The Pride-Of-Ownership Premium for Collectible Wines

My favorite white wine is the Chardonnay from Busby Cellars in Somerset, California @ $12 a bottle (with a case and club discount off the $15 retail price). 

This is the standard I use to compare all other white wines and I have not found another white wine I like better - at any price. 

I am not a wine collector; I buy it and I drink it. But a story I saw on CBS this morning caught my attention.

A few folks have different criteria that I do and will shell out $3500 for a 1961 Lafit-Rothschild. I would be thinking “What if I bought it and didn’t even like the wine?” Heck, drinking it would feel like burning 35 hundred dollar bills in my fireplace.

But why is the 1961 Lafit-Rothschile worth $3500 while Busby’s Chardonnay sells for $12-$15?  It all comes down to the “Pride-of-Ownership” Premium - in other words bragging rights. Assuming the Lafit-Rothschild is as good as the Busby Chardonnnay (I doubt it), then the Pride-of-Ownership is $3485 ($3500 less $15).

How is the Pride-of-Ownership premium determined?  Like most free-market prices, it’s a function of the supply versus the demand.

This morning’s CBS Sunday show told the story of how a recent burst of counterfeit wines is starting to put a damper on the demand for collectible wines. 

The story features Bill Koch (according to a Forbes 2012 article had an estimated net worth of $4 billion), the victim of counterfeit wine fraudsters. To date he has spent $25 million in legal fees trying to recover some of the money he spent buying from Rudy Kurniawan (recently described as the Bernie Madoff of the wine world) and other crooks.

In the interview, Koch explains: “I used to bring people down here (his wine cellar) and brag and say do you want to see Thomas Jefferson’s wine?  Well then when I found out it was fake, now what I’m going to have to do is say come on down and see my fake Thomas Jefferson bottles.” 

After his litigation (where he might fail to collect a penny) the shame of being scammed has replaced the Pride-of-Ownership Premium. Not only are the bottles worth nothing, they probably have a negative value because they raise Bill Koch’s blood pressure every time he recalls how he was cheated.  Wine experts claim that buyers are getting gun shy about buying collectable wine – the result will result in the downward pressure on the Pride-of-Ownership Premium. Like all prices, supply and demand is the ultimate driver of where the price is today and where it will be tomorrow.  

There’s Always a Bear Market Somewhere

A bear market is one where prices are dropping. Most investors search for, rejoice and succeed in bull markets (where prices are on the rise). But for even a fairly simple business (say, a local hot dog stand), some prices are going to rise (say, meat prices) while others might simultaneously fall (maybe mustard).

An entrepreneur might bet that her production prices will fall (or at least not increase) when she signs a contract to deliver a product that she does not have in inventory, knowing that she can have it produced and delivered. This is a bet that prices will drop or at least not increase. Like any bet, if the market moves against the entrepreneur, and her supplier wants to raise the price before she has placed her order, then she will make less than expected, or might even lose money. Likewise, if the price drops after the entrepreneur has made the sale, but before she has placed the order, she will make more than expected. High fives!

The traditional start-up model is to manufacture a thousand widgets and then try to sell them. The smart entrepreneur at least considers the option of making the sale first, and then producing or buying the products to meet the order.

Later on, as the enterprise gets bigger (for a few), it will likely require a minimum inventory because many customers might need the product immediately. But that’s a good problem for a later day.

Mikey Persists!

My three boys were always selling something to raise money for their soccer and little league teams. Before my youngest son Mike was even old enough to play on a team, his older brothers noticed that he not only liked to sell but was good at it. Most of the time they would talk Mikey into doing their selling which meant that I had to walk the neighborhoods to help him carry the candy.

I still remember one sales pitch vividly.

When the lady of the house opened the door, Mikey said: “I’m selling these chocolate candy bars for $2 each and they have a $1 off coupon at Round Table Pizza and they have lots of nuts.

The lady looked perturbed and said:  “#1 I don’t like candy, #2 I don’t eat pizza and #3 I am allergic to nuts.”

And Mikey just stood there with a big smile and asked: “So how many would you like to buy?” 

Amazingly she bought six.

Selling comes down to persistence and a willingness to handle “no”. Most importantly it almost always requires asking for the sale.

The Halo Effect.. and the Eight Other Business Delusions that Deceive Managers

Phil Rosenzweig's The Halo Effect is among the 10 best business books of all time in this humble author's opinion.  He deftly tears into much of the business literature and demonstrates that the research and numbers frequently don't hold water.

In a nutshell here is his thesis: "Stories of inspiration may give us comfort but have little more predictive power than a pair of coconut headsets on a tropical island. Instead managers would do better to understand that business success is relative, not absolute, and that competitive advantage demands calculated risks."

