Whiskey
asics of whiskey investing, the potential returns, and how to actually invest
For a while now, luxuries such as artwork, classic cars and fine wine have long been seen as having money-making potential, and are collectively referred to as ‘alternative investments’.
Now, thanks to some stellar returns, the so-called water of life – whisky – has joined wine as an alcoholic asset catching the eyes of some investors.
Here’s what I'll cover in this deep dive:
- Key pieces of info before investing in Whiskey
- The whiskey market in numbers
- How to invest - a step-by-step guide
- Is Whiskey a good asset for your investment portfolio?
Key pieces of info before investing in Whiskey
Ultimately, there are two options when investing in whiskey—bottles and barrels.
Simple enough, right?
Unfortunately it’s not that simple. Each option has a unique set of pros and cons. Here are five things you should know before investing in whiskey.
Only Barrels Change Whiskey's Flavor Over Time
The flavors and aromas of whiskey continuously develop while it ages in the barrel. However, this process stops once the whiskey is bottled. After bottling, the whiskey's flavor remains virtually unchanged indefinitely.
The development of flavors in barreled whiskey occurs because the wood is porous, allowing the barrels to "breathe" and interact with the surrounding air, which adds complexity to the liquid. For example, a distillery located near the ocean might produce scotch with a slightly briny character. Generally, the longer a whiskey ages, the more valuable it becomes.
Although bottled whiskey can appreciate in value, this is not due to changes in its contents. Instead, its value depends on the brand's popularity and the scarcity of bottles. As a brand gains popularity and its bottles become rarer, the potential for a higher price increases.
Whiskey Barrels Offer More Options for the End Product
All whiskey brands sell bottles, but most do not sell barrels.
The dominance of bottles stems from brand popularity. Highly regarded distilleries usually prefer to bottle and sell their own whiskey rather than selling the barrels. However, the value of casks sold at auction has surged in recent years - more on this below. as noted in this article.
Selling whiskey by the barrel increases options for buyers. A single barrel might age into a 12-year-old scotch, be finished in a different cask, or be used in a blend or collaboration. Each of these possibilities creates new labels for collectors to invest in.
Save Money by Buying in Bulk
Anyone who shops at Costco understands the value of buying in bulk. For instance, investing in a 53-gallon cask of American whiskey for $1,500 yields about 266 bottles. This equates to roughly $6 per bottle, allowing plenty of room for value appreciation before resale.
Whiskey bottles, on the other hand, come with a higher per-bottle cost.
Serious collectors often spend several hundred to several thousand dollars per bottle.
Consequently, bottles offer less value for money, particularly when aiming to build a well-diversified portfolio of "liquid" assets.
Barrels Allow for Customized Bottling and Labeling
The whiskey investing process is straightforward: invest, store, and sell. This approach works whether you own bottles or barrels.
However, selling isn't the only exit strategy. Many investors opt to bottle and privately label their barrels for personal consumption. This allows for creating a private reserve signature whiskey, finished in a unique cask and customized with your own brand. Such customization is possible only with barrels, as they provide a blank slate.
Additionally, your signature whiskey can make a significant impression at special events, serve as corporate gifts, or be shared with friends and family.
The whiskey market in numbers
To start, let’s use the Rare Whiskey Icon 100 index (an index featuring 100 of the most iconic collectors’ bottles) to get a sense of how the market for whiskey has performed over the last few years.
So the obvious point with the graph below is that 2023 and 2024 were fairly brutal years for any serious whiskey investors. Following the pandemic, non traditional assets like whiskey have tumbled as consumers responded to high inflation and rising interest rates by cutting back their spending on big-ticket items.
That said, one of my favourite quotes (from Howard Marks is):
Rule number one: most things will prove to be cyclical.
Rule number two: some of the greatest opportunities for gain and loss come when other people forget rule number one. Very few things move in a straight line.
What I mean is, there’s a crash, but there’s always the opportunity for the rebound.
If you’re looking for more in-depth analysis, check out all these indices (including distillery specific indices)
And what does growth look like for the global whiskey market?
In a nutshell, promising…
How to Invest in Whiskey?
Investing in Whiskey Bottles
As with a lot of collectibles, the most common way to invest in whiskey is by purchasing bottles of it directly.
In this case, your approach is to buy one or more bottles of whiskey and hold them in the belief that they will appreciate in value. And this can work very well. Even at the local liquor store, bottles of whiskey can sell for hundreds, if not thousands of dollars. In fact, a bottle of Johnnie Walker Masters of Flavour was on sale for $24,000 in early 2023.
But that’s just the tip of the iceberg.
Some whiskey bottles have sold at auction for prices exceeding $6 million.
