyptian-born Amer admitted; Iranian artist Farkhondeh added that they "didn't grow up in wine-drinking cultures." Not confident that wine itself would prove a durable stain on paper, the two carefully selected a series of six purpose-mixed hues for the Happily Ever After collection: copper, wine, slate, solferino, violet, and emerald. "We used color to represent the theme of harmony," explained Amer.

This is only half the story, though; the link between wine and art goes deeper here. While one could argue that the delicate images are reminiscent of the wine's character, on seeing the artists at work in Columbia University's print studio, it becomes apparent that the inspiration they draw from their remit goes well beyond taste. Farkhondeh evidently soaked up his experience around Ornellaia, learning about the winemaking process from Heinz. He describes it as "a slow, internal, almost lifetime process," at the same time spontaneous and subject to influences outside human control, "like printmaking when you add the chemicals and things just happen." As he becomes more animated in the freezing studio (university summertime means the air conditioning is full blast despite the cool, blustery spring day), Farkhondeh hits on a key parallel between the creative processes of printmaking and winemaking. Central to both, he observes, is "testing, seeing things," and, ultimately, realizing "my freedom and my limitation."

When I asked Amer what first attracted her to this unusual project with Ornellaia, she admitted, "I always thought labels were problematic, but they were looking for art." For unlike the limited-edition labels of 2006, Amer's labels are each original pieces. Seven of these artworks have found a home in the Bryants' 4,000-sq-ft (370-sq-m) duplex apartment just a block away from the Whitney, where art and wine live side by side. The bottles will live happily in the company of a Picasso, a Pollock, four de Koonings, a Warhol image of a smoking-hot Marlon Brando, as well as various Lucien Freud sketches and a painting. Their home will be Don's air-conditioned wine room, featuring bottles from 1986 Mouton Rothschild to Pavie and Yquem and, of course, Bryant Family Vineyard (the 1997 was sultry and syrupy). Art and wine in perfect harmony-and no doubt wise investments all.

Alternative investments

Following months of positive noises from the wine trade, the first quarter of 2010 closed with a decisive bang as the Liv-ex 100 Fine Wine Index surpassed its previous, precrunch high of 264 by a single point. After falling as much as 25 percent almost two years ago, wine prices returned to growth quickly. So, despite lingering economic problems, especially in the European Union, the fate of wine seems secured. This market's robust recovery means that it is- more than ever-an attractive investment proposition, comparing favorably with weak or wobbly alternatives. Gary Boom, managing director of London-based wine merchant Bordeaux Index, observes, "Many people are disillusioned with traditional investments, which have been hard hit by the recession." Richard Harvey, head of Bonhams' wine department, makes the point that "it is in merchants' interest to spread the story that wine investment is on the up." That is certainly true, but there is equally no doubting merchants' reports of unprecedented interest in 2009 Bordeaux en primeur, with record waiting lists and oversubscription. This is fueled in part by new interest from Asia, despite Robert Parker predicting otherwise. Asking himself whether the Chinese would buy futures of 2009 Bordeaux, Parker concluded, "My consultant witch-fortune-teller says, 'Not likely.'"

Wine’s performance vs selected benchmarks

Wine's performance vs selected benchmarks

The yield on a ten-year US Treasury bond currently stands at only 3.82 percent, despite the country's huge deficit, in contrast with highs of 6 percent from 1998 to 2001, when the government was in a budget surplus for the first time in three decades. So, in a confusing economic climate where cash yields paltry returns, stock markets remain volatile, and bonds are less rewarding, more people are looking to tangible assets such as art, collectibles, and bricks and mortar. Low interest rates make for affordable mortgage capital, and figures released by Nationwide in April showed that UK house prices had risen in ten of the 12 months to March 2010-just lagging the top wines, which saw no negative growth during this period. Unlike those of wine, however, UK house prices remain 10 percent below their peak in October 2007, according to Nationwide Building Society, which predicts "a gradual flattening out of the recent upward price momentum," despite the annual rate of house-price inflation having moved into double digits for the first time since June 2007. With the value of property set to flatten out, the cash rich are turning to less conventional investments-including wine. Over the past two years, wine has performed robustly next to its closest relatives on the stock exchange: luxury goods and food-and-beverage companies. This implies that its allure and value go well beyond the status factor of the former or the demand-driven nature of the latter.

