All posts filed under: Tools

Models vs. Reality, Part 1

Wine appreciation requires language. But the way you use language depends on what you consider to be a “good tasting note.” What is good? What’s the norm? View at Medium.com …writing is a learned activity, no different in that regard from hitting a golf ball or playing the piano. Yes, some people naturally do it better than others. But apart from a few atypical autodidacts (who exist in all disciplines), there’s no practical way to learn to write, hit a golf ball, or play the piano without guidance on many points, large and small. And everyone, even the autodidact, requires considerable effort and practice in learning the norms. The norms are important even to those who ultimately break them to good effect. Bryan A. Garner, Garner’s Modern American Usage (2009, p. 104)   Read the full and updated post on Medium

Wine investing and trading V: Carruades de Lafite 2010

In the final blogpost of this series, I will look to apply the tools developed over this series on one example: Carruades de Lafite 2010. This is a wine that is regularly traded on platforms due to its regular supply, healthy market sentiment and consistent expected margins. Here, we use trading data available from the Liv-Ex trading platform. The above graph shows the WQ Inventory Value for Carruades de Lafite between June 2015 and February 2016. It is clear that the supply has been fairly regular. There was a build-up in inventory between June 2015 and August 2015 due to low trading activity which we shall see later. The WQ Spread is a good indicator for both market sentiment and bid:offer ratios. A steady (and non-turbulent) trend in the spread as shown above shows that market sentiment for Carruades de Lafite has been very healthy over the last eight months. There is a small bump in December 2016 which is attributed to a possible trading hiccup as the market adjusts itself to slower trading activity in …

Wine investing and trading IV: Market sentiment and activity

In the penultimate blogpost of this series on wine investing and trading, I shall discuss two metrics which we have developed here at WineQuant to characterise market sentiment. The first metric is called the WQ Spread. It takes into account the monthly highs, lows and average trading values for a particular wine. It is designed to summarize the state of market sentiment. Market sentiment is healthy when the WQ Spread is stable over a sustained period of time. The way we see it, market stability means solid trading activity. On the other hand, volatility in the WQ Spread signifies negative sentiment. In this case, we would expect little or only sporadic activity. Let’s look at examples of these two scenarios, using Lynch-Bages 2010 and Haut-Brion 2010 as our pin-ups. An example of the WQ spread over time is shown below. This is Lynch-Bages 2010 between October 2012 and January 2016. Looking at the development of the WQ Spread over time, we see that market sentiment for Lynch-Bages 2010 has been positive and stable except for a blip in June …

Wine investing and trading III: Supply

There are several factors which determine trading activity within the fine-wine market. The main factors include inventory level and market sentiment. The inventory level is a measure of the number of bottles of a particular fine wine available on the market while the market sentiment is a measure of how receptive the wine is at the demand side. At a more fundamental level, supply and demand governs the mechanics of the market. However, real supply and real demand are unobservables and this in itself raises an empirical challenge. To this end, WineQuant have developed a quantity called the WQ Inventory Value as an estimate for supply using trading data available from Liv-Ex. This WQ Inventory value is calculated based on two variables: the number of bottles of a particular wine available in one particular number and its monthly averaged traded price. In this blogpost, I shall present the WQ Inventory Value for two wines, Haut-Brion 2010 and Lynch-Bages 2010 between October 2012 and January 2016. There are two main reasons as to why these wines were chosen. Firstly, Haut-Brian …

Wine investing and trading II: Provenance

The next few blogpost in this series are adapted from reports available on the WineQuant website which you can find here and here. In this post, I will discuss why I have chosen to use trading data available from Liv-Ex. Liv-Ex is the foremost wine-exchange platform on the UK wine scene. Traders with accounts there are able to put their offerings for others to bid. Trading activity is high and the platform gives a nice snapshot into the fine-wine market scene in the UK. There is a lot of trading data available on the platform such as the number of bottles available on the market, monthly highs-and-lows, auction bids and so forth. Non-trade users can use a subsidiary service from Liv-Ex called Cellar-Watch which gives access to some of the trading data available. One of the main strengths of the Liv-Ex platform is its provenance-verification certificate called Standard in Bond (SIB). On the regulations section of Liv-Ex’s website, wines that are given this status must obey the following conditions: the original wooden packaging must be in good condition, …

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 …