Don't buy in to this cellar's market

You may have heard about the recent study that shows collecting wine can be more profitable than buying stocks. It's a fun notion, I agree. But it's also nonsense.

Before you start turning your basement into a gigantic wine cellar, ask yourself a question: How many millionaires do you know who made their fortunes by going long Château Latour? I'm guessing the answer is zero.

Here's another question: If collecting wine is so profitable, why do winemakers sell their output? It would make more sense for them to store the precious liquid and sell the mature vintage two decades down the road for outlandish profits.

The notion that anyone can cash in by buying and holding wine is the latest in a long line of attempts to tout collectibles as investments. If you want to see how this movie ends, look up the history of Beanie Babies or baseball cards.

Despite the painful track record of these so-called investments, there's no end to stories about the profits to be made by snapping up wine, or fine art, or first-basemen's gloves, or whatever.

Most of these stories rely on three reality-distorting devices. They begin by looking at prices within a limited - and often very convenient - period. They then amplify the potential profits by ignoring transaction costs. Finally, they sidestep the possibility that producers can increase supply or that collectors may change their tastes.

The wine study, Raise Your Glass: Wine Investment and the Financial Crisis, is smarter than most of the "research" generated by enthusiasts for collectibles. The authors - Philippe Massett, a professor at the Lausanne Hotel School; and Jean-Philippe Weisskopf, a researcher the University of Fribourg - have a deft way with statistics. But their conclusions still seem tipsy.

In their paper, Massett and Weisskopf track prices at wine auctions between 1996 and 2009. They conclude that wine outperformed the Russell 3000 index of U.S. stocks during that period, while top wines did even better. The Russell 3000 gained about 50% in their study, while an index of general wine prices more than doubled and the top-quality wines produced better than a 500% return.

So what's not to like about this race between wine prices and share prices? For one thing, there's the time span of the research. Choosing a 13-year period is odd - especially a 13-year period that just happens to begin during a financial boom, when stock markets are frothy, and end with a financial crisis, when stock prices have been hammered into the ground.

Weiskopf tells me the time span was determined by the data that was available on wine prices. All right. I look forward to a more comprehensive survey. Until then, it's difficult to know if the period under study is typical.

My guess is it's not. The graphs in the study show that the stock market ran ahead of the general wine index most of the time. It was only during the final year of the study, when stock markets tanked in the worst downturn since the Great Depression, that the general wine index gained a large advantage.

But it's not just the convenience of the period under study that makes me skeptical of the study's results. There is also the not so small matter of transaction costs. The study ignores these expenses.

Auction houses usually impose a buyer's commission of 18% to 21%. In other words, if you submit the winning bid for a case of wine at $100, you must pay $118 to $121 to take possession of it.

Unfortunately, that's not the end of things. When you turn around to sell your wine, the auction house charges you a seller's commission of up to 10%. When all is said and done, the fees for buying and selling a case of wine can swallow a quarter of your expected return.

Transaction costs turn the investment appeal of most wines to vinegar. But you would never know it from reading this study.

Yet another issue is whether the fickle market for wine could go flat. Most of the increase in prices for top-quality wines has taken place since 2005, when Asian buyers became a force, especially in the bidding for first-growth Bordeaux, classic Burgundies and a small number of other great French wines.

"I'm off to Hong Kong tomorrow to talk to investors there," says Jason Boland, president of Spectrum Wine, an auction house in Irvine, Calif., specializing in fine wine. He estimates about half his business now comes from Asia, most of it from Hong Kong.

Will Asia's nouveau riche continue to flaunt their wealth by bidding up wine prices? Much depends on China's economy. In the meantime, wine doesn't pay dividends, costs money to store and - outside of a handful of prestige vineyards - exists in oceanic quantities.

Wine auctioneers say only the products of a handful of France's top vineyards attract Asian buyers and therefore qualify as investments. "The classics come through," says Robert Sleigh, vice-president and head of wine in New York for Sotheby's. "I always say go for the best of the best, the blue chips."

Fair enough. You can buy blue-chip vintages on the chance that one day you will be able to turn your bottles into a lush stock portfolio. To my mind, though, a better plan is to pour your money into blue-chip stocks on the near certainty that they will eventually pay for all the fine wine you can possibly drink.