Vol. 2. No.24…TB’s new, improved rating system for wines!

In 1972, TB graduated from college and taken a job at Western Bancorp (later First Interstate Bancorp and now part of Well Fargo), in the Investment Department where he and his boss and mentor, F. Alden Damon, managed the bond portfolios of the 11 smaller banks. Those were largely comprised of municipal bonds, so he learned to distrust Moody’s and S&P bond ratings as they were higher for similar credits on the East Coast than west of the Mississippi.

Deciding to go back to school to work on a Master’s, at night, he had a finance class that required a term paper. He submitted one on “A New System for Rating Municipal Bonds”. The prof questioned him on it and said if you pursue it don’t expect a good grade, because Moody’s and S&P already do that. Really? Frustrated but determined to continue with the project he worked on it, drawing on some research of a predecessor at WBC. Focusing on New York City, TB showed how that rating should have been much lower than the ‘A’ it carried, for many reasons including demographics, amount of debt service, and several other factors. Figuring he would probably get a ‘B’ or even a ‘C+’, he didn’t put his heart into it. In other words an adequate job but not a stellar one, thanks Dr. Dunn!

When the papers were graded, mine had an ‘A1/A+’ on it…huh??? Furthermore, he told the class it was the best he had received and even read it to the class. What caused his change of mind? NYC’s problems were finally coming out and it was on its way towards the biggest municipal bankruptcy in U.S. history! What had the rating agencies done? Lowered it to ‘Baa/BBB)’. In other words, using ‘my’ rating system would have predicted dire if not drastic possibilities, while the agencies glossed over it.

What is the point? Well, besides prof’s needing to encourage new thought, it is that all ratings are not created equal. Nothing is more true than subjective tasting of wine.

Consider the Judgment of Paris tasting the showed the quality of California wines was on a par with French wines. Quel horror! Even then on the second pass when they reversed the order there was some differentiation but generally close, except for the French judge who called it a travesty. They were using a system similar to the UC Davis 20-point system mentioned in the previous post. Imagine if they had been using the Parker (or similar) 100-point system, where 50 is the base and after all elements, 25 points are subjective – that’s 1/4 of the total and 50% of the scoring area! Gimme a break!

Parker defends his system but adds (as mentioned in that post):

“Scores, however, do not reveal the important facts about a wine. The written commentary that accompanies the ratings is a better source of information regarding the wine’s style and personality, its relative quality vis-à-vis its peers, and its value and aging potential than any score could ever indicate.”  Robert M. Parker

Got that? They are meaningless comparing one rating with another on the same time, even under the same variables but when they are at different times independently, they are absolutely worthless!

Now drag that across, not the current three bond rating agencies, but perhaps two or three dozen wine critics with varying palettes and desired flavors (not to mention potential conflicts of interest by who they may represent – TB is shocked at this! Shocked!)

As mentioned in the prior blog, we have rating escalation (where no one tries to get you to buy a wine with a rating less than 90! So we have a lot of 91-93 ratings, fewer but still many 94-95 ratings and fewer still with 95-98 and 99-100 ratings. But even Parker has increased the number of 98-100 ratings since 1982 when he rated just two bordeaux wines that high. Here is a link to  a list of his 100-point scoring wines…you decide:  http://www.wine-searcher.com/robertparker.lml

So TB got to thinking. IF there is compression, we need a bigger scale. Here is TB’s proposal of a 1,000 point rating system!!! Consider that there would them be 100 categories of wines – 100 times the number in the current system. Imagine telling your friend that you own a 1,000 point wine and his is only a 980. What plonk that must be!

Here is a comparison to all three scales:

20-point       100-point                                         1,000 point

Appearance                            0-2                    0-5                                                     0-50

Color                                        0-2                     <             included in Appearance        >

Aroma/Bouquet                    0-2                    0-15                                                    0-150

Volatile Acidity                     0-2                     n/a

Total Acidity                          0-2                     n/a

Sweetness (sugar)               0-1                      n/a

Flavor (!)                                 0-1                    0-20                                                 0-200

Astringency                           0-1                      n/a

General Quality*                  0-2                    0-10                                                    0-100

*Only subjective category in UCDavis system; In 100-point it also included potential for further evolution and improvement – aging.

