Sunday, August 2, 2015

Veseth, Money, Taste, and Wine

Mike Veseth, an economist who studies global wine markets, is a prolific writer. His latest book is Money, Taste, and Wine: It’s Complicated! (Rowman & Littlefield). It debunks the (obvious) myth that pricier wine is always better wine, even though—and I suppose this is why, in part, it’s complicated—we enjoy wine more when we’re told it’s expensive, even if it’s not. The book also offers tips to becoming a smarter, happier wine drinker.

If you’re buying wine for yourself, you should understand that the ability to sense aromas and flavors varies from person to person. The range of responses to bitterness, one of the five basic components to taste (the others being sweet, salt, sour, and the pleasant savory taste of umami), is especially great. About 20% of the population are “supertasters” who have an exaggerated reaction to bitterness, 20% are bitter-tolerant “nontasters,” and the rest of us are merely “tasters.”

If you’ve got nothing better to do with a few minutes of your time and if you happen to have blue food coloring in your kitchen cupboard, you can find out what group you fall into. “Cut a one-centimeter-square hole in a note card, put a little blue food coloring in your mouth, go up to a mirror, stick out your tongue, and look at it through the hole. Welcome to the supertaster club if you count about 150 bright-blue taste buds in that little square. A nontaster has about fifty taste buds per square centimeter, and average tasters are in the middle, with about one hundred.” (p. 25)

Still curious about why people like certain kinds of wines more than others? Veseth points the reader to the websites of Tim Hanni, and, to learn about Hanni’s classification of wine drinkers into four basic groups.

Now to the money side of wine. Have you ever heard of dump bucket wines? When a winery that normally charges a premium price has more product than it knows what to do with, it sometimes keeps the price of its fine wine high in the home market and then off-loads the excess in a market it does not normally contest. (p. 36) Sometimes the wine disappears into the bulk market and reappears “who knows where with who knows what label, perhaps blended with other wines.” (p. 39)

Then there are the big-bag, big-box wines. Not the bag-in-box wines that apparently account for more than half the wine sales in French supermarkets and are now among the fastest-growing wine categories in the U.S. No, the really big bag in the really big box—a 24,000-liter bag in a standard shipping container. The wine is bulk shipped and then bottled in the domestic market, sometimes as a private-label wine. By 2013 50% of New World wine exports were bulk wine, saving an average of $2.25 per standard 9-liter case on shipping and tariffs and reducing wine’s carbon footprint.

And what makes Champagne so special? Not the grapes. It’s traditionally made from Pinot Noir, Chardonnay, and Pinot Meunier grapes used in various proportions. Not the production process, which uses industry-standard technology. Not the cost to produce a bottle, which on average is $13. It’s marketing, a staggering $16 per bottle. And so we have at least $16 worth of good reasons to choose similar sparkling wines that can be equally satisfying at a much lower price.

Veseth also addresses the question of whether one should invest in fine wine. “The problem with fine-wine investment so far—and I think that this is changing—is that most of the action has been in a very small number of particular assets, mainly the famous names from Bordeaux. This makes the wine investment market a bit like the stock exchange in one of those emerging-market countries where the stocks of one or two companies dominate the action.” (p. 135)

And here’s a tidbit for correlation fanatics. “The prices of fine wine and crude oil have been highly correlated in recent years.” According to an IMF study, “wine follows the twists and turns of oil prices, but it is somewhat less volatile in terms of peaks and troughs.” (pp. 138-39)

Veseth’s book is an enjoyable read. Take it to the beach with a bladder of wine.

Sunday, July 26, 2015

Margins and edges

We don’t know what we want—to be part of the mainstream or to live on the margin, to stay in our comfort zone or to venture out to the edge.

Well, that’s not exactly true.

We don’t want to be marginalized. We don’t want to live a precarious life financially, not knowing where out next meal is coming from. Most of us don’t want to cross the margin of civilized behavior. But we do want a margin of safety, we allow for a margin of error, and sometimes it’s to our advantage to trade on margin. Breakthroughs often happen at the margins.

In a book a margin is that area between what is important, the text, and what is no longer even a book, everything beyond the edge. It’s a place between that which matters and that which, to the engaged reader, doesn’t. But it’s also a place where the reader can add his own thoughts, where he can be creative.

Margins have two dimensions; edges, only one. Margins are for wimps (like those who want to live another day); edges, for daredevils. People who live on the edge take risks, almost by definition without a safety net. Living on the edge can be exciting and illuminating. But the edge itself is unforgiving. There’s no second dimension in which to tiptoe forwards and backwards. You can win big, you can lose everything. The edge is not a place for risk management.

We are inclined to be in awe of those who, to our minds, live at the edge. But sometimes their contribution lies not in fearlessly standing at the edge but in working in the margin, moving the edge away from themselves. Scientists, for instance, push back the edge of ignorance. Smart traders find a way to hedge or otherwise mitigate risk.

I suspect that the humble margin deserves more respect, even though I can find no upside to being marginalized. We ourselves have to choose to test boundaries, to push beyond our comfort zone, to take on risk. Perhaps then our profit margin will improve. We don’t want others to push us out because we are deemed unworthy of being part of the mainstream—because we are poor, different, or just easy to ignore.

