StashAway | Investing, redefined

Diversifying your portfolio through investing in wine, with Tom Gearing, CEO and co-founder of Cult Wines.

Episode Summary

Tom Gearing talks about how you can begin your wine investing journey, the risks involved, and how blockchain technology can shape the future of wine investing.

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Episode Transcript

Philipp: Welcome to another episode of, In Your Best Interest, your personal finance podcast. I'm your host Philipp Muedder, and today we will be chatting about all things wine. An incredibly interesting topic that has really started to get more and more attraction from investors across the world.

There are many ways one can get access to wine as an investment, but the internet has really changed the game by disrupting the market and opening up to a much wider audience. My guest today is actually at the forefront of this, and he runs the wine investment platform Cult Wines. His name is Tom Gearing.

Tom has spent his entire working life as co-founder and managing director of Cult Wines, growing it from a small startup to one of the UK's leading wine investment companies with over £120 million of assets under management.

Tom regularly features as a market commentator, appearing on media outlets such as Bloomberg, CNBC, CTAM, and many more. Thank you so much for taking the time to join me today to tell us about the world of wines, Tom, how are you?

Tom: Yes, I'm very well, thank you. Thanks for asking me to join you.

Philipp: No, absolutely. We're very excited to have you. I know there's a lot of high net worth StashAway customers that are also customers of Cult Wines. And we've done some events with your team over in Singapore before. I myself obviously, I do enjoy wine, and I have questions myself.

So it's really great to have you today. And so, as I mentioned in the bio, it says you spent your entire working life at Cult Wines. But if we take a step back, right? How did you actually get there? How did you get into wine? What's kind of like your upbringing like?

Tom: Yes, it's quite a common question. Because obviously, when people hear that I founded the business, I co-founded the business when I was at university. I think everyone sort of looks at wine, and they think to themselves like, well, at that age, you're only really interested in wine to get drunk, right? You’re not really drinking it to appreciate it. So I think a lot of people were just like, well, how did you learn, how did you get into it?

So I mean, my back story is that I was very fortunate when I grew up to sort of grow up in a family that loved wine, and in particular, my father was a really big influence. He was an investment banker by trade, I mean, that was his sort of career that he built, and he worked for Goldman Sachs.

And during the 90s, when I was obviously around sort of 10, 11, 12, 13 years of age and I was growing up, he started to get into wine in a big way. And it was quite funny because, at home, he sort of commandeered our garage that we had and turned it into a big wine cellar.

And week by week, month by month, more delivery was turning up and more space he was sort of taking and my mom was looking at him going, okay, this is getting out of hand now. But he fell in love with wine; he fell in love in particular with Burgundy and Pinot Noir. And I think the first time I ever tasted the wine, I was 11 years of age.

He took me; we went on trips, we literally drove from our house in South London all the way to Burgundy, took 9 hours. We would go via the Eurostar, drive down there and we would spend a week there in the east, spend a week there in summer. And I pretty much did that 2 trips a year with him, from the age of about 11 to the age that I thought was uncool, and I wanted to hang out with my friends, so probably about 14, 15.

But for a good 3 or 4 years, I did that with him at least twice a year, and we just spent a week there and went door-to-door, and he'd just knocked on the doors of some of the greatest winemakers. And I remember as I said, the first time I tasted wine, I was about 11, and it was a producer called Comte de Vogüé which some of your listeners who are into wine will recognise. 

I mean, the culture in France is different, the European culture is different, there isn't that same sort of association around wine and children, though it's sort of like part of the culture.

So, I went down into the cellars, and they handed me a glass, and they're like, “You can taste,” and I sort of looked to my dad, and he was like, “Go on then, you can have a little taste.” And I think they've pulled out their Musigny Blanc, which is like quite a rare white wine that's made in the Cote de Nuits. And so I always say to everyone: I started at the peak, and everything's been downhill since then. So yes, I grew up around wine; I was very lucky to grow up in that environment.

But my dad also was an entrepreneur; he actually left the city and actually raised some venture capital funding and private equity funding to start his own business. He launched a business called Financial Wines in 2000, [05:00] and it was actually, he predated Wine-Searcher which again, sorry to talk about sort of industry-specific terms, that's like an online, almost like the Google for fine wine.

Philipp: It's a great resource for people if they want to look this up because that's the one I always use.

Tom: Yes, exactly. I think it's the number one wine website globally in terms of traffic, that type of stuff. So, he actually predated Wine-Search, and it was an online price transparency website. So he actually built a website where he was showing the world, using the internet, the dot.com age, the dot.com bubble, and how we can find wines at different prices. And unfortunately, because of the dot.com crash, they lost their financing before they were revenue-generating.