TB’s system has the advantage of making broader distinctions between a 94-95 point wine…TEN whole points…wow! Hopefully, you see this charade for what it is, because IF that became the norm, it would be even more impressive to say “my wine is a 950, yours is just a 940…peon!” But here is the incredible thing: even more price escalation! Because those ten points might now mean $50 more cost to the consumer! Yet it still might not impress if your guests tastes weren’t aligned with the raters.

UC Davis

17-20  Wines of outstanding character having no defects

13-16   Standard wines with neither outstanding character or defect

9-12     Wines of commercial acceptability with noticeable defects

5-8       Wines below commercial acceptability

Since Robert Parker’s was the first, here is his rating meanings:

  • 96-100 — Extraordinary; a classic wine of its variety
  • 90-95 — Outstanding; exceptional complexity and character
  • 80-89 — Barely above average to very good; wine with various degrees of flavor
  • 70-79 — Average; little distinction beyond being soundly made
  • 60-69 — Below average; drinkable, but containing noticeable deficiencies
  • 50-59 — Poor; unacceptable, not recommended

Here is a link that show the minor differences in various 100-point systems. if the same person was using any of the systems they should not vary by more than a point or two.  http://www.wine.com/v6/aboutwine/wineratings.aspx?ArticleTypeId=2

Now to throw a monkey-wrench into the works, here is a personal story: in 1976, TB moved to Reno, Nevada on a job transfer. We met lots of people but they only liked beer (guys) and wine coolers (girls). One day, one of them asked if I could teach them about wine. Having brought dozens of bottles with me in the car and wondering how they held up TB said he would do it, with one caveat: they would have to work. How so? They would have to score the wines using the UCDavis system which was the only one at the time. At first they balked, but reluctantly agreed. There were eight wines in the tasting, and it was amazing how close their scores were when they had to evaluate the variables of the wine. As a ringer however, TB inserted a bottle of Gallo Hearty Burgundy at the end. Bingo! That one took best overall.

So what did we learn? That differences in preferences can be overcome by paying attention to everything that comprises a wine…to hell with the critics. This is especially true when a winemaker can take his wine to a lab in Napa, Bordeaux, or other places and be told what they need to do to get a 90 rating from Parker. That is the problem with ‘Parkerization’. Question: do you want to live in a world where all the wine tastes the same? Not TB!

As they were leaving, they asked TB to arrange a trip down to Napa Valley. It was agreed but as they were leaving one friend came up quietly and said that his uncle owned a small vineyard there and we could probably visit it. Oh sure, no problem the then-wine snob, TB said. Only when we got down there did we find out that his uncle was Joe Heitz! His wines were the most coveted in California at the time. We spent a lovely Sunday on their deck drinking Riesling with sausages from the Sonoma Cheese Factory (there was none in Napa at the time!). Then Joe and Alice took us on a tour of the winery culminating with a tasting of their wines, including the 1974 Martha’s Vineyard Cab. TB loved it so much he bought a case at $25 a bottle…most expensive wine I had bought at the time! It was so good, however that whenever we had someone over we had a bottle…until there was just one left. Never drank it and finally sold it at auction for $800, more than recovering my cost of the entire case (also sold a bottle of 1992 Screaming Eagle, it’s first vintage made by Heidi Peterson Barrett, for $1,200 – a Jeroboam sold at the Napa Valley Wine Auction for $500,000, the highest price ever for that auction – along with many 1982 Bordeaux I bought on Parker’s recommendation but didn’t personally care for as did some of my friends who also bought futures. That was the vintage that ‘established’ Parker as the reigning guru, Robert Finnegan, had panned it, and was over-ruled by Parker.

