Following up on Professor Rapp's suggestion that I turn my comment into a blog post, I'm curious how an investor factors in the confluence of time scales and natural fluctuations that are inherent in the wine industry. I'm neither an investor nor knowledgeable about the wine industry in any way, so I'm talking from a total novice's point of view of things that would strike me as uniquely difficult to account for when thinking about the value of a wine company to an investor.
There is obviously a significant time lag (often years) between the growth/picking of the grapes and their eventual bottling and shipping to suppliers, and then eventually consumers. Because of this, events that impact the growth cycle have predictable effects that will impact fiduciary numbers years down the line. If a particularly aberrant weather or a seasonal blight affects the quality of the grape or the quantity of the crop in a particular year, investors should be able to adjust their expectation of a wine company's performance years in advance. I can't think of another product ( except maybe olive oil?) where this is the case. Agriculture is obviously affected by many of the same issues, but as a commodity product that usually sells seasonally in the near future.
In some ways, this would make the wine industry more predictable for investing - investors could have years to adjust and set their expectations, allowing for a smoothing effect that actually makes investing in wine companies more stable and less volatile. On the other hand, if investors can anticipate a bad year several years in advance, it could lead to movement in the stock that has a severely negative impact on the company. The reverse is true for a good year.
From an operating and financial perspective, the wine companies themselves would have to think about how to mitigate the impact of market movement because of expected bad news due to the effects of nature or other extenuating circumstances that will not manifest for years in advance. On the flip side, if an upcoming year is expected to be exceptionally good, the companies can engage in both financial and operating engineering to get a leg up on their competitors and strengthen their operations as a whole.
Jack your question in class got me thinking too and although I do have a background in investing, I'm not sure I'm any more well-positioned to opine on it. That said, I do have a couple thoughts. The first is I think these investments would make for better private ones than public. As someone mentioned in class, I think public markets do have the tendency to be relatively short-term focused, and any news of a particularly bad (or good) harvest or yield could cause a lot of volatility in the stock. On the other hand, a private investor would have a lot longer runway to see the investment through and potentially build up a brand that, while still subject to the whims of mother nature, may carry a certain cache. That leads me to my second thought, which is that an investment in the wine industry could also be seen as more of a "trophy asset" than potentially one that simply generates a good return. In a past life, we had taken a look at a sports team that instead of producing cash flows every year actually required its owners to continually put more money in. But, the allure of owning a sports team overpowered the natural desire to make a return. Perhaps the wine industry might be similar.
ReplyDeleteJack: Thank you for the follow-up from class.
DeleteJack&Karl: The punchline of your comment is that wineries/vineyards as investment vehicles are a) best held by those with long-term investment horizons, b) may provide non-monetary "compensation" benefits (joy, lifestyle, passion point/hobby) that attract investors, akin to other categories like fine art and some athletic franchises. The follow-up question to contemplate is whether these non-monetary benefits "enhance" the asset value for investors or "cloud" their judgment as rational actors?