Since the Summer, fine wine prices have moved south. So have all bond and equity markets. Systemic risk caused by European debt issues is the main reason. Which in turn affects global growth prospects. Banks are forced to de-leverage, making it more difficult for companies and indeed countries to access credit. Credit rating agencies sound warnings left right and centre, with Standard & Poor’s in their latest move warning that it might downgrade the credit rating of no less than 15 European countries.
It’s mayhem, fear rules, there’s blood in the streets, everybody rush to the exit.
Which is exactly the situation that Warren Buffett loves. It provides him with the opportunity to buy solid businesses, with a proven track record, with low risk and high value, at a price he would otherwise never be able to buy at. When Buffett – arguably the most admired investor around – buys, he does so because he believes the valuations of the business he targets will allow him to generate a handsome and relatively safe long term return. Here’s one of his quotes: “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful”.
Now, Buffett would not move into fine wine investment – he would blow the whole market out of the water with £100bn to spare. It may, however, be instructive to try and transpose his thinking onto the fine wine market. The thinking of a value investor. Long term risk averse but short term willing to take a chance if the price warrants it.
We have covered risk and rewards of the fine wine market before. To refresh your memory, here’s the chart:
15% annual return over 20 years with 11% risk, outperforming gold, silver, art and the FTSE100. With a supply and demand structure to die for: finite and diminishing supply with (potential) demand dwarfing supply. At the same time, the fine wine market is tiny: only $4bn per year, worldwide. It doesn’t take a lot for increased interest to lead to higher prices. Current pricing seems to be at a level where investors that believe in technical analysis could argue that it presents a buying opportunity.
The potential of wine investment
It gets better. The fine wine investment market has been and still is unregulated. Which holds back institutional investment, by not being allowed by the FSA (or its international counterparts) to get involved. These wealth managers would otherwise be very much attracted by the fundamentals of fine wine.
Furthermore, fine wine so far has been unable to attract serious alternative investment money, due to the unprofessional manner in which transactions are settled. The whole en primeur system, transfer of ownership, wine storage and the way stock is moved around to complete transactions; it's just not up to par – not by a long shot – with how financial markets are run and how professional investors demand transactions to be executed and governed.
Here’s the potential: Regulation and settlement will change. Although in an early stage, there are serious initiatives to take the fine wine market to a level where it will comply with institutional investment standards. It won’t happen overnight, but once it does, it will transform the way the fine wine market operates and it will allow for institutional investors to add fine wine to their alternative investment portfolio.
So, IMHO, what we have is a fundamentally attractive investors market, with in addition game-changing prospects that would for the first time make fine wine accessible to professional investors, at a time of extreme uncertainty that has resulted in depressed valuations.
Sounds like an opportunity Warren Buffett would love if you ask me. Take away the uncertainty and happy days are here.
More on uncertainty in our next posting – watch this space. We’ll also cover our views on short term demand and the funds that need to pay for that, as well as insightful tips from the trade.
And, remember to watch Merkozy on the 9th of December.
If you like this article, please share it with your friends and colleagues by using the buttons just below. Remember you can also like us on Facebook so you can keep up with all our articles, news and offers.
Some sort of disclaimer (loyal readers will know this). We like to express our opinion, because we want to provide our readers with information they can use. Our articles are not always extensively researched, nor do we claim for that to be the case. Having said that, many of our readers highly value our views and indeed consider them an authoritative voice, which helps to complete their understanding of the fine wine market. In compiling our articles, we draw upon a background in both macro- and financial economics, as well as being wine traders that are in touch – every day – with supply and demand. We do not take decisions for our customers to buy or sell certain wines. Although we will express our views, the end responsibility lies with the customer.