Three is the Magic Number
29.03.18 – Wine Investment –
Thanks to everyone who responded with such interest to last week’s note. In response to many requests we will over the next couple of notes analyse the performance of key market sectors following the same process: how did the top 3 algorithm picks perform against the bottom 3 since the market started its rally at the end of November 2015?
Just a quick word of explanation. The Amphora proprietary algorithm contains variables which are mainly static (Cru classé status, vintage quality, brand power, critics scores, and so on), but some are dynamic. Although the latter carry less weight, they are still important at the margin. They involve aspects like current popularity/demand, and estimates of availability to the market place. In this analysis we are using current variable data so we estimate a range of error of +/- 2%.
Most respondents asked about the First Growths, so that is where we shall begin; in Margaux, in fact, whose 2015 effort has skyrocketed over the last few months in acknowledgement of its commemorative bottle, had stand-out algorithm picks in November 2015 of 2011, 2012, and 2006. It’s “losers” were 2000, 2005, and 2007.
The aggregate performance of the former 3 selections using Liv-ex market price as arbiter, was 38.3%. The individual rises were 40%, 41%, and 34%. The latter 3 wines rose 32%, 20%, and 34% respectively, leading to an average rise of 28.7%. Now as we pointed out last week, whilst 28.7% seems like a perfectly respectable performance, it all depends on what you compare it against.
Benchmarks exist to allow an investor to control risk, and to assess performance. A serious investor spends some time figuring out the appropriate benchmark for his/her purposes, because risk control and performance are key to success. As it happens, the Liv-ex 100 rose 27% over the study period, whilst the Liv-ex 1000 rose 35%.
On this basis, the top 3 algorithm picks beat both benchmarks, and the bottom 3 narrowly beat the Liv-ex 100. This is interesting enough, but not the point of the present test. That is to gauge outperformance of the top 3 against the bottom 3, and the answer there is that the top 3 outperformed by a considerable 33%.
The whole point of using 3 wines, as opposed to 1, is that it captures more accurately the actual diversified investment process. 1 of anything is a punt. 3 is a reflection of process. If you had invested in Margaux 2007 (one of the bottom 3) you would have made 34%. If you had invested in Margaux 2006 (one of the top 3), you would also have made 34%. But what, other than blind luck, might have induced you to invest in the 2007 over the 2006 back in November 2015? By diversifying, and using an algorithmic process, you also capture the 41% performance of the 2012 against the 20% of the 2005, and it is precisely this which engineers risk adjusted outperformance.
What of the other First Growths? The Haut Brion outperformance is even better. There the top 3 of 2006, 2008 and 2004 rose 42% on average, whilst the 2005, 2002 and 2009 rose 26%. That is an outperformance of over 60%! You will notice the variety of vintages at play already. Whilst for Margaux you would have needed a couple of recent vintages, in Haut Brion’s case you would have had to go back beyond the last decade.
Latour is a producer we have had issues with in the past because of its propensity to issue ex chateau wine at a premium to the prevailing market price. We will not repeat our problems with this now, although we note that they are currently at it again with the 2006 vintage, released at a 16% premium to the market. As a point of interest, this is the algorithmic picture pre release:
Latour 2006 actually looks pretty good at the current market price.
Post release at £5,250:
Suffice to say there are better deals than the ex chateau 2006 at that price.
The Rothschild pair of Lafite and Mouton are also very instructive, although for a slightly different reason. The Amphora view is the whilst we lean heavily on the algorithm for stock selection, we believe we house enough experience and market awareness courtesy of our links around the world to offer a qualitative aspect to what we do.
This can reveal itself both strategically, in respect of weightings towards different sectors (when to load up on Bordeaux, or lighten in favour of the rest of the world, for example), and with regard to individual wines. A wise old market maven once suggested that you should exercise great caution when investing in something you can’t rationalise, and we find certain things in the fine wine market fitting that bill.
Mouton 2000 is one such. Whilst we understand why there is a premium for this wine, its extravagance means that we find ourselves able to excuse it from inclusion in portfolios. To us it is one for the collector, rather than the investor.
That doesn’t stop it going up though, indeed its rise from £12,500 to £18,000 over the study period makes it a top Mouton performer, and has helped the bottom 3 picks perform in line with the top 3. Mouton is unusual in that most of the wines performed much the same, but you can understand why when you see how the algorithm looked in November 2015:
There are clearly few outliers, and although we might have expected the 2012 and 2006 to outperform such outperformance was muted in this case.
Lafite was slightly different, although with the same result. For some time now the 2009 and 2010 vintages have looked really attractive in algorithmic terms. There will be reasons for this, it’s just a question of determining what they are! Obviously they had a most unfortunate start which has been well documented. In stock market terms if an IPO has a poor start it often takes a while for it to recover, but the bottom line with Lafite 2009 is that we are now so far into “consolidation mode” that the recovery shouldn’t be far away.
In practice, stock is hoovered up by merchants and dare I say, speculators, hoping to feed endlessly-rising demand. When demand doesn’t endlessly rise the stockholders tend to drift it out into the market over time, but this supply acts as a sponge on marginal demand. Given that prices rise when there are more buyers than sellers, in this scenario prices remain stuck.
But how long can this last? Lafite 2009 enjoys a Parker score of 99+. This is the fourth best of all time, behind the 100 pointers from 2003, 1953, and 1870! It is cheaper than the 96 point 2005 and costs little more than the 98 point 2008. You can’t have it both ways: the broad market rates the 2008s way below the 2009s. Not in the case of the 2009 Lafite it doesn’t!
If winter comes, can spring be far behind? Buy Lafite 2009.