Unfortunately, business didn't survive. But even from that age, I remember I was about 15, 16 and I used to have to go into their offices, and I was putting numbers and data into the databases, and so even then I was learning about wines and prices and how they can change, and how the market's quite fragmented and the spreads and all that type of stuff. 

So I'm not saying it was a natural evolution, but when I co-founded the Cult Wines business in 2007 when I was in university, it was really an amalgamation of those two aspects, in that we wanted to build a company that was, we thought there was a gap in the market. We felt that if people wanted to invest in wine, it wasn't necessarily that easy.

Wine investment was something that if you had the expertise, the knowledge, the skill set, you had the access, it's something that people were doing. But if you were just a general person who wanted to invest your money and wanted to have exposure to wine, there wasn't necessarily a one-stop-fits-all approach to wine investment.

And there wasn't necessarily a platform whereby you could immediately get that extra access, that expertise, and no one was really managing it in a sort of investment-focused way. And so I suppose we looked at the evolution of sort of family in terms of really combining those two aspects, one aspect which is actually having the connections, actually buying the physical assets. It's not a fund, it's actually buying physical assets, physical bottles, and cases of wine, which you need the relationships for.

And that still maintains that sexiness that still maintains that passion assets or wine. But then combining it with the data analytics, the financial expertise, that more rational head aspect which is looking at it as a financial asset that can deliver returns. So that's sort of like my background, that's how I sort of ended up in wine, that's how the evolution happened with me.

Philipp: Yes, super interesting, right. That's why I like to usually ask that question to all the podcast guests because you always get a different answer, kind of from growing up, but this one is obviously very unique.

And so now you guys, you said 2007, so it's 14 years now by the time of this recording, that's quite a long time. You're still working with your dad in the business. How has it been working directly with your father for so long? And it seems like you guys had that, like he kind of passed that passion on to you at an early age, right?

Tom: Yes. So in terms of the business, I left university in 2009, so that's when sort of I full-time sort of went into it. And up until then, it was sort of being run out of a bedroom, to be honest, in our family home. So in terms of being like a fully operational business, 2009 was really the sort of starting point.

So for me, yes, it's been what 11, 12 years since the start. And it's been amazing working with dad; I mean, obviously, he's been an amazing influence, and actually to run a business with your dad where you both have a shared passion, and you have a shared excitement and enthusiasm for something like wine has been incredibly enjoyable.

And some of the experiences we've shared over the years in terms of not only having that sort of really scrappy, bootstrap startup environment in the early years, where there's only 3 or 4 of us, and we're all wearing many hats. Like one minute you're on the phone to a potential client, the next minute you're printing off an invoice, and the next minute you're going down to the warehouse, and then the week after that you're going to see suppliers.

And then when it did start to work, and then it started to snowball was really exciting, because just as the clouds start to clear, and that sort of more scrappy sort of environment sort of dissipates, and actually then you're looking at your business and going okay, where do we take this? Like how do we grow this? Like where do we go next? And that building phase is just again such an incredibly exciting thing to be part of, and be part to do.

And I'd say some of my most enjoyable experiences, especially working with my dad, were like, okay, well, we knew that there was demand, and there were opportunities for us in Asia. And so going out to Hong Kong, I remember in 2013 for the first time and going into China in 2014, and starting to build a client base up in Southeast Asia. And then taking the next step and opening offices there, and then recruiting and amazing experiences.

Obviously, because at the time for me, that was sort of like, I was only like 4 or 5 years into my working career, and we were doing stuff that some people don't ever do. Or maybe dream about doing in the future, [10:00] and to do that. Alongside someone that you trust and have to share the enthusiasm and excitement about, something like wine. It's an incredible experience and something that I look back on really fondly.

And to be honest with you, it's been these essential culture and DNA that's been established within the business. I think one of the things that I've always really believed in is making sure that sort of scrappy startup environment where you have 4 or 5 people, you're working towards a shared goal motivation.

When you start to grow, and you've got 20 people, 40 people, 50 people you've got offices in different countries with different languages, different cultures, it's essential to make sure you capture that original DNA that made you excited and brought you all together as a small group of 4 or 5. Like how do you then translate that across the world into different teams and different people?

And having sort of like that alongside me, to sort of even what I just told you then, that story bringing people into that and sort of making them feel part of it, and even though they're not your family, making them feel like they're part of that family story. That's been essential for us, and I think that's what's really stood the test of time.

And coming back to your original question, I don't think that I would have been able to achieve anything like that in terms of establishing a clear DNA or clear culture about who we are and establishing those values about having that relationship within the business.

Philipp: No, it's amazing. And I think you said a couple of things, one that really stood out is obviously; you have a passion for it, right? And you made a passion for your business, and you enjoy that part, right? And you married your passion with a job, so even better.