Wine is renowned for its lack of correlation with conventional investments-one of its main attractions for a sophisticated investor who wishes to diversify his holdings. In a recent paper titled "Wine as an Alternative Asset Class," Philippe Masset, Caroline Henderson, and Jean-Philippe Weisskopf conclude that "wine returns are essentially unrelated to market risk but behave cyclically, being affected by the state of the economy." Analysis of major stock indices and commodities globally supports this argument, showing a low correlation with the Liv-ex 100 (the other indices' average correlation to one another is 0.5 but only 0.33 compared to Liv-ex). Also working in its favor, wine is historically significantly less volatile than the world's major stock indices, with a volatility of only 10.6 percent since 2001, compared to an average of almost 20 percent across the other samples. Furthermore, the Liv-ex 100, at 1.01, has by the far the highest Sharpe ratio (or reward-to-variability ratio), a measure of the risk premium on an investment relative to its associated risk. A Sharpe ratio of one or more means that the return on investment is proportional to, or greater than, the attached risk. Finally, returns have been consistently positive, Liv-ex ranking first during the period 2001 to March 2010, as well as over the past five years and three years (but performing less well over the past year compared to stocks, which have rebounded from a lower base).

Premier returns?

The first hung parliament in the United Kingdom since 1974 has left markets facing the unknown. A Conservative majority might have fostered renewed confidence in the UK's traditional markets, boosting the pound, which continues to suffer against a backdrop of uncertainty, gaining little ground against the weakening euro despite Greek debt being downgraded to junk status by Standard & Poor's on April 27. No respite, then, for UK merchants. Research by Skandia Investment Group shows the average market gain under a Tory government to be 52 percent, compared to 32 percent under Labour; I suspect this will be much lower given the potential indecisive nature of the current arrangement, not least with billions of pounds' worth of cuts under way. The lack of correlation between wine and the financial markets means any direct effect on the former is unlikely. In fact, as markets and currencies across Europe teeter, we may see the ever-more-attractive wine becoming increasingly commonplace or heavyweight in investment portfolios.

Regardless of prime ministers or exchange rates, this year's en primeur campaign will, without doubt, be a great success. Attracting higher-than-ever global demand due to an impressive level of hype surrounding it, the '09 vintage promises great reward and little risk-enough to melt the hardest of investor mentalities. Producers themselves became wise long ago to the huge profits to be made in the secondary market, frequently keeping back stock from their en primeur offering to sell once the market has pushed up prices. In April, Liv-ex undertook a study of the performance of 81 major châteaux in each vintage from 2000 to 2007, from their initial en primeur release price to their "best list price" among merchants six months after bottling. The findings were music to a wine investor's ears, with almost two thirds of wines in the study showing a price increase over the period. Unsurprisingly, "high-quality vintages prove a better buy than those from lesser years," and 2005 achieved on average a 39.1 percent price increase across the 81 wines. En primeur purchases can backfire, however, with the 2007 vintage seeing negative returns on average (despite a 183.3 percent rise in Carruades de Lafite!). Liv-ex also found that Bordeaux wines from the Right Bank tended to perform less well than those from the Left Bank. Finally, the study warned: "When you account for the cost of money (as well as the risks involved in en primeur purchases), anything that shows a price increase of less than 15 percent is arguably better bought when physical [in bottle]. If we use this criteria [sic], then only 235 wines (36 percent) are classed as definite buys."

So, should we all be rushing out and putting our retirement funds into decent plonk? Harvey does not understand such trends in the investment world: "Why invest in something if you've got no interest in it?"-a sentiment shared by Fischer, who believes "you can make money if you know the market very well, whether wine or commodities." Their point seems to be that wine should not be the new object of speculation for those ignorant on the topic; yet if you do know your stuff, Harvey advises, you are better off buying as a private individual than paying commission to a fund. The expert consensus is overwhelming when it comes to investment advice: Stick to the very top, mainstream wines. In Harvey's words, "There is a very simple rule: If you just want to make money, only buy first growths and DRC." Fischer adds, "It has to be cases, whether six or 12 bottles, and premiers crus in top years, with good Parker ratings-it's terrible to say!" It is terrible to say, but as demonstrated in the previous Liquid Assets column, price and popularity are undoubtedly linked to the verdict of this influential judge.

