"It's investment. But not as we know it."

If you’re a regular reader, you’ll know we occasionally mention Star Trek in our articles. We did so last month when we were talking about human behaviour and quoted Mr Spock saying “Highly illogical“.

The heading of this month’s article was inspired by a line from the Star Trekkin’ spoof song: “It’s life, Jim, but not as we know it”. Scroll down if you can bear to watch the original video (Warning: the chorus could get stuck in your head for days!)

But what does it have to do with investments?

Well, as you probably know, you can invest in various esoteric asset classes. Fine wine is one of those, for example, see WineInvestment.com. However, we would never recommend that wine is included as part of your core portfolio. It’s only OK to add satellite investments when you have plenty of spare money to play with.

Here’s some key advice if you do choose to invest in wine.

Imagine you bought a rare bottle of wine a few years ago for £20. It now sells at auction for £75. You have decided to drink it. Which of these statements is closest to your thinking about the cost?

  1. £0 Because I already paid for it
  2. £20 Exactly the amount I paid for it
  3. £20+ What I paid for it plus interest
  4. £75 How much I could get if I sold it
  5. £55 The bottle is worth £75 but I only paid £20, so I save money

This question was posed (in dollars) by Richard Thaler to readers of Liquid Assets, an annual newsletter on wine auction pricing. The proportion choosing each answer was:

  1. 30%
  2. 18%
  3. 7%
  4. 20%
  5. 25%

How does your answer compare to other people?

Financially, there is only one correct answer. If you drink a bottle of wine that could be sold for £75, you are sacrificing £75 (answer 4).

Richard Thaler is widely considered to be ‘the daddy’ of behavioural economics and later won the Nobel Prize. I stumbled upon his book a few years ago: Misbehaving: The Making of Behavioural Economics. I read it on holiday – but confess it’s quite heavy going. The other book you might find interesting is by Daniel Kahneman, and called Thinking, Fast and Slow. We mentioned it in our article Three Things to take with a Pinch of Salt.

By the way, you might remember this story in the media recently. Hawksmoor is an upmarket steakhouse in Manchester. In May, a customer ordered a bottle of Chateau Pichon Longueville Comtesse de Lalande 2001 for £260, but the waitress accidentally served a bottle of Chateau le Pin Pomerol 2001, worth £4,500! Read all about it on The Guardian website.

What this means to you

Don’t put your nose in the trough! If you have a nice bottle of claret on the shelf, and you want to share it with good friends on a special occasion, go ahead! Enjoy it! But we strongly suggest you never drink the wine you buy as an investment.

This article was inspired by an article we saw written by Rory Sutherland, Vice Chairman of Ogilvy UK. If you have time, you might like to watch him explaining how advertisers influence your purchase decisions (Warning, the information is fascinating but you might find him a bit shouty and sweary.)

Lance Baron

Certified Financial Planner (CFP) based in East Sussex, UK. We support people in Southeast England with more than £500K to invest by building a financial plan that will help them live the life they want… until age 100