Bidding your way to a bargain
Bidding your way to a bargain
...and a couple of bargains I 👀'd in the market
Hello fine wine lovers,
A short article where I share a couple of gems I’ve picked up in this down market.
I came across an article written by Cru, a renowned wine merchant headquartered in London, explaining an interesting trading strategy for sideways and down markets: bidding. This strategy aims to generate profits by placing a high number of speculative bids, well below a wine's recent high print.
Following this article, Liv-ex presented a case where a bidder acquired 30 cases of Louis Roederer Cristal 2015 at 6.7% below its market price, as you can see in the blue line in the chart below.
And another example — Lafite 2016.
Could this be the winning strategy in this market environment? And more crucially, which wines are prime candidates for this approach?
I’ll look at it within the context of the Saturnalia Model Portfolio, built using the Saturnalia wine investment platform. You can read the background of this project here:
Portfolio Performance
The Saturnalia Model Portfolio (excluding cash) saw a decrease of -3.9% in July 2023. During the same timeframe, the Liv-ex 100 experienced a decrease of -3.1%.
A critical point of note: the portfolio's underperformance was largely due to a pricing discrepancy of Vietti Ravera 2019 in July 2023 (as per WineDecider Pro market pricing model) against the Liv-ex pricing in prior months. Had this discrepancy been non-existent, the portfolio would have reflected +3.2% positive returns, courtesy of its pronounced emphasis on high quality wines and vintages.
What happened in the fine wine market?
July marked yet another contraction for the fine wine market, with the Liv-ex Fine Wine 100 noting its fourth consecutive decline. A staggering 76 of the 100 wines listed experienced a depreciation in value.
In the latest article, we posed the question: Has the fine wine market plummeted to its lowest?
The pool showed a majority consensus — the descent is far from over!
Below you can find the full history of the Liv-ex 100 index. In the chart, you can also see that the red lines and markers represent the drawdowns, with each drawdown's start and end dates connected by a red line.
Historical data reveals that the most significant drops in the fine wine markets occurred in 2011 (-35%), 2008 (-22%), and 2002-2003 (-9.9%). You can take drawdowns as investment risk, showing potential investor losses for the principle that history tends to repeat itself. The current drop stands at -10.1%, and despite a better global economy than in 2008 or 2011, a prolonged downturn is likely. Why? I’ve written a loooooooong market analysis last month — you can skip to the end to read about the reasons I believe we will still experience some weakness.
Updated technical analysis now underscores that the Liv-ex 100 is firmly entrenched in oversold territory — a potent harbinger for a potential reversal.
In fact, reports such as the ones from Cru and Liv-ex only underline that some buyers have started building positions in bargains. Investors typically view downturns as golden opportunities, adhering to the buy low, sell high mantra. When markets nosedive, assets may be undervalued, paving the way for amplified returns upon market resurgence.
Perfectly timing a bottom is impossible — yet, a calibrated approach in incrementally building positions during market downturns can be fruitful. This approach, called dollar-cost averaging, consists in building a position by systematically invest a predetermined amount. This ensures that fewer units are procured when prices increase and more units are acquired during a slump, thereby optimising the average cost per unit over time. This strategy is admittedly more difficult to implement strictly when investing in non-fungible assets (no two ones are alike), such as fine wine.
In addition, in down markets, it’s best to focus on quality investments as opposed to going all out on so-called value traps — assets that appear cheap but are cheap for a reason. Instead of just focusing on price, it's essential to look for quality investments that have become undervalued due to the broader market downturn. A quality investment refers to assets that exhibit a set of favorable, enduring attributes, often making them well-poised for consistent, long-term returns. These attributes might include robust financial health, a sustainable competitive advantage, seasoned management, and, above all, a track record of resilience against economic downturns. A comparable asset in the equity market would be Apple AAPL 0.00%↑ , which serves as a prime example of a quality investment. Its strong brand loyalty, innovative product lineup, vast global retail network, and substantial cash reserves have not only allowed it to command significant market share but also to weather economic storms and industry shifts.
In the current fine wine market, it's prudent to gravitate towards back vintages of prominent châteaux.
Here are two gems I've added to the Saturnalia portfolio:
★ ★ ★ ★ ☆ 2015 Vintage
Overall the 2015 Bordeaux vintage was marked by unique growing conditions resulting in wines of diverse styles, with some areas producing outstanding wines, while others were more variable in quality. While universally acclaimed Bordeaux vintages, such as 2000, 2005, 2009, 2010 and 2016, offer prestige, vintages that, while not universally lauded, still possess great quality and individual character, such as 2015 and 2020, can create the opportunity for bargains. Antonio Galloni gives the vintage a 97/100 on Vinous for the Right Bank and a 95/100 for the Left Bank. The 2015s are aging slower than the 2014s but faster than the 2016s. The 2016s, having closed down, are expected to have the longest life among the trio.
