Measuring returns honestly

Nominal and real returns

A return is how much something has gained or lost compared with what you paid. If a bottle bought for $100 sells for $150, the nominal return is $50, or 50%. Nominal means "in the dollars of the day", with no adjustment.

But a dollar today buys less than a dollar ten years ago, because of inflation: the general rise in prices over time. The real return is what is left after allowing for inflation. If prices in general rose 30% over the same period, that 50% nominal gain is a much smaller real gain, because the $150 buys less than it used to.

Costs that eat into returns

Price indices and headlines usually show how market prices moved, not what an owner actually kept. The earlier chapters met the costs that sit between the two: buyer's premium or merchant margin when buying, storage and insurance every year, and seller's commission when selling. On top of that comes the interest the money could have earned elsewhere.

Then there is tax. In the United States, wine counts as a collectible for tax purposes, and long-term gains on collectibles can be taxed at a maximum federal rate of 28%, higher than the top rate on most shares (see IRS Topic 409). Other countries have different rules, and tax is a subject where people need proper professional advice for their own situation.

Comparing like with like

A return only means something when it is compared with an alternative. The simplest comparison is with money left in a safe savings account, which earns interest: a payment for letting a bank use your money. If wine earned 2% a year after costs while a savings account paid 4%, the wine did worse, even though its price went up.

Wine also has a feature that surprises many people: it pays no income. A savings account pays interest and a share in a company may pay a dividend, but a bottle in a warehouse pays nothing while you hold it. Its only possible reward is a rise in price, which may or may not happen, set against costs that arrive every year whatever happens.

Finally, any fair comparison has to include risk, meaning the chance that the result is worse than expected. In economics, higher possible rewards almost always come with higher risk. A wine whose price can fall by a third in a bad year is far riskier than a bank deposit, and a sensible comparison never ignores that difference.

This chapter is about how to measure, not about what anyone should do. Researchers measure returns to understand markets. Deciding what to do with real money is a personal matter that depends on each person's situation, and it is where qualified, independent advice belongs.

Survivorship bias, and what the past cannot tell you

Survivorship bias is the mistake of judging something only by the examples that are still around. Wine price studies often focus on the famous names that did well, because those are the wines still traded. Wines that faded, spoiled or simply lost fashion drop out of the data, so the average looks better than the real experience of buyers.

Most important of all, past performance does not predict future results. A wine that rose last decade may fall this decade. Tastes change, new buyers come and go, and bottles age past their best. Honest measurement is a tool for understanding what happened, not a promise about what will.