5 Reasons You Should Consider Adding Bourbon to Your Investment Portfolio
Kate Lynch, November 27, 2023
The S&P 500 is up 18.7% YTD (11/27/23), which sounds exciting, until you remember that it declined 20% in 2022, resulting in cumulative growth over the last two years of just 1.0%.
While it's nice to see your investments recover losses, surely we all hope for something more than break-even returns on our investments?
And with the wide range of economic predictions for the next two years, it's no surprise that many investors are seeking alternative investment options to diversify their risk away from the volatility of a market that's down 20% one year and up 19% the next.
One alternative investment that has been exploding in popularity over the last five years is investment in bourbon barrels.
I've been working in the investment world for more than 20 years, and I've seen (and created) hundreds of investor presentations. When I first heard about bourbon barrel investing, I had the same healthy skepticism with which I approach any new investment. But the more I researched this asset class, the more I liked it. In fact, I believe wholesale bourbon investing has the most compelling risk/return profile I've ever seen.
Here's why:
1) Bourbon is a Rapidly Growing Segment of the Liquor Industry
Bourbon & Tennessee Whiskey supplier revenues increased at an incredible 18.2% compounded annual growth rate from 2012-2022. Even more interesting is the segmentation within the industry: while sales of "value" brands of American Whiskey have been essentially flat for 20 years, sales volume of super-premium brands have grown at a 15.9% 20-year CAGR, as culture has shifted from viewing high-end bourbon as an old man's drink to its current position as a hipster favorite.
2) The Price of Bourbon is Not Tied to Economic Trends or the Stock Market
Americans drink to celebrate, but they also drink when they're depressed. It's well known that liquor sales skyrocketed during the pandemic. Economic forecasters today make a compelling case for an economic downturn in 2024, but they made a strong case for recession in 2023 and consumers continue to spend anyway. Although we may see a shift towards higher or lower priced bottles based on the direction of the economy, the overall sales of bourbon historically haven't been correlated with the ups and downs of the stock market.
3) Bourbon Barrels Provide a Good Hedge Against Inflation
While bourbon is a commodity-like product, it has some unique characteristics that distinguish it from most commodities: it becomes intrinsically more valuable with age. When investors buy gold or oil, for example, the year it was sourced isn't the primary driver of its value. But a quick walk through the liquor aisle at your favorite store will make it clear that a 20-year whiskey costs significantly more than a 10-year or 2-year. Most bourbon is aged a minimum of 2 years before bottling.
In an inflationary period, holding assets that increase in value with age can create a compounding effect on returns, as the price of the bourbon increases from both inflation itself and from the increased desirability of the longer-aged product.
Note: the age of a bourbon refers to the number of years it was in a cask. It no longer "ages" once it's in a bottle, so to capture this intrinsic increase in value, investors have to hold bourbon barrels, not bottles.
4) Compelling Risk/Return Profile
If you know how to source a high-quality product and source barrels from a producer with a strong reputation, investing in "new make" bourbon at a wholesale price appears to have a very low risk profile.
Bourbon distilleries sell "new make" product at a significant discount to the price at which they sell two-year aged barrels because most buyers won't bottle it until it's aged at least two years.
A wholesale barrel of high-quality new make Kentucky bourbon purchased for $575 in 2021 can be sold for around $2,600 today. That's an unbelievable 112% annual return for two years.
Similar new make bourbon barrels can be purchased for around $1,500 today. Even if the price of two-year aged barrels DROPPED to $2,000 over the next two years, an investor who bought in at $1,500 would still earn a 15.5% rate of return on those barrels.
If recent pricing trends continue, it's not unreasonable to expect the two-year barrel to be in the $3,000 range, generating a 42% annual rate of return.
This illustrates well the value of increasing demand, combined with inflation and the intrinsic increase in the value of the underlying asset.
And as many bourbon investors like to joke, in a real disaster scenario, they could just bottle the product for personal consumption.
5) Bourbon is a Passive, Liquid Investment
As much as I've enjoyed the increased returns from shifting my portfolio away from the stock market and into real estate over the last five years, I've become extremely aware that the higher returns come at a real cost: high-return real estate investing is an active investment (managing renters, managing renovations, managing a team), and the liquidity of the investments can change seemingly overnight (hello, 11 rate hikes!).
With the right partner, an investment in wholesale bourbon barrels can be completely passive (yes, please!), and also highly liquid. It's true that the market for 2-year aged bourbon is stronger than the market for new make barrels, but a healthy market exists for barrels any age.
Investors who need liquidity should be able to sell barrels of high-quality bourbon in a reasonably efficient manner if an unexpected need for liquidity arises.
A Final Word of Caution
While all these factors make wholesale bourbon barrel investing attractive, it's easy for an uneducated investor to miss out on the upside opportunity that bourbon presents due to lack of knowledge about what they're buying.
A google search for bourbon investment companies will bring up a long list of web-based bourbon investment companies, and they're not all created equal. Many of them price the initial investment at retail prices instead of wholesale prices, marking up a barrel by as much as 100% and taking much of the profit off the table for unknowing investors.
Others invest in lower-quality product that can only be sold to the value-based bourbon brands, which haven't enjoyed the same explosion in demand over the last 20 years as premium product.
All investments have risk. If you're interested in adding wholesale bourbon barrels to your investment portfolio, make sure you're partnered with someone whose interests are aligned with yours for the duration of the investment.
About the Author
Kate Lynch has an accomplished career in Investment Banking, having previously worked for Deutsche Bank, Bear Stearns and Performance Trust, applying her expertise in bank M&A and capital raising. Most recently she supported the launch of Riverside Bank in Dublin, Ohio. Kate continues to consult with banks while also managing a variety of real estate investments. In 2023, she joined her brother Rick Lynch's boutique investment vehicle, Estate Barrels, providing high net worth investors the opportunity to own bulk bourbon barrels and to capture value from its increasing value with age.
