What are alternative investments?

Financial advisers love to lure potential buyers with the premise of fabulous earnings from so called “alternative investments”. Wealthy customers in particular are supposedly vulnerable to such proposals. So is it really worth considering investment in art, whisky or other collector’s items?

What are alternative investments?

As it happens, the term “alternative investment” is a rather vague one and various companies use the name differently. For some, an alternative investment could be the purchase of a gold bar.

However, for the purpose of this article, I shall define an alternative investment as the placement of money in assets that are not correlated (or only slightly correlated) with traditional financial markets.

Some of the most popular forms of alternative investment are high class alcoholic beverages (fine wines and whiskies), art and widely recognised collector’s items – 3 key areas we shall cover today.

Investing in whisky

Not every kind of alcohol is suitable for investment purposes – indeed only whisky and wine can be deemed profitable.

When it comes to Whisky, there is a simple question of terminology to look at before we go any further. Any bottle labelled as 'Whisky', in all but a few exceptions, heralds from Scotland as that is the form of spelling used in the country. On the other hand, 'Whiskey' is an Irish spelling and as a result of the volume of Irish immigration to the USA, the spelling was embraced by the Americans. Therefore if you come across a bottle with an “e” in the name, it was most probably produced on the Emerald Isle or across the Atlantic Ocean.

Now, frankly speaking, 'whisky' tends to be more highly valued by gourmets than 'whiskey'. Good whisky takes on more taste over time, and whiskies aged for several years or several tens of years are becoming increasingly rare for a simple reason – a lot of them are consumed.

However, this trend almost exclusively applies to single malt whisky, that is, malt whisky from a single distillery. In Poland and other countries around the globe, blended whiskies, e.g. Johnnie Walker, tend to be more commonplace. These are either a mix of different types of malt whiskies (in the case of Johnnie Walker Green Label), or blended with grains other than malt (such as Johnnie Walker black label). Blended whisky is not fit for collection purposes, but is perfectly fine for consumption of course.

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Another strategy is to search for bottles from distilleries that no longer exist, which greatly increase in value over time.

The company Rare Whisky Ltd. publish two indexes that spell out the prices of these prized drinks. In addition, the Vintage 50 shows the change in price of the 50 most expensive "emissions" in history. On top of that, the Icon 100 shows the change in price of the most "iconic" bottles, which naturally are those with the highest liquidity (and therefore the most sought after by collectors). During the last year, the Vintage 50 grew by 8.77% and the Icon 100 by 12.99%.

Another option is to purchase special numbered collector's editions that come cased in beautiful packaging. However, to verify which of these editions will increase in value, one has to be an expert and also enjoy a generous stroke of of luck.

Investing in wine

Investing in wine can be even more difficult. Nonetheless, there are some basic rules that investors can follow. First and foremost, there are some brands or vineyards, typically French, that are most sought after by connoisseurs.

Naturally, the older the wine, the better. Nevertheless, the price of the wine is highly influenced by the vintage, which may be quite simply labelled as “good” or “bad”. The key factors here are the weather during the grape harvest of a particular region and the skills of the manufacturers, however even fashion can have an influence too.

While the majority of consumers can distinguish a good wine from a bad one, knowing the difference between a good an excellent wine is a tall order. Thus, “gourmets” often rely on the opinions of professional sommeliers.

Investing in wine requires a lot of knowledge and a fair amount of money. The purchase of bottles of recognised and highly prized vintages is often a huge expense. In turn, purchasing on the "primary market" requires expertise and a lot of patience, because it often takes a number of years for the wine to appreciate.

An additional problem is the proper storage of bottles so as not to ruin their content, which is a separate field of knowledge entirely. Appropriate storage generally requires conditions seldom available in private real estates, a factor that cannot be ignored either.

Problems can also arise when it is time to cash in on your wine investment. The fact that a bottle has a certain value does not mean that someone is willing to buy it at that price. There is no regulated, formalized market and the investor has to rely on private contacts or auction houses, which tend to charge high commission rates.

Investing in art

As is well known, works of art can reach unbelievable prices at auctions. This is especially true of works by famous artists housed in the most the prestigious museums in the world. A case in point is "The Scream" by Edvard Munch, a painting that was sold for nearly $120 million.

It would seem that investing in art is nothing difficult – you just find a young and talented artist, buy their work and wait long enough for the artist to achieve legendary status (or pass it onto your heirs, as that process may take some time). After all, a version of “The Scream” sold in 2012 comes from the end of 19th century, so as a great work of art it is not that old. Another well known example are the paintings of Pablo Picasso, which only date back to the 20th century. Some of Picasso's works have fetched over $100 million.

That said, virtually nobody has the funds to buy a work of an acclaimed artist for tens of millions of dollars. Besides, the majority of these works belong to museums or avid collectors, who are reluctant to part with their paintings or sculptures. As a result, the only works that investors can consider buying are those from young and talented but still relatively unknown painters and sculptors.

However, investing in art, especially in contemporary art, which treats classical canons of beauty as obsolete, is mainly a matter of intuition. The reviews or opinions of experts are helpful, but it really all depends on issues such as fashion and taste.

As in the case of alcohol, problems can come up when seeking to sell the investment. The main problems for the seller are commission and finding a buyer that will be willing to pay the appropriate price.

The main advantage of this form of investment is the contact with the world of art, which sometimes can spark a passion and generate not only profits, but also considerable satisfaction.

Collectors’ items

Collecting is a passion; many collectors are willing to part with considerable sums of money to buy pieces they still do not own.

There are traditional collection fields such as stamp collecting, numismatics or antiques, but a collector’s items may also include beer labels, old toys or even football programs from one hundred years ago. In addition, popular television programs, such as Baggage Battles or Auction Hunters, serve to foster the illusion that buying and selling these things is simple and very profitable. However, television is, above all, to provide entertainment and not all we see there is credible. Buying and selling any collector's items requires a great deal of knowledge.

It is much easier with numismatics and stamp collecting, which are fields with a long tradition. Even so, despite there being perfectly organized communities of enthusiasts and many catalogues issued, it is not easy for a layperson to fully understand what this hobby is all is about. Not to mention sourcing and collecting those less common items that are highly valued.

Does this all mean that there is no money to be made on investing in collector’s items? Of course not. But an in-depth and systematic knowledge of the topic is the minimum required. Passion is simply essential here. So if you know everything about comic books, it is worth looking for valuable editions in antique shops. If you love ceramics, you can find teacups or other items at flea markets. You must, however, consider it as a passion rather than as a source of income.

Alternative investments are a highly specialized field of investment. If you can combine your desire for investment with a personal passion, there is no reason why these collector's item should not form a small part of your investment portfolio. However, if you invest without in-depth knowledge, you can become easy prey for hustlers.

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etEesti (Estonian)

Krzysztof Krzemień