“Past performance is not a guarantee of future results.” This piece of legal-ese often appears on advertisements for investments to insulate financial firms from the risk of litigation if the future does not turn out as they had hoped. It is strange warning, considering that the entirety of the glossy booklet is usually comprised of graphs showing extrapolations based on past performance. And regardless of this warning, past performance is a key indicator used to gauge the chances of success in the future. Wine is generally considered to be more of a romantic, rather than a business pursuit, but the reality is that great wine alone will not support payroll. Bordeaux is one of the first wine regions to realize this and apply business principles to winemaking on a large scale. Much of the character and quality of its wines is inextricably linked to this decision.
The main difference between Bordeaux and other wine regions of Europe is Bordeaux’s relative youth. While most wine regions were established by the Romans, the land that is now home to Chateaux Lafite, Latour and Mouton-Rothschild was marsh until the middle of the 17th century. The Dutch, who were strong trading partners of Bordeaux, used their knowledge of dikes to drain the land and enable the expansion of wine production. By this time, wine was no longer a localized product cultivated by monks. It had become large-scale, international business that required financing that no small farmer could hope to obtain. Owing to historically preferential trade terms with Bordeaux, its wines quickly became popular with aristocrats and businessmen in England and Germany. It quickly became apparent that small-scale farming would not satisfy market demand. Sensing an opening, these businessmen stepped in and became merchants who would buy, age, ship, and bottle the best that this new wine region had to offer.
One of the core tenets of investing is to minimize risk when possible. But the production of wine is inherently risky. Weather, disease and pests all threaten to destroy a year’s harvest. Merchants and producers dealt with each of these risks in a number of ways. Instead of planting only one type of grape, as was common in many regions, Bordeaux would be made from a blend of different grapes, each selected because they would flower and ripen at different times. Therefore, even if the Merlot crop suffered a late frost, the Cabernet Sauvignon, which would flower later, would likely escape harm, allowing wine to be produced that year. Bordeaux was also at the forefront of disease prevention, developing and implementing the “Bordeaux Mixture,” one of the first widely used agricultural fungicides, which is still in use today.
Mistakes in the cellar or during storage presented another worry. To combat this, merchants became experts on grape growing and winemaking. By training their producers in best practices for growing, making, and handling wine, they could ensure quality in the finished product. This eventually led to the founding of the University of Bordeaux in 1880 for the study and refinement of winemaking technique.
Finally, there is the risk of time. Bordeaux is a wine that requires age, and benefits from storage in new oak barrels. This is expensive. Emperor Napoleon III presented an opportunity to mitigate this risk by requesting a classification of the best wines for the 1855 Exposition Universelle de Paris. The merchants ranked the Chateaux according to their price into 5 tiers called Crus. After all, how were people supposed to know which wines were the most impressive if they weren’t informed which cost the most? To this day, Bordeaux wines in the highest, Premier Cru, perennially rank among the most expensive -- and most sought after -- in the world.
The fortunes of Bordeaux’s wine, often mirroring the financial markets, has waxed and waned dramatically in the intervening years. However, the blends, the methods of winemaking, and even the 1855 Classifications, have held up amazingly well. By injecting sound investment principles into the wine arena, Bordeaux merchants succeeded in creating some long term predictability for their investments -- an outcome to which any banker can raise their glass.