And I think this is what a lot of people strive and struggle with. But I think once you find that part where you can really pursue your passion, still make money from it, right? And follow that, it's a great recipe to build a great company.

So thanks for sharing that background; I really appreciate Tom. Moving on, you touched on a couple of things already because we already kind of talked about why you started the wine investment business and what some of the gaps in the market were that you were trying to solve. If we take a step back, what makes wine an interesting investment vehicle in the first place?

Tom: Yes. It's a really great question. I think if I had to distill it into why I find it such an engaging asset to invest in, and what I think a lot of our clients do as well is that I think it has this unique characteristic that combines both people's sort of emotional sort of the heart side of their psyche. Wine is romantic, it's sexy, it's something that's different, there's so much to learn about it.

There's the stories, there's the people behind it, there's the geography, there's the incredible landscapes, the different sort of cultures that have come together over centuries to create these incredible products that have stood the test of time. And that really plays to people's sort of emotional sense, in terms of having that sort of attachment to something.

And then, at the same time, it really plays to the head. In that from a rational perspective, there's so many strong qualities to why wine would be a sensible opportunity for someone to diversify their investment portfolio. I think given the climate we're in today, and over the last few years where we've got record low interest rates, in some countries even negative interest rates, something that I don't think any of us will expect to increase over the short or medium-term.

We're obviously in the market, a lot of financial market volatility. We're seeing the potential issue of inflation with the amount of money printing that's been going on. I think I read something over there about 20% of all the money that's ever been printed in the US economy has happened in the last 12 months and the inevitable potential inflation that could come in the future.

And so I think all of these things mean that as an investor, from a rational perspective, people are looking for diversification. They're looking for uncorrelated assets. And I think that there's always that human psyche of tangibility. And I think the human psyche of tangibility is when the chips are down, and you're sort of backed into the corner, and you need to be defensive. I think people always like to have that reliability of something like property, for example, brick and mortar, something that's physical that is tangible.

They can go and say actually like I own that, and not only that, something that has a store of value. And I think that because wine has this heritage, this tradition, its longevity, it's a luxury good, it's a consumable product. It's been around for three or four centuries, that's not going to change. So I think that wine is an incredibly alluring asset class because, as I said, I think the qualities of wine as an investment, the fact that it's uncorrelated, the fact that it has low volatility, the fact that it's tangible.

The fact that it's a defensive asset, the fact that it's inflation-proof, the fact that over the last 200 years always increased in value [15:00] plays a lot to the head. It plays a lot to invest in sentiments right now. And then underneath the bonnet, once you get past that as a reason to invest in it, you're suddenly entering into a world where the experiences and the life-enriching values you can get from wine are incredible.

Because you can visit these places, you can taste these wines, you can learn about the stories, you can meet the winemakers. You can go have dinner with the producers, and you can read up about these things. And it's fascinating, and I think people really enjoy that aspect. So it's a really two-fold powerful asset class that I think really delivers on a lot of levels.

Philipp: Yes, absolutely. I think that's the part that I enjoy, right? Is doing the research and understanding where it's from. And like you said, visiting the places, right? Just last weekend, I actually drove through wine country in Oregon, right? Which is great, you can actually see where the bottle you're drinking is being made. So we know it's an interesting investment vehicle; we talked about diversification, low correlation to traditional asset classes like stocks.

If we take it back a little bit and look at a little bit of the history of wine as an investment, right? How did the investment piece come about? Obviously, back in the days, people just, we're going centuries back, they consumed wine at festivals and things like that or it was made. But when did it become an investment? Or like what was the first where people said, oh no, I'm buying this, I'm holding it, and I'm selling it at some point?

Tom: I think to track it back to like being specifically an investment, it's difficult to say what the motivations of people were in the 19th century, even the 20th century to invest in wine. But I think what is very true of the wines that are investment-grade, investment-grade quality wines is that these are ones that are made to last for 20, 30, 40, even 50 years. So wine has always had a longevity to it.

And because these wines have a longevity to it, and they need to be stored, and they need to be able to sell it, and they will mature and actually hit their peak maybe 20 years after they're being bottled. Because of that lifespan that they've had, it's always meant it's been a tradable product. And I think there's a distinction between when did it become investment versus when it's become tradable.

I think wine has been a tradable asset for 3 centuries, if not longer. Wine has always been something that's been tradable because you might buy a wine today, let's go back 50 years, some people might be buying wines purely for the fact that they love that wine, they're going to let it accelerate and mature and drink it at some point in the future.

But the fact is things change, people change; circumstances change, you might move house, you might have a divorce something might happen where suddenly you've got all these wines you bought 10 years ago and actually you need to sell them or liquidate them or do something. So the market, the secondary market for wine, has always existed, it's always supported the wine market, it's always been a really important part of the life cycle of wine.