What does TB drink today? Mostly wines in the $20-$40 range except for wines that are bought from the winemakers who have the passion I want. Not big estates, not corporate owned entities. Wines that taste different from year to year and are produced for the pleasure of the owner/winemaker…not some critic.

Another lengthy one but hope you found it interesting…and useful.

TB

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traderbill

How did Trader Bill originate? It was conceived by me as a way of providing information summaries of global financial markets so that friends and associates could bring themselves up to speed on events and changing market conditions upon their arrival at work. In addition, it provides information on speakers and economic releases that day with consensus estimates and level of last release so that the reader is prepared to react, or knows how the market might react upon the release of information. Who is Trader Bill? Initially any reference to me was as ‘i’. This is to remove the aura of ego and to suggest that i am but a humble reporter, albeit with 35 years of investment experience. Investments are demanding of ego, however, or one would not feel that he was qualified to manage someone else’s money in the first instance. Therefore i needed an ‘alter-ego’. Like Winchell and Mahoney, Edgar Bergen and Charlie McCarthy and especially Trader Vic and Mai Tai’s! Why Trader Vic? Because he was a likeable man who delivered pleasure to his customers and knew exactly what their desires were. The reason for the alter ego became obvious once I introduced Trader Bill into my commentaries: people started asking what Trader Bill thought. They had never asked me what I thought before, but suddenly they wanted to know what TB thought! Now mind you they KNEW that I was Trader Bill but for some reason he became bigger than life. Maybe it was the small ‘I’? What does Trader Bill try to do?His goal is to educate from his years of experience. Consider that most of the traders and people managing investments weren’t even around in 1987 for the crash! Consider that Graham and Dodd, and even Warren Buffet are not relevant to them, too old hat. Their historical perceptions of markets and fundamentals (earnings, price/earnings ratios, bonds, debt service coverage) are irrelevant in this fast moving world. This is the NEW ECONOMY, or is it? How did your style originate?Years ago i found that i had a knack and talent for writing. In addition, i developed an ability to analyze market news about 15 years ago. It took the Crash of ‘87. Prior to that i was just listening to what others said about the economy. But bond yields had been soaring in ‘87 yet the stock market just kept hitting new highs. That was when i began to learn about markets. i have both a dry and witty sense of humor (some call it inane!). Therefore i attempt to make even the worst news somewhat amusing: whether it is the absurdity of an economic release, or the comments of a CEO. This is trading desk humor (or gallows humor). It isn’t politically correct but it does ease tension. Ironically, it is seeing the light at the end of the tunnel (in the Navy they say: it’s always darkest before it’s pitch black!), that allows you to be more objective in your analysis, as bad as a situation is there will still be a tomorrow! You will see that i practice three-dot journalism, a style made famous by San Francisco reporter Herb Caen, whom i idolized. At least to me it is effective. What is so special about your analysis?Frankly, i don’t know that it is special, but at least it beats “the market closed down today on profit taking.” What i do know is that most of what you read is spat out without considering whether or not it is rational, like the above statement. Is it right? Sometimes yes and sometimes no, and that is the key to what is different about my analysis: it is meant to make you think. Is Dan Rather right or is Trader Bill right? If it causes you to stop and think about it, regardless of whether you agree, i win! Because THAT is my goal…not to have you think i am a guru, got that? Bet you never heard that ANYWHERE before in my business! Instead they want you to think just how smart they are but remember in this business if you are right 60% of the time you ARE a genius! Another thing that is different is when i am wrong on an analysis i will tell you, not hope you forget what i said. So now you have the tools to do what the speculators and hedge funds do: challenge authority, and if you make money it is because YOU did it not me. i was just a tool, your flunky to do the grunt work and let you decide…course you could be wrong too but at least you looked at the big picture. But the goal is also to have fun! This shouldn’t be a business of hushed tones and grim faces. It is a living, breathing thing and nowhere else in the world do you have the odds as much in your favor as here. Just beware of the guy who wants to put his arm around you and tell you he is your friend. So there you have it. I hope you select me as one of your sources for market information. If you do I promise to work my best for your financial success. Trader Bill

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