Alice Feiring, in her book The Battle for Wine and Love: or How I Saved the World from Parkerization, decries Parker's role in the globalization of wine, asserting that, "as growers tried to capture Parker's attention, the spectrum of wines' tastes narrowed." Feiring's fantasy is thus: "Girl sleuth suspects a dangerous sameness in wine, discovers a link between the globalists gobbling up small wineries, technologies that change the nature of wine, and an influential critic." And yet the wine investor would be ill advised to follow his or her heart, championing the underdogs à la Feiring. As Fischer points out, "There may be a bigger return on 'upcoming' wines, but the risk is much bigger." Feiring and the rest of us should, in some respects, be thankful that "investment grade" wines are restricted almost exclusively to top-growth Bordeaux, with only a sprinkling of wines from Burgundy, Rhône, Champagne, and Tuscany making an appearance in the Liv-ex 100. Surely this leaves Feiring's "delicate," "edgy," and "authentic" treasures for those who adore and appreciate them, safely below the desired rate of return required by the one-trackmind investor? The Liv-ex Investables Index is even less diverse, consisting of red Bordeaux from 24 leading châteaux-avert your eyes now, Alice Feiring-"chosen on the basis of their score from Robert Parker." It strikes me that you do not necessarily need to know very much at all about wine to make liquid investments, provided you follow the simple rules, staying firmly on the beaten track.

Hedge your bets

Less conventional than "traditional" assets, wine investment is also less sophisticated. Despite its clear investment potential, even fine wine remains in large part the stomping ground of the private collector, not the financial world. The delayed effect of the credit crunch on the wine market is testament to this, with individual buyers continuing to buoy prices throughout the summer of 2008. Despite being so predictable, "the crash of the auction market came so late!" exclaimed Fischer, who did not see results at Steinfels suffer until November of that year, when sales were down 30-40 percent and his auction only 65 percent sold. He saw a shift in his buyers from trade to private individuals; from a peak of 71 percent, professional buyers represented only 25 percent of his turnover at the trough of the market. No wonder then, that the Liv-ex 100 index is so closely correlated with the number of billionaires globally; whether collected or consumed, wine is the plaything of the wealthy individual, not the markets.

Liv-ex 100 Fine Wine Index vs number of billionaires

Much of the wine trade has long embraced technology, through umpteen blogs and, more recently, Twitter. The Antique Wine Company was one of the last to begin blogging in March, steaming out of antiquity ten days later with the introduction of a free application for iPhone and iPod Touch, boasting podcasts, prices, and tasting notes. But wine is light years behind other investment products. Liv-ex has done wonderful things for the transparency of the market since its inception in 2000, but director Justin Gibbs is the first to point out that "the wine-investment market is still in its infancy." Electronic trading is relatively new to the industry; just a year ago, Bordeaux Index launched rival platform Live Trade, which is open to private customers, as well as to merchants. With both, however, the wine is a physically traded product that must pass from seller to buyer, be this a merchant, collector, or, in the case of Live Trade, the company itself, which buys and sells the wine rather than acting as an exchange. Such trades incur more logistical admin and related fees than a share certificate would-not to mention storage costs. For example, an auction-house vendor's commission is 10-20 percent and buyer's premiums are 15-20 percent or more, whereas Liv-ex charges 2-2.75 percent. None of these includes delivery fees, which might be in the region of an $80 flat fee for wine bought at auction, for example. Storage will cost approximately $15-20 per case per year, depending on the quality and location of the facilities. In the case of Live Trade, the wine may not physically move as a result of a sale, because often the buyer or seller is an existing client of Bordeaux Index, whose cellar already resides in storage with the company.

Physical trade, with actual cases and bottles changing hands, is of course inevitable for as long as wine lovers continue to acquire the commodity for drinking rather than as an investment. Wine cannot exist purely in the form of intellectual property, without real demand for it as a commodity. However, for those concerned solely with the wine's potential increase in value, there are funds more akin to a traditional financial investment, doing away with the clunky elements of wine investment-for example, The Wine Investment Fund. But don't these funds also eliminate the magic, and for most the whole appeal, of wine collecting: being able to dip into your investment and savor its taste? London-based Berry Bros & Rudd and the Financial Times play upon this unique quality in an advertisement for their Cellar Plan (where you can choose to build a cellar for drinking or for investing, or a mixture of the two); in among the fund listings of the real asset managers toward the back of the newspaper's salmon-pink pages is a picture of an empty wine glass with the caveat: "Your investment may go down as well as up." According to James Miles, co-founder of Liv-ex, very few people collect purely for investment, "but speculation and investment do play an important role in adding liquidity, getting more people involved and in price discovery."