Because theoretically, if these investment-grade wines didn't have a secondary market, then it really reduces the appetite for anyone to obviously pay the ongoing cost of storing and maturing these wines. If you know that if you were buying a good today, where you go, you're going to have to store and pay the cost of storage and the cost of carry for the next 20 years before you can even use this product.

Oh, and at any time you decide you don't want it anymore, you can't resell it. The market disappears like you're not going to get a lot of people that are interested in doing that.

So the secondary market in what I talked about, the ability to actually sell, resell, and trade these wines, has always existed, it's fundamental. It's absolutely fundamental. And the way that the life cycle of a wine works is that there will be people that aren't interested in doing that, and maturing and selling for 20 years, and paying the cost to carry. But there are people that will pay a premium for someone else doing it.

So in answering your question, I'm not trying to skirt around the subject. I think the fundamentals of wine being a tradable investor asset have always existed because they had to. And I think the actual mentality changes and the actual approach of wine being an asset class. I think has really, I think, really started sort of in the mid-2000s. 

I think the mid-2000s, I think you were right like you completely nailed it in terms of people from the 80s, the 90s, even further back, they've always bought wine and thought themselves oh well, if it goes up in value, I'll really sell it. And that's obviously a very sort of hobbyist; I think that's how I described that point in time; wine was a hobbyist asset.

Philipp: And it was probably also because it was difficult to understand what it's even worth, right? Like without the internet, and without having paid sites like Wine-Searcher is one, but like there's many different other pages where you can actually now see values. It was really difficult even trading them, right?

How to even buy and sell it, right? Especially like you said. It's a little bit like Gold, right? With Gold, if you buy gold bars, there's still storage to it, [20:00] and it's a physical asset, so it's hard to move. And I think back in the days; I just feel people would be, it's just going to be a very small portion of people that traditionally invested in it, just because of those reasons.

Tom: Yes, absolutely you've nailed it, and I completely agree. And as I was saying, I think that sort of mid-2000s where you had the emergence of platforms like Liv-Ex, have the emergence of platforms like Wine-Searcher, and of course, we had the internet age.

An internet age, wine is one of those industries that sort of takes a bit of time to catch on to the technology advancements, but that sort of mid-2000s sort of a lot of people talk about 2005 Bordeaux. 2005 Bordeaux almost been the emergence of wine as a purely investment and asset class, because that was when a lot of money went into buying 2005 Bordeaux, there was a lot of hype around it.

And then, as you said, there was that sort of starting point of having a little bit more data, there's a little bit more access globally to see these wines. But that's why we existed; we established the company and sort of took it away in 2009.

We wanted to create a way for people to get access to this as an asset class. So we wanted to bring wine to a larger, greater audience. When we started Cult Wines, we weren't doing it because we wanted to go after the people that were already doing it. Because as you said, those people were already doing it; they were the hobbyists, right? 

We came to being because we said well, we can now help other people do it because you're right, the Internet has meant there's now more data, there's more pricing, there's more transparency, there's more accessibility, the price spreads are lower, and you can actually track these things, you can analyse these things.

Philipp: Yes, that makes a lot of sense. And I think that this is like, because like I think before I even did more research and I met you guys a few years ago, I think even for myself, I always yes, I like wine, and I'm on a bunch of newsletters from different wineries. So I'm buying directly from some of the estates, cellaring them, but I've never used it as an investment.

Yes, of course, it has some value because I'm buying them early like you said, cellaring them I'm using a storage locker, right? In a wine storage place, that costs money, but there was more to enjoy with the family. And so I think because I think it felt very overwhelming to invest in it. There's so much out there, there's so many wines, there's so many different regions in the world.

So it becomes  very overwhelming to pick the right ones and who are going to be the winners and the losers. So how do you guys go about picking wines for customers? And what are some tips you can give listeners to get started in this? Because there's so many different ways of getting access to wines, right? Maybe we can even go through some of them for our listeners.

Tom: Yes. I mean, just to touch back, what sort of point you might have resonated with me massively, what you said, and it resonates a lot with conversations we have with people that do generally just love wine and enjoy drinking it and learning about it.

One mantra that we hold really true internally at Cult Wines, is this concept. And the idea is that investing in wine should be as effortless and enjoyable as drinking wine.

Like for you, like the experience being close to wine, buying them from the winery store and enjoying them with your family, that's an experience, that's enjoyable, that's effortless for you, that's something that you get a lot of value out of.

But as you said, you look at investment, and then suddenly, well, this now feels a bit daunting, this feels a bit more sort of like okay, where do I start? How do I start putting this together? What's the information that's needed? How do I actually do this? And then, at that point, you're thinking, you know what? It's not as effortless and enjoyable as drinking the stuff. So maybe it's not for me.

