WhiskyInvestDirect Comments

[Milton Kuo]

I thought I'd write up something on WhiskyInvestDirect, the platform where people can invest in barrels of Scotch whiskey, because I had mentioned it in another thread as something I had been using to invest money in a somewhat more esoteric asset. Also, I figured it might be worthwhile to create this thread so that I can write any additional commentary or observations on this investment as new developments arise. Finally, to the person who named me as a referrer when he opened his own account with WhikeyInvestDirect: Thank you very much!

For 2022, my investments in Scotch whiskey actually turned a healthy profit, at least on paper. A rough estimate is that the whiskey I held (purchased in previous years) and added to (purchased in 2022) increased in price by 24% and that is after storage and maintenance fees. The return would have been slightly higher (maybe 1%) had I not purchased any additional whiskey. The return far exceeded what I expected and it's certainly better than the beatings given to those invested in the S&P 500 and NASDAQ indexes; and to a lesser extend the Dow Jones Industrial Average.

This rather nice return brings up a problem which I saw and perhaps the other iTuliper also saw. It's entirely possible that the gains seen are somewhat fictitious and were heavily driven by too much money in the system thanks to the central banks' ridiculous loose monetary policy over the past decade. It's not just that we saw 20+% gains in a year when a reasonable expectation should be in the 8% - 12% range. It's also that, starting around October 2022, it became impossible to buy a somewhat larger amount of whiskey in the pre-orders of new stock. Whereas in the past I was easily able to buy 500 or more LPA of whiskey per batch, I was suddenly in a situation where I had difficulty getting even 100 LPA. Most of my orders didn't get filled because I set a minimum quantity (typically 100 LPA for me) for the order to execute. To date, as far as I can tell, there is far more money chasing limited stock of new whiskey than there is new whiskey. On the most recent pre-order, I got allocated nothing.

A nasty bubble in whiskey is just one possibility, though. Another possibility is that inflation is truly roaring (we all know it is for food) and the price increases are not insane. One thing I've noticed this year is that there have been some bulk bids (distilleries buying whiskey from the investors) offering fairly high premiums for whiskey that isn't that old. For example, in February 2022, I ended up selling some Bunnahabhain whiskey that I had originally purchased in Q4 2020. On a nominal price basis, excluding storage and maintenance fees, I nearly doubled my money. There were some other bulk bids in which I did not participate because the returns were not nearly as exceptional (about 1.7x the price I paid two years earlier) and I am in a situation where I could not reinvest the money into new whiskey because of the problem stated above.

It's possible that the distilleries are also seeing high inflation, don't see any near-term end to high inflation, and are looking to buy up stocks so that they can get some sort of hedge against a secular, inflationary environment. One of the bulk bids I did not sell my whiskey into was for Tormore malt whiskey from Q3 2020. The buyer was seeking to buy 100% of all whiskey on the platform: a bit over 50,000 LPA.

In the coming year, I will attempt to continue buying whiskey in the pre-sales but am uncertain if I will be allocated anything. Also, I'll be keeping a close eye on how much liquidity the Federal Reserve actually removes from the system. If there is a liquidity crunch, we could see prices for whiskey fall by 30% or more as we saw in 2020. I also get the impression that many, if not most, of the users of WhiskyInvestDirect are British investors. It may be worthwhile to keep an eye on whether there is a liquidity crunch in the U.K. when making decisions on buying whiskey.

As it is, it's relatively painful to keep cash on the platform when a 1-year Treasury bill yields about 4.69% and a 6-month Treasury bill yields about 4.75%.

I'll close with the observation that investments in malt whiskey have been much more profitable for me than investments in grain whiskey. Net of fees, this should not be the case according to WhiskyInvestDirect but that is how it has played out for me so far. Being that the storage fees are based on the volume (liters) of whiskey one owns and not the price of the whiskey, grain whiskey is (so far) looking particularly bad because an investor has to pay more in fees for a given dollar amount of investment. For what it's worth, just eyeballing the price of the grain whiskey I own, I am probably averaging about an 8% - 9% rate of return net of fees. That's kind of what I expected with all whiskeys but the malt whiskeys have greatly outperformed. About 10% by volume of the whiskey I own is grain whiskey; the rest is all malt whiskey.

[thriftyandboringinohio]

Fascinating Milton, thanks.