If the reported demand for wine as a financial product is borne out, the investment opportunities around it will fast have to mature to serve a new kind of consumer. Wine funds hit the scene in 2003 and continue to launch, with at least two more planned by existing merchant businesses (one French and one British). However, Miles says that "most professionally managed investment portfolios have between 80 percent and 90 percent by value invested in just eight brands-the five first growths, plus Cheval Blanc, Pétrus, and Ausone," so the funds are only active in the very top echelon of the market. Again, this narrow strategy could be deplored as mainstream capitalist lack of creativity or applauded for its common sense; but either way, it leaves more room for originality elsewhere.

Globally, the wine market has trebled to around $3 billion over the past five years, and we may well see further growth with its continued sophistication-for example, through the birth of a derivatives market. This would allow financiers to trade futures and options in wine-that is, to trade in a derivative of an underlying wine stock or index without ever taking delivery of anything other than cash, thus distinct from the simplistic form of future that is en primeur. Since futures markets are typically much greater than that of their underlying commodity, this would increase liquidity enormously, allowing speculation without the need to actually buy a case, and growing a market that is physically restricted by the limited supply of investment-grade wines.

Derivatives are worth roughly 40 times the global stock market, at $1.144 quadrillion ($1,144 trillion), and this sheer immensity is a cause for concern in the eyes of many. Prior to 2008, Warren Buffett (the second-richest person in the world) described derivatives as "financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." Harvey, while less dramatic, also believes that derivatives are a risky business, fearing that "the wine market is so minute that it could easily be manipulated if it got the top financial players in," especially given that "volumes produced by the top châteaux are less than in the '70s and '80s." With reference to Lafite, he cites the distortion of the market by "a small number of buyers in China," warning, "This would happen even more if there was a derivatives market." At present, spread betting on the Liv-ex 100 index is as advanced as the market gets. But if the 2009 en primeur campaign lives up to the hype and investors' thirst cannot be quenched, then the market is bound to develop in this direction. Miles believes that a derivatives market for fine wine would be very useful for wine funds, to get increased exposure, as well as to merchants and growers, who could hedge production.

Furthermore, derivatives would allow investors to wager on wine without keeping it from the real enophiles, who love wine with their palates as well as, and even before, their wallets. Since there would only be a viable market for these financial instruments for the very top wines, we need fear Buffett's WMDs no more than Iraq's. The downside is that, with a bet or a futures contract, there is no consolation when things go wrong. I would still prefer to have the option of drowning my sorrows in a failed investment; wine, after all, is the ultimate hedge.

Hammer happy

Aerospace consultant and wine collector Lloyd Flatt placed the emphasis on drinking over investment, making clear his was "a working cellar, not a showcase; I collect in order to drink my finds and to share them." On March 19 in New York, Sotheby's conducted the white-glove sale of Flatt's collection for a total of $1.18 million, more than double the low estimate, following Flatt's death in January 2008. Divorce (another of the dreaded Ds) had previously forced Flatt to auction off the first iteration of his cellar in 1990, and both times around, he proved the investment potential of wine even when a collection is assembled for the sole purpose of drinking. Flatt had a novel take on accounting for his cellar, saying, "You must mentally expense the cost of your bottles at the moment of purchase." His cellar-by his subsequent calculation worth "nothing"-made a pretty decent return!

Four days later, a Hart Davis Hart sale was 99.99 percent sold, interpreted by vice chairman Michael Davis as "another affirmation that the rare-wine market remains robust," with "prices [that] stabilized at historically high levels." The Wine Spectator Auction Index saw US prices rise 6 percent in the first quarter of 2010 compared to the last three months of 2009. With high sell-through rates from others, including Zachys at both its Winter Auction in New York and the La Paulée de San Francisco sale, it would seem that western economies are working up a thirst once more. Worries of supply outweighing demand in the auction world seem quelled, and in Australia, Wickman's Fine Wine Auctions has apparently experienced the opposite problem, having introduced a range of "referral bounties," as well as zero seller's commission on Grange and red Bordeaux throughout April and May.

