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Copyright © Ric Einstein 2009
Expensive Bad Advice (4 October)
Greed and avarice have been around since long before Moses played front row against Cairo, and as history shows, many people are eventually burnt by it. This characteristic of human nature means there are always “opportunities” for the unscrupulous and dishonest to make money from the greedy, but unfortunately it’s not always just the greedy to get caught up in these schemes. Such is the case of James (name changed to protect his identity) and this is his story. James Hacker recently contacted me after reading There Is Still One Born Every Minute which was an article I had written in early in 2006 about Australian Portfolio Wines Pty Ltd (APW). He wanted some advice about his “investment” so I rang him.
James is certainly not greedy. In fact he has spent his whole working and personal life in the pursuit of selflessly assisting others. Without telling you his real occupation, as that will immediately make him easily identifiable to APW, let’s just say his vocation had him involved in social work and helping the needy. When it came time to retire, James and his wife owned their own home in a major capital city and his retirement nest egg amounted to under $200,000; not a lot of money to keep a couple going for the rest of their life. James wanted to ensure he invested the money safely so he went to an investment advisor. The advisor charged him $2,000 for the advice but who knows how much more they received in the way of kickbacks. The advisors, Online Super Pty Ltd trading as onlinesuper.com.au are no longer in business! (This is an archived page on the company involved. They appear to have stopped trading late 2006/early 2007.)
In 2004 James went to some investment seminars arranged by the advisor. One of the presentations was all about Australian Portfolio Wine Pty Ltd and what a wonderful investment their wine would make. James knew nothing about wine, but he believed what he was being told. There were people at the seminar with lots more money to invest than he had, and they seemed happy enough to put their money into the venture. James thought, what is the point of paying for advice if you don’t take it, and the advisors were recommending this as a good opportunity.
Early in 2004 James dipped his toe in the water and invested in the first batch of wine from APW. Essentially, they offered wines and people bought them.
Here is where things got a bit blurry. When I was researching this story, I relied heavily on the information contained on APW’s web site. After the article went live, I received a phone call from Eamonn Egan, the APW General Manager telling me that I had some of my facts wrong. Much of what Eamonn told me has now been included in this story.
It turns out that APW is in fact a wine retailer that packages wine portfolios for investment. They then manage the inventory until it is sold or removed from their charge.
APW arranged for “experts” to attend “meetings” where they could learn more about the wines and the opportunities. They also got to taste the wine. Sounds like good stuff! Well it was, except the “experts” were from the wineries, and of course, they did not have a vested interest in selling the wine! Not much they didn’t. In terms of how the wines were selected, APW would put together portfolios and offer them to potential clients.
When I had a look at the prices paid for the wines in James portfolio, I though they looked to be high, about normal recommended retail, or a little higher. I have some of these wines in my own cellar, and I paid anything up to 25% less than James. I have since found out that the price includes three years climate controlled storage and insurance. The purchaser owned the wine outright but APW would help sell the wine when the time was right. They heavily pushed their exit strategy as a feature of the investment. There were a number of options available for storage; Australia, or bonded in the UK were the main ones. When James read the APW material, the UK option seemed like the best option. A low Oz dollar and a buoyant secondary market for Oz wines in the UK looked attractive.
As 2004 progressed, James received “valuation reports from experts” showing how much these Oz wines were appreciating and what a solid investment they looked to be, so James “invested” more of his retirement nest egg and by the end of 2005, he had sunk almost half of his superannuation into APW deals. About $88,000 worth. These valuation reports turned out to be about as reliable as a Ouija Board forecast that had been derived by a drunken epileptic with Parkinson’s disease.
According to Eammon Eagan, “The valuations that James talked about where carried out by a UK based firm with no association to APW. “We arranged for the valuations and paid handsomely for it, but we want to distance ourselves from them. They used a mix of auction and retail prices for the basis of their numbers. We want realistic numbers and now do it in-house ourselves. We now use three auction houses to get the most accurate information.”
Fair enough, but if APW hired an organisation that provided bad advice, it is their fault even if their intentions were good. APW selected the company, not the investors, and it was due to these reports that James was sucked in further. Blame shifting does not wash.
If James is guilty of one thing, its being naïve and too trusting. He certainly does not come across as a greedy person.
When I had a look at his list of investment wines, I was surprised at the quality of the inventory. I expected a lot of dogs in there. Generally speaking the brands were good ones. Loads of Torbreck, Kay Bros, some Coriole, d’Arenberg, etc. There was also loads of Henry’s Drive, Killibinbin, Olivers Taranga, Viking etc that appeared to be more speculative and aimed at the Parker points market. Not necessarily bad, but they would be better sold in the US or Asia, rather than the UK. However, there were a couple of other real concerns about the portfolio. Firstly, some of the brands may have been fine, but the labels were not a brilliant investment proposition, for example, d’Arenberg Laughing Magpie and the Kay Bros Amery Cabernet, to name just two. The second concern is the amount of 2003 vintage wines in the portfolio. There is a reasonably high proportion of this poorly regarded vintage in the mix.
Eammon justified this position by stated that as retailers, they had to buy the poor vintages as well as the good, or they would not be supplied in future. In some cases, they also had to purchase "x" cases of low end wines to get an allocation of the wineries top wines. That may be the case, but it doesn't help the investor!
Unfortunately Jame's problems don’t end here. The three years storage has already run out and James has had to fork out about another $5,000 for the next twelve months storage, money that is now completely dead. So this investment has not only failed to return anything to date, its costing more money to maintain.