When talk turns to severe inflation and how an individual can cope on a personal level, wine and spirits are often mentioned as a great store of value.
That supports your postulate that whiskey prices are responding to printed money and broad inflationary forces, much as we'd expect from gold or real estate. There will always be people willing to pay top dollar for great whiskey despite general inflation.

Does fine whiskey behave at least partially as a specialty commodity that responds to it's own fundamental market demand forces that are specific to it, separate and apart from broad economic conditions? I'm thinking of things like raw gemstones, fine art, or fine perfumes. I know a man who made a tidy sum travelling annually to the Thai/Cambodia border, buying raw sapphires and rubies directly from small local miners and reselling them in the US.

[Milton Kuo]

Fascinating Milton, thanks.

When talk turns to severe inflation and how an individual can cope on a personal level, wine and spirits are often mentioned as a great store of value.
That supports your postulate that whiskey prices are responding to printed money and broad inflationary forces, much as we'd expect from gold or real estate. There will always be people willing to pay top dollar for great whiskey despite general inflation.

My thought is that people will somehow make enough money to pay up for commodity-based products that must go up in price due to inflation. It doesn't have to be the good stuff; the cheap stuff will also cost more money. Barring a collapse into utter third world status (the probability of this is far more non-zero for us in the U.S. than I'd like), people will manage to find money to buy alcoholic beverages although it may be possible that poor Americans will buy American bourbon instead of imported Scotch whiskey. That's something to consider for anyone considering an investment in Scotch whiskey.

Does fine whiskey behave at least partially as a specialty commodity that responds to it's own fundamental market demand forces that are specific to it, separate and apart from broad economic conditions? I'm thinking of things like raw gemstones, fine art, or fine perfumes. I know a man who made a tidy sum travelling annually to the Thai/Cambodia border, buying raw sapphires and rubies directly from small local miners and reselling them in the US.

Fine whiskey that is bottled and branded potentially has a collectibility factor, giving it a little extra oomph in potential price gains. In additional to rising in price with inflation, there is also the possibility that the price can skyrocket due to some sort of mania. For example, bottles of Yamazaki, before it became famous, were not that expensive. I don't know the price but maybe it was $100 a bottle? After it became famous by winning some sort of whiskey award, the price of a bottle shot up to $500 or $1,000. [Generally speaking, you could not find it in stores and had to get it through the secondary market.] I personally purchased a bottle of Macallan 18 year two or three years ago for $270 or so (I don't remember the exact price but it was definitely under $300). That same bottle is selling for $400 at the liquor shop today. You're not going to see that kind of price jump for more common whiskeys such as Johnnie Walker red or black label.

Personally, I think these kinds of price spikes are due to too much money in the economy and I'm not at all convinced that the price increases are sustainable. The person who buys a bottle of Yamazaki for $1,000 might find that he can't sell it for $500 in a recession. That's just my opinion, of course, but I've read quite a few news stories of insane speculation (and insane realized profits for those who sell) in bottled whiskey. I am buying whiskey in barrels and should not experience the insane upsides or potential downsides from buying bottled whiskey.

I've certainly seen crazy prices these past few years for things such as Nintendo game cartridges and, astonishingly, movies on VHS (yes, video cassettes with their lousy image quality). If people are willing to speculate on garbage such as NFTs, why not something physical like a VHS cassette? It's just a less insane aspect of the wild speculation that the Federal Reserve has intentionally induced over the past 13 years.

Regarding your acquaintance who bought gemstones, that's a business that's almost always profitable if bought at the proper wholesale price and the gemstones are authentic and of good quality. They may be difficult to move in a recession but in a normal or booming economy, the profits are quite high as I understand it. However, gemstones and fine art aren't very fungible and are less liquid than more fungible things. I have no comments on perfumes because I know nothing about that business.

[thriftyandboringinohio]

Milton, thanks so much for the thoughtful reply.

[Milton Kuo]

I've been meaning to write this up in light of an upcoming sale of new whiskey on the WhiskyInvestDirect web site and some changes in the market that are making me reconsider my investment in whiskey. However, I've had something of a case of writer's block and have had difficulty completing things so I'm going to put my thought sup in two postings. This is the first posting and I hope to have the second posting up later today or tomorrow.