Europe proved similarly strong in the first quarter of 2010. Fischer was pleased with the results of Steinfels' 94-percent-sold auction on March 13, where a case of '82 Mouton was sold for just under CHF15,000 ($14,150). Such fast-paced growth may be untenable, he warned, commenting, "We believe that the auction market has very strongly rebound [sic] and most probably will not rise as fast until the end of the year." On March 18, Sotheby's London sale was 99.7 percent sold, with 52.8 percent of lots selling on or above their high estimates. "Interestingly," according to wine-department senior director Stephen Mould, "UK and European buyers were dominant in this sale."

So, while Asian demand is widely regarded as having led the way to recovery for the wine market, it is no longer the single driving force as traditional markets see a resumed appetite. Nonetheless, Asians are set to increase their influence further-not only as first-time en primeur buyers, but across the board. Buoyed by another huge Acker Merrall & Condit sale in Hong Kong on March 28, president John Kapon reiterated, "It would surprise us if Hong Kong did not become the wine-auction capital of the world in 2010. It has certainly become our capital, with an estimated 70 percent of our auction revenue to be in Hong Kong this year." Figures from the first quarter of the year certainly point in this direction, with Hong Kong taking the early lead as wine auctions totaled HK$209.9 million ($27 million)-11 percent more than the total of $24.3 million achieved throughout the US, and 111 percent more than New York-only revenue of $12.8-million. Furthermore, Hong Kong's four auctions from January to March were sufficient to outdo double the number of sales held across New York, Chicago, San Francisco, and Los Angeles. Even though Hong Kong auctions are often larger, glitzier affairs, considerably fewer lots-of more expensive wine-were sold in the Special Administrative Region than in the USA, cementing the stereotype of Asian collectors as big spenders chasing the top wines. Acker's sale, 98.15 percent sold, featured four centuries of Lafite in a single superlot, setting a new world record for this benchmark wine, at HK$2.56 million ($330,000) for the 70 bottles, and no prizes for guessing the buyer's nationality (answer in Fig.5, overleaf). London trailed New York, despite six sales to New York's four, with total auction sales of £5.1 million ($7.9 million). Even Europe's overall total of $11.7 million could not rival the Big Apple's total and was well under half that of Hong Kong.

Price check

Do Hong Kong auctions merely sell more sought-after, more expensive wines, or are the wines actually priced higher in the region? The auction houses will assure you that the estimates are not influenced by geography in today's global market, but that is not to say that buyers in Hong Kong are not willing to pay more in an environment where demand, and therefore competition, is higher. On average, 99 percent of lots were sold at Hong Kong auctions during the first quarter of 2010, compared to 92 percent elsewhere, meaning its auctiongoers must often fight harder for their desired lots by bidding one or two increments higher than they might have done in, say, New York. This theory seems to be borne out by looking at a small, random selection of 21 different wines (Fig.6, overleaf). Hong Kong was host to 12 of the highest average hammer prices in 2009 for wines appearing in the sample, with London, the next "most expensive" location, appearing only three times. The study is far from conclusive, given that the nature of the data means that each wine, in the same vintage and format, is only sold on a handful of occasions globally each year. It does, however, point to a trend observed by many commentators on the auction scene-namely, Hong Kong's willingness to pay, which, moreover, seems to be spread quite evenly across the regions of Bordeaux, Champagne, Burgundy, California, and Australia. A still smaller data sample shows that, on average, Sotheby's achieves the best prices on four of the nine wines studied, ahead of runner-up Acker Merrall & Condit. Christie's was not the most expensive for any of the wines included in the sample.

Figure 7

In issue 27, I discussed various factors determining price in a bottle of wine, promising this time to explore the benefits of buying both at auction and from merchants. The first thing everyone wants to know is where they can get the best deal-and unfortunately the answer is not so straightforward. I will start at the end, with the most expensive method of sourcing wine, which is to go to the first wine shop you see and to purchase what you want, when you want it. The graph below shows that the average price at which merchants list their wines is always the most expensive and can often be more than £1,000 ($1,500) greater than the best price listed at any one time by any one merchant. This immediately highlights the importance of time and research when scouting merchants' offerings to acquire wine at its cheapest price point. Websites such as Wine-Searcher.com make the job considerably easier, by searching prices from 17,272 wine stores globally, though this approach could quickly lead to high delivery and/or storage costs if many different sources are used.

