Wine investors get
- 17 April 2012
The question investors and their advisers must now ask is "Why?" Why are those with spare cash happy to hand over substantial sums on the basis of phone calls and a glossy brochure or website despite warnings against scam booze investment firms going back 15 to 20 years?
Cold calling is the first step
It all starts with a cold call. Salespersons, invariably armed with a script, tell potential investors that interest rates are ultra low and the stock market is ultra volatile. Both statements can be true. It's their fine wine investment "solution" that is worrying. And it is the lack of financial knowledge and advice that allows them to scam people out of sums well into five figures if not higher. Because they are totally unregulated, they can say whatever they want – they have no requirement to issue even the slightest wealth warning or to discover an investor's real needs.
They will say that the way to positive growth is by investing in the fine wines of Bordeaux. They claim expertise going back many years, although Companies House research will often show the directors are in their early 20s and the companies themselves have only been in business for a matter of a few weeks. And they point to indexes which seem to show non-stop growth in wine prices.
Added to that, they will say the gains are tax-free, playing on most people's desire to reduce their tax bill. This is only partly true – see this HMRC statement for details. And that assumes the wine is real or gains in value or that the so-called wine broker does not disappear.
Supply and demand theory
According to their story, it all comes down to supply and demand. They claim the supply of fine wines is limited but that the demand is increasing. Before the millennium, they tried this with champagne, saying that demand for celebratory drinks would be so great, prices had to soar.
More recently, the story has changed. Firstly it was demand from China (the "new rich who would pay whatever it took to get a prestige bottle") and more recently demand from India (a reduction on some import duties plus the "new rich who would pay whatever it took to get a prestige bottle").
It's always easy to back an investment tale with stories of higher demand. Yes, people did toast the new millennium but champagne companies had geared up for this with extra production – and when prices go too high, consumers switch to other fizzy wines such as Asti or Cava.
Virtually all the late 1990s champagne companies went bust, leaving investors with a few bottles of poor quality wine at best and nothing but a phoney certificate at worst. There was no boom.
Phoney wines in new bottles
Yes, it is true that the value of some wine vintages has gone up substantially since 2000 although prices have fallen some 20 per cent in the last year. But from that past performance (perhaps in just one wine) it's a big leap in faith to assume that:
- That trend will continue – that there will be no substitution effect as consumers switch to other wines or to other visible signs of wealth (neither China nor India has a cultural record of wine drinking)
- The wines you buy will exist, are genuine, or are fairly valued. There is plenty of evidence with scam wine firms that the bottles do not exist (often more than one investor will have title to the same cases of claret) or that they are overpriced or that they are fraudulent.
- The company you deal with will stay in business and not go into liquidation. The BBC says that 50 firms have disappeared in just four years – that's one a month. They often leave chaotic or non-existent paperwork making it difficult for liquidators to know who to contact and what they might recover for them – most do well to refund 20p in each £1.
- The staff know anything about wine or investment other than what is on their prompt sheet. Even acknowledged wine experts faced with blind tastings get it wrong – confusing £20 with £200 bottles.
Up to 50 per cent taken by sellers
Sales staff at these firms often say they earn just 2 to 5 per cent commission. But they work to a model where they really take up to 50 per cent, split between the firm's bosses, the middle managers and those on the phones. It may be called a bonus or a sales override or an incentive payment.
They always try to discover how well off potential victims are – there is no point in chasing a pauper while knowing about existing investments enables them to tailor their stories to fit individuals – if targets hold savings accounts, for instance, they will say they are poor value.
And they often suggest that you start off with a trial investment – perhaps £5,000 to £10,000 to "get your toe in the water". A few weeks later, they will tell you your investment has increased to encourage more money. This is rarely if ever true but it gets more cash in their direction.
Target the vulnerable
Sellers are trained to know who is vulnerable and who is not – they will put the phone down quickly with the latter. They look for the elderly (more trusting) and the recently bereaved (possibility of bequest and grieving people are more suggestible).
This Office of Fair Trading document contains material on the psychology of the scammed as well as of the scammers.
Potential investors can check via the Invest Drinks website for more information on individual firms.
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