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There have been some happenings in the market for Scotch whiskey, at least seen from the perspective of a person who only follows the market through the WhiskyInvestDirect web site, that makes me believe that future returns will be far poorer than the past few years. In fact, I am considering pausing, if not ending, all new investment in whiskey at this point because of these developments. The issues that drive this sentiment are increased costs of warehousing and noticeably higher costs for new whiskey.

Firstly, since I started buying whiskey as an investment, the monthly warehousing and insurance costs have been raised twice. In 2015, it cost £0.15 to warehouse and insure one liter of pure alcohol (LPA) for one year. That price was increased 16.7% on December 1, 2021 to £0.175/LPA/year. The most recent increase of 9.7% occurred on March 1, 2023, setting the current price of warehousing and insuring at £0.192/LPA/year. The total increase in warehousing and insurance costs since 2015 is 28%.

Because the total warehousing and insurance fees are based on the volume of whiskey and the amount of time the whiskey stays in the warehouse, it has an outsized influence on less expensive whiskeys such as grain whiskeys or younger malt whiskeys. At an extra £0.042/LPA/year, that translates to roughly 0.87% of the cost of one LPA of new malt whiskey or 2% of the cost of one LPA of new grain whiskey.

WhiskyInvestDirect has published an article showing the effect of the higher storage fees on overall returns at the following link:

https://www.whiskyinvestdirect.com/i...-analysis-2023

The other issue that I suspect might negatively affect returns is the higher cost of new whiskey. For a period of six months, no new whiskey was offered for pre-order on the platform while there were a number of bulk bids from the distillers seeking to buy whiskey owned by investors. The whiskeys getting bulk bids were relatively young whiskeys with the most recent bulk bid for a whiskey I own being a mere 13 months old. For reference, Scotch whiskey must be aged at least three years before it can be sold to consumers as Scotch whiskey so it seems peculiar to have a distiller buy back whiskey from investors two years before it can be used and perhaps even longer before it will be used.

It is my suspicion that the distillers are trying to buy back whiskey that they sold to investors because they are trying to get ahead of much higher prices in the future due to inflation or possibly demand.

Going into the details, the 13-month old whiskey I own (I did not sell) that caught a bulk bid was Benrinnes malt whiskey from April 2022. At the time of my purchase, it was $4.04/LPA and warehousing and insurance costs for 13 months was about $0.24. In May 2023, a distiller made a bulk bid for the whiskey at a price of $5.55/LPA. The commission of 1.75% for buying comes to $0.07 and the 1.75% selling commission comes to $0.10 for a round-trip total of $0.17. Thus, the total profit would have been $5.55 ÷ ($4.04 + $0.24 + $0.17) = 24.7% over 13 months or 22.6% annualized. Not bad at all although the high inflation of the past few years greatly reduce the real return and was one of the factors in my refusal of the bid.

While the distillers were buying whiskey that I suspect is not going to be immediately bottled, there was also a period of six months during which no new whiskey was offered on the platform. Even prior to that, there was far more money than whiskey as I had many pre-orders fail where I was allocated zero whiskey. Three batches of new whiskey have been announced for pre-order for sale this Friday, May 26. The prices for new whiskey have gone up substantially from comparable whiskey sold in the past and I'm fairly certain that this will reduce returns going forward. I'm almost certain that returns will not be what have been seen over the past 5 or so years

These are the new whiskeys that are being offered for pre-order to be sold on May 26:

North British	2023 Q1	Grain, refill hogshead	$2.61
Strathenry	2023 Q1	Malt, refill bourbon	$5.94
Strathenry	2023 Q2	Malt, refill bourbon	$5.94

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For comparison, here are comparable whiskeys I have bought in the past:

North British	2018 Q4	Grain, refill hogshead	$1.39
Bunnhabhain	2020 Q4	Malt, refill bourbon	$3.95
Glen Moray	2022 Q2	Malt, refill bourbon	$3.62
Strathenry	2022 Q1	Malt, refill bourbon	$3.57

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Using a reasonably close apples-to-apples comparison, the price for new North British grain whiskey has gone up 87% while the price for new Strathenry malt whiskey has gone up 66%. In the case of North British grain whiskey, I purchased it about one quarter after the pre-order (bought in 2019 Q1) so the initial price might have been a tiny bit lower. The North British grain whiskey purchase was made before the COVID panic and, thanks to the incompetent and corrupt Federal Reserve and federal government, there has been high inflation for the past few years. However, the 87% increase in asking price for new whiskey seems excessive.