Less decisive are the data comparing the merchant's best price with what you might find at auction. The line representing the "average auction price" is characteristically spiky, telling us that auctions are not a predictable beast. As we have seen above, price at auction can vary wildly, depending on the market on that day-that is, the audience in the room and its appetite-as well as myriad other factors including the location, the auction house, and even the hour. (Lunchtime or sales that drag on late into the evening can be perfect opportunities to snap up a great deal, though the introduction of live online bidding last year means that, as bidders in the room tire, others are waking up elsewhere.) Because of their capricious nature, auctions can be both a bargain hunter's dream and his nightmare. He must possess the patience and cool-headedness to pass on those tempting lots that creep up and out of the realm of the bon marché, which is a little like trying to windowshop at the desirable department store by that name in the sixième arrondissement of Paris.

The three-month rolling auction price gives an evenedout picture of price trends at auction, showing a closer correlation with the merchants' best list price. However, two different trends emerge pre- and post-crash, with merchant pricing largely higher than auction pricing until November 2008, when the merchants drop their lowest prices considerably. While auction prices follow suit with a violent dip in December, they rebound much more quickly, overtaking the merchant's most competitive prices in January and proving resilient throughout 2009. Harvey told me that wines regularly go under the hammer at Bonhams for 10 percent more than the best Wine-Searcher.com price, conceding that "people sometimes pay more at auction," but equally that "things are underwritten by the trade, so you're unlikely to get a good bargain case of first-growth Bordeaux [from a merchant]." By the end of March 2010, the average auction price and the best list price had again converged, leaving no clear winner. So, while the best list price is not always the least expensive, it is never far off the average auction price and represents a consistently reasonable source of fine wine, providing care is taken and time is spent to seek this out from among the vastly more expensive offerings-as the graph shows, the average merchant price has been consistently, and considerably, higher than average auction prices.

The best deals, I would argue, are to be found at auction, but again there are caveats. Richard Coffman, in his 1991 paper "Art Investment and Asymmetrical Economics," argues that "bargains," which he defines as "underpriced assets which will yield above normal risk-adjusted returns," may be found "in various tangible assets, most notably art and antiques." This thesis can appropriately be extended to wine, where, as discussed above, the market is not as sophisticated as those of conventional financial assets. Whereas efficient financial markets frustrate the quest for a bargain, the less regulated forum of an auction provides hope, as by nature it is home to fluctuating prices that are no longer possible elsewhere-even in the somewhat antiquated wine-trading business. An auction may not, on average, provide the cheapest source of wine, but it will be home to the highest number of "bargains." The extent of the bargain is limited by the existence of a reserve price on each lot, to protect the seller, which is, nonetheless, likely to be lower than the price at which a merchant would sell the same wine. As Christie's wine-department head Charles Curtis MW puts it, "The reserve is a fantastic bargain, and if wine was sold at the reserve, it would be unbelievably cheap. The estimates are set to entice people to buy-hence reserves are set at an artificially low level."

In the world of auctions-to a greater extent than in wine investment-it really does help to know your stuff. Yes, you can focus on the premiers crus, following the almost-foolproof "simple rules," but the beauty of many auctions is the lesser-known gems. And if you know you like them and have an idea of what they are worth (to the market, or even just to you), then you can take advantage of rare opportunities. Experience furnishes you with the flexibility to exploit bargains that you may not have had in mind, in contrast to the common auction-price pitfall of paying over the odds for a lot you had set your heart on- another factor contributing to fluctuating prices in the saleroom. Curtis points out that "private collectors are not disciplined. That's why the auction market works." The next best thing to expertise is homework; this way you can at least be aware of the market value of a selection of lots you are interested in, setting a ceiling beyond which you have the best intentions not to venture. Approached thus, an auction can be a wonderful window on to wine discoveries, prior research providing comfort during the bidding process. (Bidding blind on a wine that you have never heard of is huge fun but probably not to be advised on a regular basis or for very expensive lots!)