Forks in the Road

Champs listen to Yogi Berra’s advice: “When you come to the fork in the road, take it.” I advocate an even more assertive mantra: “Find a fork in the road and take it!”

If, like most of us, you are starting with little or no capital, forks in the road are your primary currency. Each decision gives the champ a chance to distance himself from the chump.

Finding the right idea

By 1997, Bruce Springsteen had over 350 recorded but unpublished songs. The Boss always had so many ideas that he had to work at focusing on a small subset of them whenever he released a new album. This principle might be thought of as Find Them, rather than Find It. You need to find enough of “them” in order to get the right “it.”

So be an idea generator, and record them all. Talk about them and mull them over. Then set aside most of them and focus on the best one.

In the Next Crisis, What Assets Will Take the Biggest Hit?

The US real estate and equity markets have been on a roll for the last several years. One of the drivers of this trend has been record low interest rates.

My question for you is if there is correction or even a crash, what will happen to assets that are made up of more Pride-of-Ownership premium than other assets? The Pride-of-Ownership premium is the premium that buyers will pay for an asset compared to an alternative asset without the same subjective bragging rights. My hypothesis is that luxury goods will take a bigger hit than bread-and-butter kind of assets.

If this hypothesis is correct then I would expect fine art prices to decline faster than the price of five year old Chevy trucks, caviar to drop faster than potatoes, Malibu beach house prices to take a bigger hit than basic apartment complexes in Los Angeles.

What do you think?

Business is not easy.

The overriding lesson is that business is not easy at all.  You can be sitting in the cat bird's seat and before you know it, the world has changed and you have no advantage at all.

Richard Branson's Discussion of Optimum Persistence

Richard Branson has valuable advice for an entrepreneur about when to persist with his start-up and when to move on.  It is always a tough call, but Branson asks the struggling entrepreneur several good questions to consider.

Branson says: "If you’re feeling disheartened because larger competitors have saturated the market with their products, well, that’s exactly what they were hoping for. Remember that once upon a time, there were lots of airline executives and industry experts who thought they understood the market and that a new entrant like Virgin Atlantic, which was run by a company with a background in music, wouldn’t be able to keep up. Yet it was our fresh perspective and unique take on travel that brought about our success, and Virgin now has three thriving airlines, while many of our former competitors have gone out of business."

A Full Spectrum of Choices

"Often, for example, we'll get stuck in a mindset of prevention OR promotion. If we can do both, seeking out options that minimize harm AND maximize opportunity, we are more likely to uncover our full spectrum of choices." - Chip Heath and Dan Heath in their book Decisive How to Make Better Choices in Life and Work

Contrarian

“It is better to be right than to be contrarian. But being contrarian is very often a good heuristic for finding what is right.” - Peter Thiel, co-founder of PayPal

An Entrepreneur Long Shot!

Understand how much of a long shot you are. A one in 20 bet might be a “good bet” if you can afford the downside AND you have a chance at a 1,000 to one payoff. But it’s essential that YOU GET REAL!

Some entrepreneurial endeavors entail more risk than others. Riskier bets require execution of the fundamentals just as much as the more conservative ones. But the riskier gamble on a unique and un-proven value proposition hopes to create a long-term competitive advantage, and a chance for an eventual home run.

One who has never worked in either the coffee- or food-delivery business is a long-shot to create a new business that promises to deliver 300 kinds of coffee to the customer’s doorstep within fifteen minutes of ordering. And yet, almost all radical change comes from industry outsiders. Great examples of this include Amazon (originally a unique approach to the book business, but now so much more) and Apple, in both the music and cell phone businesses.

Long shots can offer tremendous value based on the upside, but the calculations and risk/reward profile are quite different from the safer plays.

Nassim Nicholas Taleb reminds entrepreneurs: “Most of you will fail, disrespected, impoverished, but we are grateful for the risks you are taking and the sacrifices you are making for the sake of the economic growth of the planet and pulling others out of poverty.”

Thankfully, some entrepreneurs will still make the plunge. 

 

"I have so often in my life been mistaken that I no longer blush for it." Napoleon Bonaparte

The Sure Thing is the Sure Loss!

 I would love to find the sure thing for making a profit, but I have been totally defeated in that search. My experience is that the only sure thing is the sure loss.

Sometimes Smart Bets Lose

In business (and life in general), you need to appreciate that sometimes smart bets lose, and occasionally dumb bets win. As Michael Lewis said about the game of baseball in Moneyball, “There are lucky doubles and unlucky outs.” If you can’t come to grips with this truth, you might avoid decisions—and that in itself is a bad decision.