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All You Need to Know About Investing in Whiskey

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Fueled by rising demand in developing countries like China and India, whiskey has become an increasingly attractive investment option.

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People keen to grow their income typically turn to equities, hoping to make a killing through studying the market and making the appropriate moves. The trouble, however, is that the market is vast and unpredictable. Consider the Dow Jones Index (^DJI) and the S&P 500 (^GSPC), two broad barometers of the state of the equities market. After a year full of spectacular climbs and gut-wrenching plunges, the Dow ended 2011 up a teeny 5.5% while the S&P 500 basically stayed flat. In other words, a year full of sound and fury signifying nothing, as Shakespeare would say.

If you're tired of the volatility of the stock market but want to do something with your money besides parking it in a bank or under your mattress, perhaps you could turn to investing in whiskey.

Yes, while the market for fine wines is already saturated, the one for precious whiskeys is still expanding energetically. Four years ago, 1,500 bottles of single malt -- the most valuable form of whiskey -- were sold at auctions. Last year, the figure grew to 8,500. The value of the auction market, currently at about $5.7 million, is predicted to rise to some $27 million by 2020.

More importantly, whiskeys also have the potential to provide tantalizing returns. If you had invested in the 100 best-performing whiskeys in 2008, you would have receieved a 163% return in 2011.

The most expensive whiskey today is a 62-year-old Dalmore single malt, of which only 12 were ever produced. Seven years ago, one fetched a princely $51,000. In September last year, a Chinese businessman bought another bottle for $195,000, which represents a 282% increase. Granted, that's peanuts compared to Green Mountain Coffee Roasters' (GMCR) 3,500% increase in the past five years, but who would take caffeine over a good shot of whiskey?

Michael Kappen, a former banker who started the World Whisky Index, expects whiskey investments to return annual yields at an impressive 12%.

Also, unlike wine, whiskey, once bottled, does not age and can serve as a great long-term investment.

If you're curious about investing in whiskey but don't know where to start, here's a quick primer:

Which whiskeys should one invest in?

Whiskey prices follow the simple logic of supply and demand, says expert collector Mahesh Patel, who hosts an annual whiskey trade show called the Universal Whisky Experience in Las Vegas. As such, he advices would-be investors to always go for limited-edition bottles.

"Don't go for something off the shelf, even if it's 10, 12, 80 years old or whatever because those are generally not limited production. Those are created every year, whereas limited-run productions are maybe 100 bottles or 10,000 bottles -- at 10,000 bottles, they're going to be lower in price, but as people drink them, supply gets reduced and the prices go up immediately."





Companies like Fortune Brands Inc.'s (FBHS) Beam Global Spirits & Wine Inc. unit and Diageo PLC (DEO) have in recent years focused their production on lucrative small-batch bourbon made popular in recent years by shows like AMC's (AMCX) Mad Men.

Besides buying only limited releases, investors should generally stick to bottles from iconic distilleries like Macallan, Dalmore Glenfiddich, or even better, to those from distilleries that have ceased operation, like Islay's Port Ellen and Sutherland's Brora.


A bottle of Dalmore Single Malt

Andy Simpson, an independent whiskey valuer and consultant, has been a keen follower of whiskey sales for some years. His Whisky Highland Index tracks the performance of some 143 distilleries at whiskey auctions.

Based on his index, here are the top 10 distilleries from which you should get your bottles of single-malt scotch, based on the price of bottles sold and the percentage gain in value.

Distillery Whisky Highland Index
1. Macallan 95
2. Dalmore 94
3. Port Ellen 90
4. Balverie 88
5. Glenfiddich 88
6. Bowmore 87
7. Ardbeg 84
8. Glen Grant 81
9. Highland Park 81
10. Brora 81

What are some good-value-for-the-money whiskeys investors should look out for?

One good whiskey that will be released later this month is Macallan's fourth edition of its Easter Elchies Cask series, which "will retail at around £140 ($221) and should see good growth, as with most limited Macallan," Simpson said in an email.

However, the series will be a distillery exclusive, which means you will have to take a trip up to Scotland to get your hands on it.

Another good buy, Patel shares, is the Mackinlay Rare Old Highland Malt, which has a fascinating back story. In 1907, explorer Sir Ernest Shackleton headed down to the Antarctic, bringing along with him for company 25 cases of the drink. Three crates of this special whiskey were buried under the snow after Shackleton's expedition failed to reach the South Pole, thought to be lost forever.

However, in 2007, a team from New Zealand managed to uncover a single crate, and carefully shipped three bottles to Whyte & Mackay in Scotland, where Master Distiller and Blender Richard Paterson analyzed the alcohol and expertly recreated the exact taste of it. Whyte and Mackay then created a limited 50,000-bottle run of this whiskey, which retails at about $160.

"I guarantee that this whiskey will go up in price because most of it is being drunk, and the story behind it is so amazing. I'm already seeing on eBay (EBAY) that some people are selling it for about double the price," Patel elaborates.

Of course, such popular limited-edition whiskeys often sell out quickly upon release. If so, you can turn to the growing number of both traditional and online whiskey auctions, where discontinued bottles and rarities can be found. One new online auctioneer Simpson recommends is the Glasgow-based Scotch Whisky Auctions.

Ultimately, investing in whiskeys requires you to do a lot of homework, and it is probably better if you already have a fondness for this particular poison. Simpson cautions that while there are a lot of positives associated with whiskey investing, "the stark reality is that you can lose a lot of money if you don't know what you're doing." So, only invest what you can afford to lose, and in the rare case that you make a bad purchase, take comfort in the fact that you can very easily drown your sorrows at the very least.

(See also The Top-Performing Alternative Investments: Litigation Funding and The Top-Performing Alternative Investments: Celebrity Autographs.)
No positions in stocks mentioned.
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