A sideways look at economics

If I asked you to think of some profitable and safe investments over the last few decades, gold, government bonds or real estate might come to mind (or, depending on your definition of safe, Bitcoin). What probably didn’t come to mind was whisky. Now hang on, this isn’t the opening line of a sales pitch where I attempt to sell you my semi-drinkable, homemade whisky through an elaborate pyramid scheme. The reason I mention it, is that last week a 28-year-old sold a collection of whisky bottles, gifted over the course of his life, for £44,000. And whilst I know getting an 18-year-old bottle of whisky as a birthday present from your father from the day you were born probably isn’t the most relatable story, it does shed light on the interesting dynamics of the liquor market.

Whisky prices

His father estimated the bottles had cost £5000 in total, representing a nominal return of 780%. Even after adjusting for inflation the return from this investment is sizeable. The success of this collection was helped by a surge in whisky prices in recent years. APEX 1000, a monthly index created by Rare Whisky 101, tracks the “value of a collection of one thousand of the most sought after bottles of Single malt Scotch”…and I thought Fathom’s indices were interesting. The index rose by 170% in the five years to August 2020, eclipsing the price rises of most major long-term assets.

Whisky prices

High returns aren’t the only benefit of investing in whisky. I know I’m probably not doing much to convince you this isn’t a sales pitch, but I’ll run with it anyway. Whisky prices are also surprisingly recession proof, shown by the APEX 1000 reporting an average price rise of about 4.2% since the start of the year. This is especially impressive when compared with the performance of the S&P Global Luxury Index, a measure tracking the value of 80 of the largest companies producing luxury goods and services, which lost a third of its value in the first three months of the year before recovering. As one investor put it: “Whisky will always be drunk in times of celebration and in times of crisis”. A note of caution, however, if you do ever find yourself investing in whisky, I would recommend not drinking it.

One reason for the low volatility in price is the illiquid nature of whisky assets. Assets like oil or the FTSE 100 are traded at a high frequency and a consequence of this is that their prices will fluctuate significantly. Whisky isn’t homogenous and its price will depend on a variety of things like brand, vintage and rarity. In this respect, whisky investments are similar to other illiquid investments such as fine art and antiquities or classic cars. These types of assets generally hold their value due to the emotional attachment of their investors. The Coutts Passion Index, created in conjunction with Fathom Consulting, tracks the returns of such assets, with components ranging from stamps and coins to fine art and ultra-prime property. As seen from the chart below, whilst the Coutts Passion index as a whole rose by 8.6% from 2014 to 2018 the price of collectors’ whisky rose by 200%, dwarfing all 14 components of the index.

One of the biggest drivers behind the price of a bottle of liquor is its rarity. Like all goods, the lower the supply the higher the price. However, what separates liquor from most other assets is the idea of vintage. Inevitably as bottles of a given vintage are consumed, they cannot be re-made and those left in circulation become rarer and consequently more valuable. Earlier this year, a rare cognac bottled in 1762, one of only three remaining bottles of its kind, sold for an eyewatering £1.5 million. Historically, limited supply has driven whisky prices higher, but increasing demand from investors could change this. The risk is that, as the interest in these kinds of investments grows and the price inflates, a wedge will begin to form between the actual price and its true intrinsic value. In other words, a bubble. Already there is a growing difference in the APEX 1000, a measure of collectors’ whisky (that tends to be bought as an investment), and the average price of whisky (which will mainly be driven by bottles bought to be consumed).

However, looking at the stable rate of growth the asset is currently enjoying, a bubble is clearly not forming yet. In the twelve months before Bitcoin peaked and crashed at the end of 2017, it experienced an average monthly growth of about 25% against the dollar. The APEX 1000 index averaged a monthly growth of just 1% over the last year.

Although we are far from a bubble, profits from investing in whisky are strong. Returns on the average collectors’ bottle of whisky were almost four times higher than those of gold since 2014. In the current circumstances, under lockdown, the biggest risk to investing in whisky is probably consuming your investment in an enjoyable, but ultimately regrettable, night. However, on the off-chance that prices do crash in the future, at least investors will be able to comfort themselves with a good glass of whisky. Until then they can enjoy these unusually strong and steady profits, maybe with another glass of whisky.