And so that for us is a really clear mantra, and that's something that we really keep quite sort of close to us in terms of informing the way that we build our products, the way that we build our customer experience, the way that we interact with prospects and clients and partners and producers and everyone like that. And to answer your question, so up to our model and how we're currently structured is around an actively managed portfolio.

And so what we understand and what we feel is that there is a large audience of people that are wine drinkers and people that are enthusiastic about wine, who would love to get more exposure to wine as an asset class.

And I think the main stumbling blocks or the main potential objections to people making that decision is one, what we just touched on it, being quite daunting, where do you start, how do you begin access? 

Philipp: Yes, because also in this case, like for example most people will probably first get some experience by going to their local wine merchant, and learning about wines. And buying their first bottles there, but like investing is different, right?

Tom: Yes, absolutely yes. And so for us, it's about understanding each individual client's sort of motivations, experience around wine and what their objectives are, and actually building a managed portfolio. Where they're not taken out of it, they're part of the process, but they actually lean on our experience, our expertise, [25:00] and our accessibility.

And then we manage it internally from a very much like an investment manager; we have an investment committee, we have a top-down asset management approach, we have portfolio managers, and we have software and data that we have internally which on a day-to-day, week-to-week, month-to-month basis is analysing the market, evaluating our positions and validating our client's positions, and making sure that we're delivering the best risk-adjusted returns for our client portfolio.

It could be someone who's coming in saying, look, this is for the next 20 years, I'm going to be putting money in on a regular basis, and I'm happy with sort of 7%-8% returns, and I'm really excited about some of the experiences and getting access and learning more about wine. Then we might have someone else who comes in and goes. This is a sort of 5-year view for me.

I'm really interested in getting high returns; I'm looking for 10%-15%, I'm happy to take a bit more risk on. I'm looking for a bit more trading opportunities in the portfolio, and I want a bit of excitement with how I'm trading and building the account. So we can all the time have these slightly different sorts of profiles of individuals.

And so we will then work with them, and their portfolio manager will build a portfolio that matches their sort of risk profile, their investment objectives, and what they're looking to get out of it. And then we will actually take on the role of building a portfolio, whether that might be $50,000 of wine, which will be across, I don't know, 40% in Bordeaux, 30% in Burgundy, 15% in Italian wines, 10% in Champagne, 5% Californian wines. 

The provenance and authenticity is absolutely guaranteed. So in a lot of cases, it will literally go to the winery,  allocation to Cult Wines, Cult Wines to the client. We will pick it up; we will ship it into the UK or go into our UK bonded warehouse. And at that point, the client would have access to our digital platform.

So they would have access to our client portal, where we sort of digitise the experience. That's when they actually have a much more sort of modern technology-focused approach to, OK, these are the ones in my account; this is the profit and loss. We're bringing in sort of daily price valuations, so on a day-to-day basis, the portfolios get re-valued. 

Philipp: let's say, for example, our listeners would like to get started. Obviously, most of them will do their research on different ways to invest. There's probably also some wine funds that you can invest in nowadays directly.

What would you say investors should look out for? Especially when it also comes to scams, right? Because I think with the internet, we always know that there is going to be potential risks with investments. And especially in spaces that are new. Maybe people aren't so sure what to ask for, right? Investing in stocks. Even there’s scams nowadays, right? And that's been around for so long. Any tips you have for those investors?

Tom: Yes. I think probably the two areas I'd focus on around sort of, as you said, sort of providence authenticity, making sure you're working with a company. I think the second area I look at is having an appreciation of sort of the costs that are attached to it. With any sort of luxury asset class you get into, there are quite significant transaction costs and costs of carriers.

 So, starting on the former, I think it's super important; I think that there's been unfortunately in the wine market over the years, there's been plenty of examples of, sort of from one extreme to another, from companies genuinely just going out of business.

And it might be that if your wines are stored with that particular company in their warehouse, or that you've bought an En primeur which is a wine future, which is where you actually get allocation of a wine before they're physically bottled.

Yes, there've been plenty of cases where a company goes out of business, and actually, the process of getting that wine can be very long, quite lengthy, might involve lawyers and administrators, and in some cases, you don't actually get the wine. You might get pennies in the pound or cents on the dollar back.

So there's always a risk attached with buying wines with companies that maybe haven't been around for a long time or don't have the necessary sort of infrastructure to be able to support that. Then to the other way, the other extreme, which is there are companies that have set up overnight and talked about oh, we can get you this wine or that one I'm going to get it at a great price, and there's actually quite a famous example in America, a company called Premier Crew that was based out of Berkeley, California.