The Strathenry malt whiskey is a better comparison since the already-bought whiskey and the new whiskey were offered after COVID and the central bank/government response. Still, a 66% increase in asking price for new whiskey is very high and is likely to greatly reduce investment returns.

[Milton Kuo]

Continuing from my earlier post...

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The previous post discusses two factors in pricing that I believe will negatively affect investment returns in Scotch whiskey. Of the two factors, I believe that it is the higher cost of new whiskey that will most impact returns. Of course, it is possible that investment returns will be roughly in-line with what has been seen in the past if whiskey-in-barrel prices in toto jump to a "new normal" and aging whiskey uses the new, higher prices as the basis on which to compound with the passage of time.

However, if that "new normal" does not come to exist, investors are looking at giving up years of returns to make up for the higher prices paid on initial purchase. Take for example, the higher prices for Strathenry malt whiskey. With prices 66% higher for new whiskey than just one year eariler, an investor is giving up 4.5 years of returns at 12% if the "new normal" for whiskey prices does not come to pass. For grain whiskey, it is even worse because of the greater increase in cost for grain whiskey and lower returns that have been seen in grain whiskey. If we assume that grain whiskey increases in price at 6% annually, the 87% price increase for new whiskey means that investors are giving up 10.7 years of returns if a "new normal" for pricing doesn't happen. If we believe that grain whiskey's 6% annual returns are anomalously low, the 8% annual return I expected when I first started investing in whiskey still results in 8 years to cover the higher initial price.

Again, maybe raw whiskey prices will reset higher at a level similar to what is seen in the asking prices of new whiskey being sold this Friday, May 26. However, I would not bet a lot of money on this outcome.

Going forward, we can observe the prices of bottled whiskey and the profit margins of the large distillers. If the increases in prices of new whiskey are "fair," we should see noticeably higher prices of bottled whiskey and/or lower profit margins for the distillers. However, if we only see marginal increases in bottled whiskey prices, no meaningful decrease in the profit margins of the distillers, and much poorer returns in whiskey, then it seems reasonable to conclude that that investors in whiskey are subsidizing drinkers of whiskey and the distilleries' profit margain.

From reports I have read, there does appear to be booming demand for Scotch whiskey in South Korea, India (demand will go even higher if the extremely high tarrifs are reduced to reasonable levels), and China while demand in the developed markets are also quite strong. From that perspective, I believe the distillers will do fine although I do not know how their stockholders will do (I don't follow the stocks of the major distillers.) I believe this also means that there will be demand enough for investors in whiskey in barrels to sell although I do not know what kinds of returns will be seen on the higher prices for new whiskey. In my opinion, whiskey purchased prior to the price increases should continue to do a fair bit better than the expected 8% to 10% annually.

Conclusions

I strongly suspect that returns on malt whiskey will continue to be noticeably better than returns on grain whiskey. This is based on the following factors:

• The price increase in new grain whiskey is quite a bit more than the price increase in new malt whiskey.
• On a basis of dollar invested, it costs less to warehouse and insure malt whiskey than grain whiskey.
• All of the markets, both developed and developing, are moving toward more higher end whiskeys which means demand for malt whiskey should grow at a higher rate than the demand for grain whiskey.

Going forward, I do not believe returns, real or nominal, will be as good as they were in the past. I'm not sure how much worse they will be but if there is a "new normal" in whiskey prices, then returns will only be about 1% compounded worse. The returns where there is not a "new normal" in whiskey prices are uninvestible. Following is a list of all the frictional costs that erode investment returns that investors must consider:

• There is a 1.75% commission on buying and selling--3.50% round-trip--whiskey. This commission has not changed but investors should realize that gross profit is reduced by over 3.5% for every whiskey investment made.
• Increased warehousing and insurance costs have gone up 28% since 2015.
• New whiskey is markedly more expensive than in the past with grain whiskey and malt whiskey prices up 87% and 66%, respectively.

