Monday, July 14, 2014

Improving the Quality-Price Ratio (QPR)

QPR, in its simplest form, is a great concept but if you consider it even slightly, it quickly falls apart. It is clear that it's an inferior measure of wine value.

Consider an 85-point wine selling for $11 (whose QPR is 85/11 = 7.7) and an 91 point wine selling for $17 (QPR = 5.3). Does anybody really think that the $11 bottle is a 45% better value simply because it has a 45% higher QPR? Nope; in fact, the $17 bottle is likely the better value.


Clearly, something is wrong with QPR.


So I've been reading about different ideas regarding improving the QPR calculation. I borrowed one part of a solution offered by Robert Dwyer in this blog post: He notes that wine value increases exponentially as they rise through the 90-100 point range, and that makes a lot of sense to me, as the scores lie along a bell curve of distribution, so a 99 pointer is much, much rarer (and more valuable) than a 93 pointer (assuming that there is agreement on those two scores for two different wines).


I don't care for the proposed formula that Mr. Dwyer offers, but I borrowed one element from his article: I used the following factors as "weighting factors" to multiply by a wine's score:


90 points: 1.0 x (no effect on quality)

93 points: 2x
96 points: 4x
99 points: 8x

To take a couple of real-life examples: 2010 Chat Leoville Las Cases has average professional score of 98.3, so its QPR is: 98.3 x 7.3 weighting factor / $340 = 2.11.


A 2013 Lafite has average score of 93.5, so its QPR is 93.5 x 2.4 weighting factor / $480 = 0.47.


96-98 point 2013 Mouton at $360 (higher score and lower price) was hardly better, with a score of just 0.65. 


But 2013 Montrose (from a poor year, but it gets a great average score of 94 and the price is right at $90) gets the highest Bordeaux score in my 20-wine sample: 2.61. 


If you are choosing between the first two wines for investment purposes, the Leoville Las Cases (a Super Second Growth) looks like the far better choice. The Lafite might appreciate more, on a percentage basis, over time, but it has a higher starting price to overcome, so I expect its ROR to be less than the LLC, over time. We shall see.


I'm not sure if this revised method is close to accurate, but I think it's a huge improvement over regular QPR. I just used it to make a wine purchase.


What does this tell us? I think it suggests that First Growths on the market today are overpriced for the wine quality they bring. That's not shocking, but the corollary is a bit shocking: If you invest in the Super Second Growths (Pichon Lalande, Montrose, Leoville Las Cases, and a few others), you might do better over time than with the Firsts. Particularly in an off year where the prices are down but your target wine gets great scores. 


I think that, twenty years from now, people won't look at my 2013s and think, "oh, no! those are from a poor year." I think they will see the wine's age and its high scores, and buy those bottles. As I say, time will tell. Collecting Bordeaux is a Great Experiment. 


In a great year, the First Growths have CRAZY prices, and, via my revised QPR calculation, pretty lousy QPR, So I think my days of buying First Growths may be over. 


Life is all about finding, and exploiting, value. Let others overpay for wine; it is the easiest thing; any idiot can do it. Finding the best wines at the lowest cost--now there is a trick.



QPR

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