And the Oscar for diversification goes to Fine Wine…
Diversification in the wine market.
It has been quite unusual over the last few years to see the fine wine investment indices outperforming other financial markets, so I suppose we can forgive certain commentators for pointing out that someone with a fine wine investment portfolio is getting a rather better night’s sleep than someone exposed to the world’s stock markets at the moment.
And how the financial journalists do love a bit of market mayhem! It is quite hard to keep a clear head when banner headlines constantly shriek of impending doom, and it’s funny how absent these headlines are when the markets are doing well when it would actually be helpful to know that a crash was just around the corner.
So does the fine wine investments market wallow in this recent outperformance comfort, or take warning from the correction that has taken place elsewhere?
The benefit of investing in fine wine
Certainly, if you believe that global economies are grinding to a halt it is quite hard to be positive about the fine wine investment market. However, the beauty of fine wine investments is that you are dealing with a diminishing supply and as it is consumed its desirability increases. It also improves over time as it ages in the bottle, avoiding static value.
Let’s remember that it definitely isn’t cheap, so to a certain extent you have to be feeling pretty chipper if you are going to crack a bottle costing (well) over £100. And the more you read the financial pages at present the less chipper you are likely to feel.
But there’s the rub. The financial pages aren’t representative of what is happening on the ground. Statistically, economies are still growing, not shrinking, apart from the relatively few that are oil and commodity-dependent.
If you talk to someone beavering away in Mumbai or Shanghai they will tell you that they’ve never had it so good. Of course, you might find someone struggling, but that is precisely the point about economic growth: component parts don’t all behave the same way at the same time. Someone involved in services may be having a whale of a time whilst someone in manufacturing is not.
How diversification in the fine wine market can help investors
This is also the point about having a diversified investment portfolio. No-one is smart enough to know exactly what will go up or down next. Nor does anyone know when a market has reached a top or a bottom.
What a savvy investor does is figure out if there is a coherent investment case to be made and if the answer is yes, then he or she steps in and waits. The trouble with most people is the waiting bit. As the night follows the day, the investment does not immediately produce results.
During this period, an investor will no doubt get assailed from all sides with different opinions that may sway their original decision. If these opinions are anything like the current headlines, however, they don’t even reflect reality. So, listening too closely to them may be a trap for the unwary.
But you can choose to mitigate the pain substantially, and over time achieve a better investment performance if you diversify. Unusually for something outside of the mainstream of investment media, fine wine investment permits a diversified exposure.
Recent history bears out the wisdom of this. If you were long only of First Growth wines in the run-up to 2011, your performance would have been excellent. Post-June 2011 it would have been awful. And in neither case would you have been exercising any control over your investment.
Far better would it have been to reduce your weighting in First Growths as the market escalated to its stratospheric heights. You would have sold too early, no doubt. No-one ever sells at the top. But with the proceeds you would have picked up positions in Super-Tuscans and wines like Opus One and Dominus, which have carried the day whilst the Left Bank has been in decline.
Your anguish would have been significantly reduced as a result. You wouldn’t have slagged off the market as a fool’s paradise, and you would have been in a great position to make your next investment move. As an example, here is the performance of Opus One 2005 against Lafite 2005 over the last 5 years:
How to choose between different fine wines
However you choose to invest in fine wine, you should have a rationale for your purchases, wine by wine. In a market as complex as the fine wine market, it is not particularly difficult to find wines that are trading at the wrong price. Certain vintages can sometimes be overlooked and be unusually cheap, relative to other similar fine wines.
Take the Super-Seconds at present, for example. You would have to pay £690 for a 2001 Montrose that Robert Parker scores at 91 points. His overall rating for St Estephe in 2001 is 88 points. Come 2008 and the vintage score rose to 91, so you might expect the wines to be better.
Sure enough, the 2008 Montrose scores 95. This is a high-class wine and the cost? £545. On a relative basis in as close to a like-for-like situation as you can get, this is a steal. Same picture for Cos D’Estournel.
Over in Margaux, it is a similar story. The 2008 vintage outscores the 2001 by 90 to 89, the Palmer 2001 scores 90 and costs £1,420, yet the 2008 scores 94 and costs £1,300. If you buy such wines as these you are giving yourself a much greater “margin of safety”, which investors from Benjamin Graham to Warren Buffett have long used as the foundation of their investment decisions.
Is the current market shake-out and today’s hyperbolic headlines reflective of economic conditions to come? If so, by all means, sell everything, and buy gold. Theoretically, when the world is going to hell in a hand basket the smart money moves into gold, that famous safe haven in times of crisis. This is what happened in the run-up to 2008-2009 when unarguably we were in a slough of despond:
At present, if the scary headlines are to be believed, there should be a bit of action on the gold front, yet as we can clearly see from the above chart, there is barely a flicker.
So if you think the markets are currently worrying excessively about things which have long been known about, then be on the lookout for bargains. And remember to diversify your investment portfolio.
Discover more fine wine investment news in our wine investment blog.