Finally, the lack of any new whiskey for six months and the difficulty of getting allocated larger quantities of new whiskey has made it almost impossible to qualify for the Regular Investor Award that WhiskyInvestDirect offers. The Regular Investor Award is a rebate of £0.02/LPA/year on warehousing and insurance fees, a 13% discount on the original £0.15/LPA/year fee and a 10.4% discount on the current £0.192/LPA/year. The terms of the Regular Investor Award is explained on the WhiskyInvestDirect web site at the following URL:

(https://www.whiskyinvestdirect.com/i...nvestor-reward)

I am going to essentially cease my purchases of whiskey after this week's pre-sale of new stock and I will observe how the new, higher prices affect returns. If I feel returns will still be good and if I can easily purchase enough whiskey to qualify for the Regular Investor Award, I will go back to investing larger amounts of money. I suspect it may take me one or two years before I get enough data to convince me one way or the other. For the upcoming sale of new whiskey, I have placed an order for 100 LPA each for Strathenry 2023 Q1 and Strathenry 2023 Q2. I don't know if I'll be allocated any whiskey (I will either get 100 LPA or nothing) and I am only considering purchase of malt whiskey.


In closing, I think the party is over for the rather good returns we have seen over the past eight or so years. It was a pretty good party while it lasted. Perhaps a good opportunity to buy will arise if we get a very deep recession and I suspect the good returns will be achieved by buying whiskey from other investors, not from buying new whiskey.

[Milton Kuo]

And both of my 100 LPA pre-orders for new malt whiskey failed to get filled due to greater demand (money) than supply (whiskey.) The final proof of whether my concerns are valid or not will be when the distillers buy the whiskey back in a few years. Then we'll see what the rate of return was.

[Milton Kuo]

This is not related specifically to WhiskyInvestDirect but it is related to investing in whiskey in general.

Just today, I found that there is another company that allows people to invest in Scotch whiskey as well as wines. The company is Vinovest and, as far as I can tell, it is an American company that was founded in 2020. As its name suggests, the company appears to have been initially started as a way to invest in bottles of wine. At present, it also has a way for people to invest in bottles of whiskey (branded whiskey such as Macallan, Johnnie Walker, etc.) as well as casks of whiskey. WhiskyInvestDirect only invests in casks of whiskey. I should add that Vinovest's whiskey investments are not limited to Scotch whiskey. American and Japanese whiskeys are also available for investment.

At the moment, I do not intend to invest with Vinovest and only bring this up as it is related to WhiskyInvestDirect. If I do decide to invest with Vinovest, I will state so here before I open an account and buy anything. That said, I do not anticipate that I will ever open an account with Vinovest.

Being that Vinovest allows investing in bottled wine and whiskey, it is a means by which a person so inclined to invest (speculate) in bottled alcoholic products can do so. As I have mentioned in previous postsings, rather spectacular gains can be made in buying and selling bottled whiskies and wines. I don't understand wines but I think I remember reading that wine in a bottle continues to improve with age so long as it is stored properly. However, that is not the case with whiskey. My personal opinion of buying bottled wine or whiskey is that it is highly speculative, especially for older stock (product bottles years ago and traded on the secondary market).

The existence of Vinovest, I suspect, could slightly reduce the returns seen at WhiskyInvestDirect. In previous postings, I have mentioned that there is more money than whiskey as it has been nigh impossible to purchase somewhat larger quantities of newly-casked whiskey since 2022. In addition to the surfeit of money now on the WhiskyInvestDirect platform, it now has a competitor in Vinovest for distillery stock. That is, if a large distillery such as Diageo wants to offload some casks of whiskey for repurchase later, it now has at least two major purchasers for those casks: WhiskyInvestDirect and Vinovest. This is likely to result in the distilleries being able to ask for a higher price for casks of whiskey.

Likewise, when the distilleries wish to buy back casks of whiskey for bottling, they may be able to offer a lower price assuming that more than one platform has casks of the whiskey desired by the distilleries.

Vinovest could be a business run by people who genuinely love wines and whiskies. However, I get the depressing, uncomfortable feeling that it's a company borne out of decades of failed Federal Reserve monetary policies and is just another venue to rent-seek or speculate (Airbnb, Uber, cryptocurrencies, etc.).

Meb Faber interviewed one of the founders of Vinovest and the YouTube video of the interview is below.

From Vinovest's web site:

Fine wine has delivered 10.6% annualized returns for more than two decades, outperforming global equities. Meanwhile, Knight Frank called whiskey "the best-performing collectable of the decade."

I can only assume Knight Frank is referring to bottled whiskey. Ugh. On a final note, I cannot wait for the current everything bubble to pop. Only after the serial bubble blowing ends can we get true price discovery in things and wipe out all the zombie companies and braindead concept companies.