Several factors contribute to these high prices, with culture and age being the most significant. Like wine, whiskey is deeply connected to history and place, with each bottle telling a unique story and carrying a valued lineage. This connection is partly because whiskey drinkers often value the heritage and rarity of their bottles, contributing to their high value.
The underlying nature of whiskey also plays a role. Unlike many other beverages, whiskey improves with age. This means that old bottles often retain, or even enhance, their quality over time. An 80-year-old bottle of whiskey might only improve, while beer or vodka would become undrinkable. This aging process makes high-quality whiskey a rare commodity; producing the best bottles requires decades of maturation, adding to their expense and scarcity.
Additionally, whiskey is a global asset. Wealthy communities worldwide desire this product, creating a broad market for both acquiring and selling valuable bottles.
However, investing in whiskey is more art than science. It involves buying into the narrative of each bottle and understanding consumer preferences. To succeed, you need to learn about whiskey's history and individual bottles, focusing on those likely to maintain their cultural value and flavor. Patience is essential, as it may take years for a bottle to appreciate in value.
Investing in Whiskey Barrels
In addition to purchasing individual bottles, you can also invest in whiskey by buying barrels (or "casks") directly from a distillery.
Many distilleries offer this investment option, allowing you to acquire barrels of whiskey as they begin the aging process.
There are both advantages and disadvantages to this approach.
One of the main advantages of buying a barrel is the volume and potential opportunity. You can secure the whiskey before it gains a reputation, potentially benefitting if the batch turns out exceptionally well. Buying in bulk is also an option, as a single barrel can yield approximately 500 bottles of whiskey.
However, there are risks involved. Not every barrel in a batch will turn out well; some may spoil, while others might be mediocre. Additionally, distilleries usually charge for storage and bottling, since once you purchase the barrel, it belongs to you, and they're merely storing it. Furthermore, like individual bottles, this is a long-term investment. High-quality whiskey typically requires at least two to three years of aging.
Investing in barrels can be a lucrative way to capitalize on the whiskey market, but it is a long-term and potentially risky endeavor. Thoroughly research each batch before making a purchase to mitigate risks.
Investing in the Market
Finally, like with all assets, you can invest in whiskey by entering the market. This involves investing in the companies that produce or distribute whiskey rather than the product itself.
For example, you might invest in Brown Forman (BF), a major manufacturer responsible for brands like Jack Daniels. Another option is Diageo (DEO), the company behind Johnnie Walker.
To diversify your risk, you can also consider investing in funds. Although rare, there are ETFs and mutual funds that track the global spirits industry or whiskey specifically. One such asset is the ETFMG Whiskey & Spirits ETF, which occasionally becomes available.
Investing in the whiskey market provides a more stable, albeit potentially less exciting, way to add this asset to your portfolio. It allows you to benefit from the market's overall performance and mitigates the inherent risk associated with investing in collectible assets.
Specific Whiskey Investing Platforms:
Lots of benefits to this avenue, including insured and managed/stored, some companies let you schedule a visit to see your cask in person and if you don’t want to sell it, they’ll often allow you to bottle it.
There’s a few out there, including:
Is Whiskey a good asset for your investment portfolio?
When it comes to investments, it's crucial to choose wisely. If you're considering investing in whiskey, here are three essential questions to ask yourself:
Are you a long-term investor?If you're aiming for quick profits, trading in public markets might be a better option. Whiskey investments typically require a minimum holding period of three years to see decent returns. The value of a whiskey cask increases significantly after 12 years, and it reaches premium status after 15 years. Therefore, patience is key: buying a younger cask is more cost-effective and lowers your risk if you’re willing to wait for it to mature. Unlike stocks, whiskey doesn't pay dividends, so your gains rely entirely on capital appreciation.
Are you already well-diversified?If you're new to investing, starting with whiskey might not be the best idea. Ideally, you should have a core portfolio of stocks, bonds, and cash before venturing into this alternative asset. A general rule of thumb is to allocate no more than 15% of your portfolio to alternative investments. The longer your investment horizon and the higher your risk tolerance, the more you might consider allocating to whiskey or other non-traditional assets.
Do you have time to do your homework?Whiskey is a specialized asset, requiring thorough research before investing. Be aware of fraudulent schemes, where scammers sell overpriced or nonexistent casks. The lack of regulation in whiskey investments increases the risk, as there’s little recourse for compensation in case of a scam.
Consider taxes on any profits
In the United States, whiskey investments are subject to capital gains tax (CGT) as collectibles. This means that any profit earned from the sale of whiskey investments held for longer than one year is taxed at a flat rate of 28% for long-term capital gains. If the whiskey is sold within one year, the profit is taxed at the investor's regular income tax rate
Hope you feel a bit more savvy on the world of whiskey as a potential investing idea.
Jason
DISCLAIMER: None of this is financial advice. Finbrain is strictly for educational purposes.