If James had invested in Bordeaux First Growth and had his wines stored in London, his situation would be solid, given recent London wine auction sales results, but sadly, Oz wines, especially big Oz wines, are not exactly flavour of the month on the UK secondary market. Poor old James is between a rock and a hard place. Right bands, wrong labels; ordinary vintages, wrong market place and a poor UK economy to boot and the wine is chewing up storage costs. His investment looks like getting smaller and smaller. The guy is so desperate, he is seriously thinking about donating it to charity and wanted to know if I had any better ideas. I did a bit of research. Interesting!
Firstly, APW is still operating. At the moment they are not actively selling wine portfolios and haven’t since last year. Their website is more about maintaining the inventory for clients, although the sales information blurb is still there.
Whilst I was trawling through their website, I found information that was most interesting.
“Storage and Insurance
Once you make an acquisition, you will be offered the chance to have your wine stored and insured against loss for a period of 3 years at Winevault – www.winevault.com.au in Sydney or at London City Bond in England - www.lcb.co.uk. Should you desire, an additional two years storage will be offered at our reduced rate. There will always be three different prices offered to you for purchase.
Here is where Eamonn provided a load of useful information. They offered three different options; one of which is worth exploring here. In James case, he bought the UK option. The way it works was that the wine was sold to James exclusive of GST and WET in London.
So in the typical parcel, for example in the case of say, Torbreck The Struie, James paid $53.50 exclusive of taxes. That sounds enormous to me, as the tax free price is about $32. However, the $53.50 figure includes three years storage (in bond), shipping to the UK, insurance and management fees.
If that difference sounds excessive, then according to Eamonn, “London bond storage normally costs between £12.60 and £17 (including insurance) plus VAT per case per year. APW charge $10.80 a case per annum with no other handling charges.
Once the wine came out of bond and was sold in the UK, that countries duty and VAT would need to be paid. According to Eamonn, the wines in the UK are sold “in bond” and the person who takes it out will have to pay the VAT.
Given the commercial storage costs, investment in lower price wines is bloody stupid. The lower the price of the wine, the greater impact the storage cost will have on the investment. You will pay the same storage cost on a case of wine that costs $360 as a case that costs $3,600. The companies that package these investments know this, but they don’t care. They are out to make money for themselves, by selling wine (and their services) – not put together packages that are safe investments.
No matter which way you look at this situation, investing in wine at best is a huge risk, at worst it’s a con. The highway is littered with wine investment road kill. Those who invested in Wineorb and Heritage Fine Wine know all about getting slammed. In both these cases, as in many others, the only people who make money from the wine investment are the shonky bastards who are selling the stuff.
Investing in wine is not for the amateur investor. The original investment advisors, who were paid a commission, and also charged the investor for crappy advice, shoulder a lot of the blame and responsibility in this situation. However, the investment company also have to share part of the blame. In reality they are not much more than glorified wine retailers that have come up with a creative way of “adding value” to a retail wine package. The problem is that the “added value” - when added to an investment proposal that is poor to begin with, is still a poor investment proposal. A pig is still a pig, even if it is wrapped up in a silk.
Putting the money into a fixed deposit would yielded a higher return (and a safer investment) in 99% of cases. I wonder how many of the people who set these schemes up can sleep at nights.
I must admit, I feel sorry for James. Having spoken to him I am convinced he is not greedy. He sought and paid for investment advice but unfortunately his advisors provided the worst possible advice. James only sin here was that of naivety. Now at the age of 71 he has had to return to work part time to make up the shortfall in income. I wonder how the advisors who profited from James would feel if this had been done to their father? But then they probably don’t know who their fathers are!
Addendum: A number of “plonk roulette companies” around the world have gone to the wall owing investors large amounts of shekels. At least AWP has done the honourable thing and is still around and living up to their management commitments. They take this task extremely seriously. They have invested $500,000 in state of the art computer software to manage the investment inventory. The program has to handle multiple storage locations, multiple currencies, different countries taxes, and have the ability to move them from one to the other. In addition, earlier this year Eamonn spent three months in the UK taking inventory to ensure every box of wine was accounted for properly.
They have a big commitment to this business and state they will be there for the long haul. Although they are not selling new portfolios in this market (good on them) according to Eamonn, “Will the investment market come back? Yes! But we need to assist our investors in clearing the stock that won’t last that long.”
My advice….. Investing in wine is to be avoided unless its top of the line
French wine…… and you really know what you are doing. And if you have that
knowledge, you don’t need investment companies to teach you how to suck eggs –
Feel free to submit your comments!
From Gazzab: Sunday 12 October
Torb, this experience is probably no worse than having invested money in the sharemarket or having a large component of your super in the sharemarket. May be "bricks & mortar" is the way to go!
Garry, no argument about the bricks and mortar. However, in terms of the share market, I disagree. The market always goes up and then crashes, and then goes up again. Long term if you hang in there with solid investments, the chances are long term you will make good money.
That is absolutely not the case with investing (gambling) with Oz wine. It has a limited life before its inherent use by date (and hence value) expires. Also, you have probably got a better chance of making money at a roulette table, than the possibility of making money from investing in Oz wine over the last ten years, and the next ten years too.
From Deborah Gray: Sunday 12 October
Interesting article (and addendum) and well researched and presented. Perhaps
the lack of comments result from the good job you’ve done in laying out the
history of this fellow’s experience and your case for not investing in such
highly speculative and doubtful schemes – with which I, and no doubt everyone
else, absolutely concur! It is a darned shame that poor James received such bad
advice and has, to date, lost money. It does underscore the need to either
understand the industry you are about to invest in (whatever it is), be
absolutely safe and conservative, or have so much money that it doesn’t matter
if you lose some.
From Adam Catford:
I reckon I have made these points
before, but may be worth reiterating.
From Adam Catford:Tuesday 14 October
I reckon I have made these points
before, but may be worth reiterating.
Copyright © Ric Einstein 2008
Copyright © Ric Einstein 2008