That basically went down for around $20 million worth of clients' money. And they were sort of pre-selling wines and selling these lists out with wines at incredibly cheap prices, and understandably many people can be greedy and go oh, that sometimes you don't ask why is that price so great. And actually, what turned out is that they were; it was almost like a Ponzi scheme structure, there was one line to the next person and selling it multiple times, and actually, no one actually owns the ongoing asset. So that's a really extreme example of fraudulent activity that can happen.

So as with anything, you have to do your due diligence, you have to understand who you're working with, you have to make sure of that. But I think you can mitigate [30:00] a lot of these risks. A lot of things I just talked about there is, okay, well if you're buying wine, you're buying a physical asset, have your own storage account, have it somewhere where you can have it delivered into that physical, a third-party warehouse, a third-party warehouse, ask for the wine to be delivered into there.

You can even say something well, once you deliver into the warehouse, obviously, I'll fulfil my invoice, I'll have some sort of payment arrangement, so you're not risking too much cash in terms of the delivery of the asset. Obviously, if you're working with a company that's got a great reputation, they have been around for a long time, that are very widely recognised, I don't think those risks are going to be anywhere near as great, and of course, like 90% of the businesses that are in wine are obviously very reputable and very trustworthy. 

Of course, then there's a question that I think maybe a lot of listeners would have seen maybe in some of the Netflix documentaries that have come out like Sour Grapes. They're having a big issue with counterfeit wines. And counterfeit wines really do affect the top end of the market and the bottom end of the market.

Philipp: And I think this is a difficult thing, and I'm going to listen to you explain a little bit more about it. But I think this is one of the, one of the reasons why also people will probably shy away from wine investing, right?

Because you have that, something can be faked, manufactured fake, or it can also go off, or the bottle is off, right? So having someone manage that and understand and track wines. And tell me how you guys do. It would be super interesting, right?

Tom: Yes, absolutely. I mean there's so many different; I mean counterfeit wine, as you said, means so many different things. And some I mean in the case of people like Rudy Kurniawan, one who's obviously the main person focused in Sour Grapes.

Philipp: It's a good movie to watch for people if they're interested in this,

Tom: Yes, absolutely. But I think again; there are ways to mitigate it. I think firstly, a lot of the counterfeiting that happens in the fine wine world happens at quite the sort of rarified end of things, in terms of price point and rarity. And quite often, it's wines that would maybe turn up at auction that have been found in someone's home cellar. So I think the storage and the provenance of the wines is really important.

And I think that you can mitigate all these risks depending on the history of where the wine's coming from. So a lot of the ones that obviously we're trading in and investing in half of our clients, they're coming directly from the winery, they've been shipped to us, they're going into a bonded warehouse.

That means that we have a fully irrefutable track record and history and problems with that wine. In that okay, 2010 Jeffrey Rothschild came from the negotiation on X where we collected it in 2013, it went immediately into a warehouse, and it's been in there since 2013, that's a third party warehouse, where you can verify that information. And it’s in its original wooden casing hasn't been touched; it hasn't been opened, it has never been, hasn't ever been moved. So it's very, it's quite easy to sort of do the right sort of due diligence to understand and identify wines that have been in the right type of care, the right type of history in terms of where they're been, the locations, and how they're stored.

Where things tend to get a little bit trickier is especially auctions, where you've got a 1985 Burgundy from Henri Jayer, or DRC or Loire-Var, while it's one of these producers or Ponzo as it was in the film. These bottles are really old; there may only be a few bottles in existence. What's the provenance? Oh, it comes from a collector, they're not giving you any history. Always come from someone's house, in a cellar, it's been in there. Like once it's in that type of environment, there is no track record. There's no way for you to be able to know where that wine is being over a period of time, so there is a significant degree of risk attached when you're buying those wines.

So that should always be a consideration for people. I would always recommend, if you're investing in wine, to really focus on original wooden casing wines that have never been broken or opened, and not loose, wines that have stayed within a professional warehousing facility that you can actually verify the history of.

And make sure that if you're buying it off another individual, rather than a company that you can get asked for their provenance. So if there's another individual that you know is selling a case of wine, it'd be like, okay, well tell me where you bought it? What did you buy, and where has it been? And if a lot of people have done this properly, they'll be able to say, well, I bought it this year, here's the invoice, here is the original documentation.

Philipp: So, has there been any changes now that technology has become so prominent? Obviously, you can't retroactively go back to old vintages, but going forward, has there been any strides made, maybe directly from the estates, from the wineries to maybe combat this in the future? Because I assume there could be like through technology better tracking, right? And you can almost eradicate that part then.

Tom: Yes. I think in terms of what's happened so far, mostly from the wineries, is the implementation of sort of proof tag technology. I mean, some listeners who are into their wines and drink these bottles will have noticed this, is that there'll be like a tag that's on the side of the neck of the bottle that goes up to where the cork is. And has like a unique imprint [35:00] in which you can actually scan it with a QR code.

