Do you remember the craze over the Bordeaux 2000 vintage? I do, - TopicsExpress

Do you remember the craze over the Bordeaux 2000 vintage? I do, mesmerized by one wine publication high gloss cover after another exclaiming that this was the vintage of the century. It felt as the train was leaving the station without me. As it turns out, what appeared to be outrageous futures prices for first growths such as Chateau Lafite Rothschild in 2000 ($350) actually turned out to be a good investment, the wine peaking at $1500 in 2011. Even today, amidst a still fragile post recessionary global economy, the wine sells for $900 or just shy of a 275% appreciation over the last 12 years. Not a bad return when you consider the 75% return of the Standard & Poor’s 500. Of course, in retrospect, we know that the fervor over the 2000 vintage was only the beginning, a tidal wave of greatness unleashed in the form of the 2005, ’09 & ’10 vintages, the latter two perhaps the greatest back to back since the 1940’s. That final verdict, however, will be the responsibility of future generations. Accompanying these historic vintages were historic prices, top Bordeaux going parabolic in what seemed to be a “tulip” bubble. Even non-wine publications got into the act with Business Week magazine (now Bloomberg Business Week) running a wine column by Robert Parker. Like a locomotive out of control, the frenzy grew. Hong Kong wine auctions became Monopoly like, investors hungry for status throwing funny money without discrimination at trophy wines at two and three times the average US retail price. But then something unexpected happened on the way to easy riches. The 2010 futures market softened (courtesy of a weakening global economy) coincident with average or “classic” 2011, ‘12 & ’13 vintages. Hong Kong investors, stunned by losses began to retreat. Communist Party leaders, concerned over lavish spending by wealthy Party members for high end wine and art, mandated a crackdown, further weakening the market. Today, the Chinese economy, while still stronger than that of the US (if you choose to believe the figures from either market), continues to slowly weaken and the EU, comprised of 28 countries, struggles with austerity measures necessary to circumvent recession, not the mention repercussions from Russia. Meanwhile, the US, while slowly recovering its financial footing, is still fragile in certain sectors, such as housing. So why do I drone on and on about basic and boring economics? Simple, because it’s the revenue & earnings lifeline of any company. For anyone who has ever sat through a course of economics 1A, you can’t forget those supply-demand curves and what they signaled about economic strength and weakness. Too much supply and pricing weakens. Too much strength, pricing firms. Historically, Bordeaux produces huge volumes of wine (supply), some estates pumping out 10,000+ cases per vintage. And with demand for high end left bank (1rst-5th growth) and right bank (Premier Grand Cru) Bordeaux tentative in today’s world, the takeaway is clear: supply outstrips demand. While this is not so welcomed by producers, it’s good news, for seasoned or novice collectors. For example, Chateau Lafite Rothschild, Pauillac, 2000 reached an average peak price of $3,366 in 2011. Today, you can locate it for $1,600 or a whopping 52% drop! Chateau Margaux Margaux, 2000 peaked at $1,526 and can be found today for $1,000 or a 34% correction. Chateau Haut Brion, 2000, listed at $1,015 on average in 2012, can be located for around $750 or 26% less, hinting that both Lafite and Margaux were more significantly inflated. Second growth Cos d’estournel, St. Estephe, 2005 peaked at $304 in early 2012 and now runs around $220 or nearly 28% less. Even fifth growth Pauillac star Pontet Canet, 2005, which peaked around $186 in 2013, is avaiilable for $135 or 27% of its high. The message here is clear, unless you’ve lost your mind to reason: you’re being given an opportunity to get in on a market that has centuries of quality & reputation to its name. To put this into a different perspective, imagine a stock purchased 10 years ago as a long term investment. The company had superb management and an impressive track record of appreciation. While you’ve made a significant paper profit today (you haven’t sold it), some of it has now evaporated, courtesy of a 30% correction due to global weakness. Nonetheless, the long term future is still bright for the company. Management is doing everything right to navigate challenging economic times and ratings on the company are very strong. Seems like a good time to buy more of that stock or start a new position, following a Warren Buffet approach. And I would argue that in today’s market, you should entertain the same philosophy when considering high end Bordeaux. Now remember, no one has a crystal ball and can forecast where prices go from here. Anyone who makes that claim is either a fool or a liar. So the best we can do is speculate based upon facts & history. For all the reasons detailed above, I believe that demand for top Bordeaux will fluctuate around current levels near term, resulting in stable prices. I believe that we have seen the worst of the correction with weakness already baked into current prices. I still believe, as I wrote several years ago, that the near financial collapse was a once in a generation event, not to be repeated in our lifetime so a measured recovery should continue to take hold. When this might translate into price increases is anyone’s guess (remember…………no crystal ball) but it will surface at some point. Adding all this up, I believe that you can begin to make some purchases, but incrementally. If prices soften further, consider it a gift and buy more. And if by chance the worldwide economy unexpectedly strengthens and Bordeaux pricing suddenly escalates (which I doubt but did I say that crystal balls are out), at least you have some. And you can always bite the bullet and buy a little more at higher prices than today but still significantly lower than the high. Don’t expect that you will ever see prices free fall to the release prices of yesteryear. Top Bordeaux wines, surpassed only by some of the low production appellations of Burgundy, have a centuries of excellence as their foundation and thus command top pricing. However, even the best stumble on occasion and for the astute, these are unique opportunities to step in. Don’t be one of those who looks back a decade from now when prices are up and kicks yourself for not pulling the trigger.