What are the odds?

Can we first of all go on record as saying that the result of the US Presidential election will generate enough hot air without Amphora Portfolio Management adding to it.

It is abundantly clear that no-one has the faintest idea what the likely repercussions are, even top economic commentators coming out with banalities that help no-one, apart from their own need to go into print.

Throwing political interference into an investment strategy is difficult enough at the best of times, but as our recent Brexit experience confirms, knee-jerk reactions are often costly in terms of returns. Already this morning we’ve had markets freaking out and then recovering. Quite honestly, strong views about what might happen next should be treated with caution. Markets have a habit of making fools of us all.

My own first thought today was to bemoan my stupidity in not putting a few bob on “the surprise result”. When the odds stretch in a two horse race I think it’s fair for a red-blooded fellow’s gambling instincts to kick in, but investing is not like gambling, and this is where a lot of “investors” in the fine wine market go wrong.

It is very important to differentiate between an investment and a bet. You make an investment in the expectation of success. You make a bet in the hope of success. Hope and expectation are very different. This is the reason the odds seem so attractive when you make a bet. The likelihood of success is remote, so it has to be balanced by the prospect of exaggerated gain.

All odds are bound up with this concept of risk, and it is how you handle the risk that determines the outcome of your investment strategy. Modern Portfolio Theory suggests that returns are more safely generated by diversification, and diversification should be reflected throughout any investment plan. So, just as your pension plan wouldn’t all be invested in one stock, so your fine wine exposure should not all be through ownership of a single wine.

It is tempting on mornings like today to “throw the baby out with the bathwater”, but this smacks of selling in ignorance, since none of us really know how things will turn out. Those who cash up at this point will find themselves sitting on cash in a world where its value is likely to be reduced precisely in consequence of the election result.

Some people by contrast are singing the praises of gold, silver, physical investments, and you will find people also touting the qualities of fine wine in this context. Quite simply, the Amphora view is that it is too early to tell.

So, what to do? Last month we introduced our algorithm-based fine wine selection process, and at times like this it becomes incredibly valuable. Following Modern Portfolio Theory where a portfolio should be exposed to a variety of asset classes, so Amphora investors are encouraged to own a diverse spread of wines. These wines don’t all perform the same way at the same time, and all investors will have wines that have generated the lion’s share of performance over the last few months.

The key now becomes whether to run these winners, or switch into areas of relative value elsewhere. This column will focus principally on prospective purchases, rather than highlighting recommended sales (for the simple reason that we don’t know who from the Drinks Business readership owns what). We welcome questions from investors direct should they be wondering whether to take profits in specific wines.

This week we would like to alert investors to the relative value on offer in a couple of ‘Super Seconds’ (or equivalent, in the case of L’Eglise Clinet), from very recent vintages. We will not be lifting the skirts of the algorithm too high, and will emphasise the point using only two of the variables, Parker score and vintage score.

Ducru Beaucaillou 2011. You can buy a case for under £850. The score is 92+. “One of the vintage’s stars” according to Parker. Off vintages over the last few years with similar scores and vintage scores cost up to £1,200.

L’Eglise Clinet 2011. Available for under £800, this is better than most of the off vintage wines and is as cheap as any. As an indication of potential upside the slightly better 2006 (wine score 96 vs 95 and vintage score 90 vs 88) costs in excess of £1,200.

Léoville Las Cases 2012. Unusually for this producer you should be able to pick up cases for just under £1,000. 2012 was marginally inferior to 2011 in St Julien but the wine scores are both 93+, yet the 2011 costs the best part of £1,150. The 2007 scores 91+ and costs £1,220. Other off vintages trade even higher, notably the 93 point 2004 at over £1,300. The recent brief correction in the 2012 represents a good entry point.

Philip Staveley is head of research at Amphora Portfolio Management. After a career in the City running emerging markets businesses for such investment banks as Merrill Lynch and Deutsche Bank he now heads up the fine wine investment research proposition at Amphora Portfolio Management