You can then go and probably go to the actual producer's website, you can compare the unique pin print to say that okay, that's that bottle, and I have some details around the history. I think what's happening now and something that we're also working on, and a part of a partner to, is looking at blockchain technology and how that can also be implemented throughout the supply chain.

So there's definitely a lot of stuff that's going on at the moment; I wouldn't say that there's any particular software or platform that's out there that's really cracked it yet. But I wouldn't be surprised in the next 2 or 3 years that there is a global blockchain platform that producers are using.

You still need every person in the link of the chain to keep up. You need everyone involved to maintain the chain. Otherwise, it breaks. 

I mean, I've got a few sort of private network blockchain, but that's not blockchain, that's just a decentralized ledger. Like you need public blockchain for this to be verifiable. So that means you need different nodes; you need different participants to actually make sure that this is verifiable. But as I said, you can get producers doing that; they have a total production.

But their total production, if you look at say top Italian producers or Burgundy, they then work with 200, 100 different importers around the world, right? So if they make 50,000 bottles, and then they work with 100 different importers around the world. Then if one of those importers isn't a participant in that chain, then that part of the supply is completely gone, and that part of the chain is completely gone.

So really, for there to be widespread uptake in this, you need every single participant to actually participate and actually see the value in participating. So I think from a proof of concept, I think we will get there probably quite soon.

Like within 18 to 25 months, I'm not saying Cult Wine; I'm generally saying for the industry. I think there will be one leading platform software solution that works. For it to genuinely work, and it generally to eradicate counterfeits, and to genuinely solve this issue, it's going to take another 5 or 10 years.

Because I genuinely believe it will take that long for all of the participants to come around and start using it, and actually use it every time knowing that the value is worth it. And I think that there is enough justification for it because if it was you or if it was me, as a private customer, I want to keep the chain going. Because it probably means that the point that I want to resell my wine, it's going to be worth more.

Because if you come to market and say here's my wine, and it's being blockchained from the producer, and that chain's been immaculately kept up from the day that it was bottled to this point in time. The price that you're going to achieve for that is going to be higher versus another case that hasn't got that sort of issue and that problem.

Philipp: And you just need the adoption right, the global adoption to happen. But I think like you said, I think there's a great use case for it, and it makes sense, right?

Tom: Absolutely.

Philipp: Good, and then go ahead?

Tom: Yes, I was just thinking back to the question and transactional costs in terms of advice. I just think that just really quickly on that won't go on too long. But when buying wine, the biggest issue and one of the things that again we have, one of our missions is actually to drive out inefficiencies and drive down costs, and actually make this more widely acceptable as an asset.

But with wine, you buy the wine, there's a retail margin included in that, you've got to ship the wine, you've got to deliver the wine, you've got to insure the wine, you've got to store the wine. You then got to find some way of tracking and managing it. And at the end of it, when you want to sell, you also have to pay someone to sell it.

So if you're doing it yourself, and you're buying off loads of different people, it's always worth bearing in mind the total cost that you're taking in, because even if a wine goes up 50% in value, if you look back and go well, actually 25% of that value I've spent in costs, and actually that means I've only made a 3% annualised return. You can very quickly eat into the profit.

So I think a consideration always has to be around the fees and the transaction costs that are going into it. There are obviously many different ways you can obviously reduce those costs and scale them down. But I think it's a consideration for people as well.

Philipp: Absolutely, and I think that's where platforms like yours come in to bridge that gap. So do you suggest then people, if they want to get access, they want to diversify their portfolios or their overall holdings as a family, allocate some money to wines, and then they still buy their own wines for consumption? Or do you guys actually see people use your platform to get access to rare wines and then actually come to the warehouse and pick them up?

Tom: Yes. I think in terms of what we do, we try and make sure that people coming in, we're going to manage it to generate the best return. And sometimes, the best returns aren't necessarily going to result from buying the wines you're most going to want to drink now.

Because most often, you're going to drink the wines that give you the most pleasure, and quite often, they're going to be mature wines, they've already gone up in value quite a lot. So we try and get people focused on the fact that this is an investment, so we want to get the best risk-adjusted returns. However, people are buying [40:00] physical cases, bottles of wine that they own, and we have.

They also own an underlying asset. And so sometimes people want to have some of their gains actually distributed in wine. Because if I've got a $100,000 investment and it increases by 50%, then I might look at that and go well, I'm really happy with that return, it actually means I've got maybe $10,000 or $20,000 of wine that I can actually drink, which theoretically I haven't even paid for, because it's my capital, it is still in there, and I'm still sitting on profit.