Saturday, July 25, 2015

Updegrove, The Lafayette Campaign

A change of pace: some light reading for those who watch programs like “Mr. Robot” and even the dreary “CSI: Cyber.” (I exercised through about ten minutes of the latter show before I pulled the plug once and for all.)

Andrew Updegrove, author of The Alexandria Project, is back with another Frank Adversego cyber-thriller, The Lafayette Campaign: A Tale of Deception and Elections. If you (well, only if you’re a Republican) think that the worst case scenario is that Donald Trump decides the next presidential election, assuming that he runs as a third-party candidate, think again. Elections can be tipped or determined not only by third-party candidates (Ralph Nader is often said to have been the spoiler in 2000) and Supreme Court decisions but also by hackers.

The more electronic elections become, the more hackable they are. Competing rogue forces can devote funds and skills to shaping their outcome. Indeed, just think about it. Why give millions of dollars to PACs, money which is often wasted, when you can fund a bunch of hackers? The Chicago “vote early and often” pols and the RNC Watergate crew worked in the pre-digital era. Today their exploits seem laughably primitive. Elections can be stolen much more elegantly with a few lines of code.

The Lafayette Campaign is a fast-paced thriller that takes the reader through the machinations of election cyber-fraud. A perfect beach book.

Sunday, July 19, 2015

Process vs. results

How many times have you read that, in investing and especially in trading, it’s the process that matters. Results either follow or don’t. Since the financial markets are more or less random, one can’t control the results, only the process.

In a book that’s coming out in late September, a book that should be on everyone’s radar screen and that I’ll review later—Superforecasting by Philip E. Tetlock and Dan Gardner—the authors criticize the American intelligence community for not systematically assessing its forecasts.

“What there is instead is accountability for process: Intelligence analysts are told what they are expected to do when researching, thinking, and judging, and then held accountable to those standards. Did you consider alternative hypotheses? Did you look for contrary evidence? It’s sensible stuff, but the point of making forecasts is not to tick all the boxes on the ‘how to make forecasts’ checklist. It is to foresee what’s coming. To have accountability for process but not accuracy is like ensuring that physicians wash their hands, examine the patient, and consider all the symptoms, but never checking to see whether the treatment works.” (p. 73)

Similarly, I think that educators who teach traders and investors to focus only on process, not results, may be selling them short. Traders and investors need to learn to think probabilistically, to size trades accordingly, to make and revise forecasts in the light of new evidence. And they need to check their forecasts, including the time horizon of these forecasts, against the outcomes.

Every investor and trader forecasts, however much they may belittle the notion. Why not learn to do it better and make it a key measurable metric?

Wednesday, July 15, 2015

Answers to word triplet problems

As promised, here are the answers to yesterday's puzzles:

reading, service, stick? Answer: lip

baby, spring, cap? Answer: shower

Tuesday, July 14, 2015

Word triplet problems

The pace of reviews will slow over the next few weeks. It’s not that I’m being lazy. I continue to read and write reviews. But some of the books that I’ve written about won’t be published for some time, and most publishers want reviews to appear close to the book launch date. Right now I have posts scheduled for August, September, even October.

In the meantime, I’ll try to fill the gap with some random thoughts, bits of trivia, and brain teasers. Today’s post belongs to the last category.

From Innovating Minds, a book that will see the light of day only in October (so stay tuned for the review), two word triplet problems. In these problems you are given three apparently unrelated words and are asked to think of a fourth word that is related to all three words and that can form a phrase with each of them. For example, the words “age,” “mile,” and “sand” all are associated with “stone”: “Stone Age,” “milestone,” and “sandstone.”

Okay, ready? Here are two sets of words. See if you can find the missing fourth word in each case.

reading, service, stick

baby, spring, cap

I’ll post the answers tomorrow.

Wednesday, July 8, 2015

Zopounidis and Galariotis, Quantitative Financial Risk Management

Quantitative Financial Risk Management: Theory and Practice, edited by Constantin Zopounidis and Emilios Galariotis (Wiley, 2015) is a collection of 15 papers, written primarily by academics. The papers deal with five main topics: supervisory risk management, risk models and measures, portfolio management, credit risk modeling, and financial markets.

One paper that I think should be of general interest to investors is William T. Ziemba’s “Portfolio Optimization.” Ziemba argued in 2005 that the Sharpe ratio needed to be modified to evaluate properly the returns of great investors since the ordinary Sharpe ratio penalizes gains. The modified measure (DSSR—downside symmetric Sharpe ratio) uses only losses to calculate the denominator.

So what kinds of DSSRs do the great investors/traders have? Berkshire Hathaway’s is 0.917. Compared to four other funds (Quantum, Tiger, Windsor, and the Ford Foundation), it has the highest monthly gains but also the largest monthly losses. “It is clear,” the author writes, “that Warren Buffett is a long-term Kelly type investor who does not care about monthly losses, just high final wealth.”

By comparison, “the great hedge fund investors [Ed] Thorp at DSSR = 13.8 and [Jim] Simons at 26.4 dominate dramatically. In their cases, the ordinary Sharpe ratio does not show their brilliance. For Simons, his Sharpe was only 1.68.” Be careful, however, what you wish for. One fund that the author studied had an infinity DSSR. “That one turned out to be a Madoff-type fraud!” (pp. 203-204)