After a long and beguiling climb, the stock market dive of 2000-2002 put phrases like ?irrational exuberance? and ?speculative bubble? back into common usage and was a stinging reminder of the importance of portfolio diversification. Financial wizard Mahesh Kumar shows how to guard against the inherent riskiness of the stock market while still reaping the benefits of a profitable portfolio in his new book Wine Investment for Portfolio Diversification: How Collecting Fine Wines Can Yield Greater Returns than Stocks and Bonds. It?s a thorough piece of academic analysis, which combines the Nobel Prize winning Markowits Theory and Kumar?s Fine Wine Fifty Index and empirically proves that Fine Wine is one of the best diversification tools available (whether you?re high-finance or a modest personal investor). Fine Wine is ?uncorrelated? with stocks and bonds; that is, they aren?t affected by the same types of risk. Moreover, Kumar points out that Fine Wine has a HIGHER expected return relative to its overall contribution of risk. ?Smart investors are those who recognize large shifts in the economy early on and invest for the long term,? he writes. ?In the ?70s, gold investors thrived; in the ?80s it was the real estate owner?s turn. In the ?90s the action shifted to stocks. What will this decade bring? Alternative investments (Fine Wine, Fine Art or Antiques) will make a breakthrough, and compensate investors for their disappointing equity, bond and cash portfolio returns.? The book also includes a history of wine markets dating back to the 12th century; chapters on the different modes of marketing and distribution in Bordeaux, and the primary and secondary markets; and he critically analyses the total alternative investment market, and the relationships between their price and quality. He also discusses, systematically, the key question: what constitutes a good investment portfolio?

Customer Review: Gift it to your financial advisor

According to Professor Mahesh Kumar, and his dense Wine Investment for Portfolio Diversification, people who invest in wine don't all have butlers for alarm clocks. They don't all have different homes for different moods.

It's true that some wines have Bentley price tags. A few years ago, three bottles claiming to be the past property of Thomas Jefferson (the handwritten "Thom. J." on the label giving it the seal of authenticity) was auctioned off to a Florida millionaire for 500K. Their actual provenance is being determined in a NY court as I write. These sorts naturally get the headlines. So we, those who've never raised a paddle to a rapidly appreciating Monet, naturally think the whole indulgent scene is the domain of the moneyed set.

But ask Kumar and he'll tell you that people who invest in wine don't all have their phone numbers on congressional speed dials, and after reading his book, the parts that I could grasp, parts not requiring an advanced math degree, it not only makes sense, it exposes bagging six-figure bottles as merely big-game hunting.

By not assuming as a starting point the profitability of wine, Wine Investment for Portfolio Diversification is unique to the small population of wine investment books, like Sokolin's1987 Liquid Assets, and the new Keys to the Cellar (interesting but superficial buying and cellaring guides). Kumar first presents the arguments against wine investment (and there are plenty of these). Point-by-point he unravels them, with his Fine Wine 50 Index, a collection of a dozen blue-chip Bordeaux (the household names like Lafite, and Petrus) which, over a 21-year period, holds steady with the Dow and beat the FTSE 100 by several percentage points. This alone wouldn't make for much celebration, but taken in step with Kumar's assertion that wine prices aren't influenced by the same sort risk that affect stocks and bonds (recession, inflation, etc.), and are far less volatile, which makes fine wine "and other alternative investments" ideal diversifiers--for as much as a $50,000 per-year earner puts in his 401-K annually. That of course means he's not suggesting holding fine wine as a single asset class, but held as part of portfolio of tradition equities. Kumar also diagrams "relative value analysis." He says it's a "simple and effective indicator of which wines and vintages are under-or over-valued" that "maximizes returns by minimizing overexposure to specific labels." Seems useful enough. But simple? I couldn't tell you. Overexposure to six-inch-long math equations make my eyeballs vibrate.

Thus afflicted, the second half of the book was impenetrable. Kumar is after all a professor of finance. But it does purport to have in it calculations (like "relative value analysis") to help insure prudent purchasing, so I suggest gifting it to your financial advisor. Include a bottle to make it well rounded.

The first half was surprisingly fascinating; not what I was expecting from my experience with other wine investment/buying guides. Kumar unpacks how the alternative investment market interacts with the wider financial world--a brief education in economic and financial philosophy, and the kind of primer that engages the imagination.

The front matter includes an introduction by the iconic Michael Broadbent, a wonderful retrospective of Christie's (the British auction house for which he's director of wine) dealing in the old wine trade; and an interesting short preface by the publisher which attempts to come to terms with the "general anti-wine-investor vehemence" of wine critics.

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