Fischer describes auctions as "an interesting place to start for a person who likes to try new things," conceding, however, that a merchant offers more consistency and guarantees for the less "curious" buyer. A merchant will often let you taste the wine before you buy it (sometimes the case at auction, too), and if you want more of the same, it is there, unlike at an auction, where you may have to scour two dozen sale catalogs before your wine reappears, and even then it may be a different vintage or the wrong format. A merchant lists a price at which you decide whether to purchase the wine, while an auction is rife with uncertainty and suspense: That wine you have been waiting for an opportunity to acquire may be snatched from under your nose by a bidder with more stamina or deeper pockets. The disappointment is undoubtedly worth it in the long run, if only for the rarity of the wines available, which are often much older than the stock of the constant, convenient merchant. Ultimately, any serious collector would benefit from using both sources.

Off the beaten track

Particularly at smaller auction houses, such as Steinfels, mixed lots and single bottles are rife, providing the perfect opportunity for Fischer's "curious" buyers to experiment without breaking the bank. Bonhams, despite being an institution often bundled with Christie's and Sotheby's, is differentiated, says Harvey, by its accessible range, including among the regular offerings "odd Burgundy, bizarre southern French wines I don't even know, Austrian wines." He adds, proudly, "I'd like to say that our auctions are designed for the wine lover." Even more diverse in its offering is Welsh auction house J Straker, Chadwick & Sons, established in 1872 and today dealing in property, livestock, and antiques, as well as wine. I asked William Chadwick, auctioneer and principal, what made them different from the big names. "We're not in London!" he exclaimed, adding, "We don't want to be a 'regional' auctioneer." Many have never heard of this traditional auction house, Abergavenny's best-kept secret, and yet it holds around ten wine sales a year, turning over more than £3 million ($4.7 million) in 2009. Chadwick seems rather put out by the lack of attention afforded to the business, complaining, "You magazine people seem to think nobody is interested in wine outside the M25." I apologized on behalf of fellow journalists and decided to set things straight.

And so at 7am on a cold February Saturday morning, I set off from the very epicenter of the M25 to see what we were all missing. Bond Street it was not, and three hours later, as I wound my way down into Abergavenny, the castle's turret protruding from the morning mist ahead of me, I was struck by the archaic beauty of the scene. After three circuits of the one-way system without managing to find my way to Straker Chadwick's parking lot, I left the car in the cattle market around the corner and headed down the one-way street on foot under the light drizzle. Inside the brightly lit purpose-built saleroom was a feast for a wine lover's eyes. Straker Chadwick is unique in displaying every lot for the buyers' inspection prior to the sale. The pre-auction tasting was less of a draw, focusing entirely on the bottom end of the sale's spectrum, which went as low as £5 ($8), but it is hard to complain when the traditional buyer's premium is replaced with a drop-in-the-ocean £7.05 ($11). On any lot worth more than £50 ($80), this works out cheaper than the buyer's premium at Christie's and Sotheby's (15 percent in London, and up to 21 percent elsewhere). The sale featured lots ranging from a case of Valpolicella, which sold for a hammer price of £18 ($28), to 17 half-bottles of Lebanon's Château Musar 1961, sold for £1,000 ($1,550). There was no shortage of first-growth Bordeaux either, a case of '89 Haut- Brion going under the hammer at £9,200 ($14,350). The acquirer of this case would have paid a further £1,380 ($2,150) as a premium at any of the major London auctions.

Altogether less stuffy than urban sales, this one was home to Barbours, fleeces, wellies, and waterproofs, and the falling of the hammer was interspersed with lighthearted commentary. The audience's lack of interest in a gallon bottle of Asbach Uralt (pure grape brandy) was met with playful encouragement: "We could all have a party," insisted the auctioneer, and then, "I feel rejected now," as alas, the lot went unsold. As the day drew on, people left in search of sustenance, one party returning with cider from the local pub. A group of serious bidders (trade, no doubt) huddled around an iPhone to watch Italy beat Scotland at rugby. The sale was 95 percent sold, thanks in small part to me. As I drove back over the Second Severn Bridge-the poor, laden car less sprightly than on the first crossing-I reveled in the harmony of the luminescent, pale-green diagonals speeding past me on either side in a geometrical flash, the sinking sun majestic in each gap.