All posts filed under: Market Tools

Value & Risk in Fine Wine, Post 5: Age Curves

The fourth and final tool in this series is the Age Curve plot.  Age Curves show the development of market prices relative to initial release prices as wines age. Is a vintage an ageless benchmark or is it a duffer, over-priced at en-Primeur, waiting for a “second release”? That’s the sort of question Age Curves help us to answer. Lafite Rothschild It has been our habit to start with Lafite. And here we go again: the plot below displays the evolving price of the oldest vintage for which Liv-ex has a detailed price history (1982) compared against five other vintages that are often seen as benchmark years. (Note on graph: +/- 2 months because the first traded price after release can vary from one year to the next.) Compared to the 1982 vintage, the price levels of the more recent vintages initially developed at an accelerated pace. But what goes up (too quickly), must come down! The gains were in a vulnerable spot; a downturn promptly followed. The 2009-2010 peak led on to a sharp correction. We know this already, and …

Value & Risk in Fine Wine, Post 4: Relative Price Lines

Our second tool consists of straight lines of best fit drawn through normalised prices of traded vintages. We call these lines Relative Price Lines (RPLs). As we shall see, vertical shifts of the RPLs over time indicate changes in the overall state of a wine’s market, while the steepening or flattening of a line over time represents changes in relative value across vintages. Lafite-Rothschild Let’s start with Lafite as a reference point. Our focus is on movement (size of the parallel shifts and the flattening/steepening). Following the 1996 RPL (red line at the bottom left), there is a large upward shift over the first five year period followed by a much smaller shift in overall price levels from 2001 to 2006. There is then an extreme shift from 2006 to 2011, from market trough to market peak (a development we observed from a different perspective through the Channel Spread). We then see a downward shift to 2015 price levels. Next, looking at the slope, we find that it is relatively stable at around 0.08-0.1, but the line steepens in 2015 …

Value & Risk in Fine Wine, Post 3: The Channel Spread

Recap: Last time we started with a broad selection of Bordeaux fine wines across five investment categories. We then used a simple algorithm to re-cluster the wines based on price characteristics. From each of these new clusters we selected a wine to play with. We are looking at  Margaux, Clerc-Milon, La Conseillante and Lafite Rothschild.       Sometimes simple tools are best. At least to start with. Given the Liv-ex data we have, here’s an obvious thing we can do: let’s compare ex-Château release prices with London release prices. The intuition is that a large positive gap between London and Château release prices signals oversubscribed interest for a young wine. This might be explained with reference to the “animal spirits” of an investment bubble. Alternatively, the gap might be explained by market fundamentals: a new wine may be considered fundamentally superior to recent vintages. We call the gap between the London and Château release prices the Channel Spread. The following graph shows a history of the Channel Spread for our four selected wines. Looking at the …

Value & Risk in Fine Wine, Post 2: Preparing the Ground

To develop fine wine market tools we have to decide what wine data to look at. The decisions we make on data will trickle down and affect our tool development. We begin by manually defining four groups of fine Bordeaux wines based on qualitative factors important to wine investors. Our reason for coming up with an initial clustering is to ensure that we include a good range of investment wines in our analysis. The table below shows: the wines we pre-selected, the manually assigned group number, the first available time stamp for the first available vintage on Liv-ex, the  years for which ex-Château prices are missing and then finally the decision of whether to include the pre-selected wine in this analysis. All price data is courtesy of Liv-ex. To track the development of wine prices over time, we are interested in release prices and monthly market price data for vintages going back as far as possible. Most of the supplied data had a first time stamp of 31/07/1983, but only a few wines (e.g. Lafite Rothschild, Mouton Rothschild, Margaux, Léoville-Las …

Value & Risk in Fine Wine – Introduction

Image Link As 2015 fades into memory, WineQuant presents some thoughts on value and risk in the fine wine market, which may prove useful in 2016.  Value & Risk in Fine Wine, Post 1: The call for new tools In the fixed income, equity and commodity markets, practitioners use a range of standard visualization tools to think about financial quantities. In fixed income markets, the shape of yield curves indicates the time value of money. In equity markets, implied volatility surfaces provide snapshots of future price expectations and in commodity markets, forward curves indicate the relationship between cost of carry and current / future demand for an asset. Patterns of thinking develop around the standard tools used. Discussions about relative value, risk and uncertainty inevitably reference the common tool-set of the professional market participant. An advantage of a commonly held tool-set is that the salient characteristics of complex financial dynamics can be understood and communicated at a high level. A disadvantage of a common tool-set is that (unsophisticated) participants may rely on the received wisdom without a …