And so that idea of actually creating an investment portfolio, which actually delivers you not only returns in actual pure currency and profitability but returns in actually drinking the physical assets. Because you're drinking it for free effectively. It's quite a strong motivation. So some of our clients do see it as a way to build collections, and hopefully, at some point in time, actually get to enjoy some of the bottles that are in there.

So that's something we do encourage. I think generally, when looking at wine investment, there are different motivations. I think you've got; I think you've got people that would be really sort of             passive in terms of like they understand it, they think it's great, they'd love to get exposure to wine. They're not really that bothered about what wines are getting in their portfolio, they're not worried about drinking them in the future.

They want an easy product that they chuck in a bit of capital beginning, maybe do some monthly or regular payments, and they have an advisor that they rely upon and feel that it's going to do the best before them. So really hands-off, passive, low touch type of product or individual that's the type of audience I think there is. There's another audience which is probably a bit more like me and you Philipp, which is interesting, excited about the investment perspective, also really interested and excited about the products and the wine they're actually owning.

You've got people who literally like, obviously Robinhood's been in the news the last few weeks, but your retail investor who loves doing a bit of research, playing in the markets, doing their own stock picking. And then you've got other people that just want to invest in an ETF and just get exposure to a particular stock market.

Philipp: Yes, I think there's something there for everyone, which is awesome, and it's kind of like why we wanted to have you on. So before I let you go, one final question. What does the future have in store for wine investing? Where do you see this going?

Tom: I think the wine is an inflexion point right now. 

And I know I've just mentioned, I know I just mentioned Robinhood, I want to be careful what I say. But I think there is a general move towards democratisation of assets, and I think that that's filtering into wine. I wouldn't say that we are looking to democratise wine investment because I think there will always be limitations to access because, obviously, there's a limited supply of products.

So I don't think it could be full democratisation. And also, I do think there is limited value in a pure retail investor client going in. But I think in terms of audience segments, mass affluent to high net worth individuals, to ultra-high net worth individuals, that segment of wealth. I think there is an opportunity for that segment of wealth to get greater exposure to wine.

I think there is a lot of what's going on in the digital world that is filtering down into wine. I think if you look at say Vivino yesterday raised $155 million evaluation, not really sure what it'd be, but it's going to be seriously north of $500 million that sort of raise. And that's really testament to what's going on in the wine world.

So I think the future of wine investing is really exciting. I think that it's going to become easier for people to get access to it. I think there's going to be more tools available for people to do it. I think inefficiencies are going to be eradicated; I think the wine markets is going to become less fragmented.

I think we're going to see an eradication of supply chains. I think that there is a trend at the moment for wineries and producers to try and sell more closely to the consumer, that B2C strategy is something that a lot of wineries are looking at. 

They want to have a shorter supply cycle. And so I think that when you couple that motivation from a producer, I think when you attach it to the sort of innovation that's happening around technology and digital globally, but also within wine.

I think that's going to end up creating a more globalised marketplace, a more accessible marketplace, more efficient marketplace. 

Philipp: Yes, great and super interesting future for wine; I'm looking forward to learning more about it. I know the listeners will be as well. And for the listeners, we will also put in some links to your website.

Is there anywhere else they can learn a little bit more about Cult Wines? I know you guys, we've done an event together before; you always have events on as well where people can learn more. But any particular direction you want to guide them to?

Tom: Yes. I mean, we do a lot of content outreach, whether it's webinars, virtual tastings, reports that we write, general sort of video content. So I would recommend just directing to the website, signing up on our mailing list. So our website is wineinvestment.com. So yes, easy to remember.

If you sign up for wineinvestment.com, add yourself to the mailing list, and yes, we've got lots of great content. I think we did a webinar yesterday, doing virtual tastings, as I said. Lots of great content, lots of ways to learn more about wine as an asset, learn more about the wines and the producers in the history behind it. So yes, that's probably the best way to get in contact and learn more.

Philipp: [45:00] Yes, we'll put those in the show notes for everyone. And I can only suggest to sign up for the newsletter because I do enjoy reading the reports on the different regions and updates. So they're always really thoughtfully written. So Tom, thank you so much for being with us today; we really appreciate it. And yes, I'm looking forward, we'll cross paths again, I'm sure.

Tom: Yes, absolutely. I really enjoyed it; thanks so much for having me on.

Episode notes

Investing in wine presents a unique opportunity for investors to diversify their portfolio by adding an asset that is uncorrelated to how the markets are doing. In this episode, Tom Gearing explains how wine investment works.

Find out more about Cult Wines here.

For past guests, visit stashaway.com/podcast

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Episode Contributors

  • Philipp Muedder (Head of Financial Planning at StashAway)
  • Tom Gearing (CEO and co-founder of Cult Wines)