˗ˏˋ ★ ˎˊ˗ Ch Mouton Rothschild, 2015
As mentioned above, selecting quality names that play a defensive role in the portfolio is key in this kind of market environment — however, a strategy putting a 50% bid on MR 2016 it’s unlikely to be successful.
What’s more likely to succeed is to identify vintages and wines that may already offer great value, at the current prices, or that are trending downwards. One such example is Ch Mouton Rothschild, 2015.
In the WineDecider Pro analysis below you can observe that:
The rating attractiveness, which measures the users interest across three aspects: the first letter is for the wine, the second for the château, and third for the appellation or region, is AAA.
This highlights that Ch Mouton Rothschild, 2015 is a highly coveted wine from a widely recognised appellation and château.
The market price (developed by WineDecider Pro with proprietary algorithm that includes B2B offers, price and stock levels) is lower than the average value (the average of market prices over 15 vintages).
This indicates a wine that is trading below historical prices and has the potential to appreciate.
Finally, Saturnalia’s fair value model also highlights that the 2015 is currently trading at a discount of fair value.
Other vintages from Mouton Rothschild are also trading at a discount — see 2014, 2017 and 2021; however, picking from lesser vintages might not be the right strategy during a market where also a lot of on-vintages are trending downwards.
PS: from the chart above, you can see that 2019 also seems to be greatly undervalued. The 2019 vintage was also unquestionably a Left Bank vintage. The price seems to be trending downwards and certainly is an interesting one to follow.
★ ★ ★ ★ ☆ 2020 Vintage
The 2020 Bordeaux vintage is highly praised, recognised as the most consistent of Bordeaux's trilogy spanning 2018 to 2020. The wines are of excellent quality across various price points and Antonio Galloni gives the vintage a 98/100 on Vinous for the Right Bank and a 97/100 for the Left Bank. The wines from 2020 reflect advancements in vineyard and cellar practices, suggesting that they might surpass the aging potential of previous acclaimed vintages like 2005.
˗ˏˋ ★ ˎˊ˗ Cheval Blanc, 2020
Cheval Blanc 2020 may just well be another undervalued gem.
Saturnalia’s fair value model suggest it’s trading at a 33.4% discount. Other arguments similar to those for the Ch Mouton Rothschild, 2015: AAA attractiveness score and a market price that’s below the average price.
Neither one of the two wines above come at a cheap price. And the reason why bidding can be a successful trading strategy has more to do with psychology than with rational market forces.
Of course, bidding can take advantage of a sideways, down or simply volatile market in fine wines where the prices of the wines do not necessarily follow a clear upward or downward trend, instead fluctuating between certain price levels. And, this combined with a lower liquidity in the market can result in a greater spread between the highest and lowest prices for any given wine, which can obscure the true market price (a.k.a. fair value) of the wine, leading to potentially profitable opportunities.
However, in uncertain or down markets, market participants tend to be fearful and may want to protect themselves by holding cash — the safest asset. Some investors might decide to liquidate some assets in order to meet unexpected liquidity needs or to have a margin of safety and some other will not invest in assets that are illiquid or perceived as risky, such as fine wine. This could lead high-value fine wines, such as the two discussed above, to be a great potential for liquidation, which can make them great buys for intelligent investors.
A summary of bidding …
Here's a breakdown of how the strategy works:
Identifying Opportunities: Look for wines trading significantly below their recent high prices. The rationale is that some wines' prices have dropped more than what is justified by their quality or demand, indicating a potential undervaluation. It is often the case with some top Champagnes (Dom Perignon 2012, for example) or the two mentioned in this article.
Making Bids: You should have a higher number of bids than usual out in the market. These bids should be on the lower end of the new trading range, but still realistic. The goal here is to "pick off" any stray low offers that might occur as the market fluctuates. You're essentially trying to buy the wine at a discount.
Speculative Bids: In addition to bids at prices you believe are fair, you should also place a number of 'speculative' bids. These are bids at prices which are even lower, hoping that a seller might accept your bid in a moment of desperation or a sudden drop in price.
Understanding the Market: It's important to understand the wine market and the particular wines you're bidding on. This can help you decide on the best prices to bid at. For example, you would not expect to win a bid that's 50% lower than the current price for a popular wine like Mouton Rothschild 2016.
The end goal of this strategy is to purchase fine wines at prices below their intrinsic value due to market volatility.
Of course, for the purpose of the model portfolio, I just used the current price; however, in reality it’s worth spotting quality wines and try to place both realistic and speculative bids in case the owner of those wines might be interested in selling at reduced prices.
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👋 Sara Danese
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