“Wine connects man and nature and time in a way nothing else does.” – Hugh Johnson
“Growth of the soil was something different, a thing to be procured at any cost; the only source, the origin of all.” – Knut Hamsun, Growth of the Soil
My favorite class in college was not taught by a professor, nor did it take place in a classroom, nor did it involve any papers or tests. Well, technically, it did involve a lot of tests…taste tests, that is.
You see, my favorite class in college was a wine tasting course that I took during my semester abroad in Dijon, France. We met at the house of one of the host parents, who was an expert in the rich history of Burgundian winemaking. As we sampled one incredible bottle after another, he taught us what to look, smell, and taste for. Like any self-respecting Burgundian, he made sure that we understood what makes Burgundy wines superior – especially compared to those of Bordeaux (Blending different varieties? Sacré bleu!). He explained what makes the Burgundy region uniquely suited to produce some of the best Pinot Noirs and Chardonnays in the world: namely, the terroir.
Terroir is a multifaceted term, but at a basic level, it means land, or dirt. The soil in Burgundy has a mineral content that is ideal for growing two varieties of grapes: Pinot Noir and Chardonnay. And for centuries, that’s what the winemakers in Burgundy have produced. They understand the composition of the landscape, embrace the grape varieties that flourish within that landscape, and continuously refine their skills while honoring the tradition of their craft.
(If you’re interested in learning more about the concept of terroir in Burgundy, this article offers a nice overview)
As investors, I think that we can all learn from these French viticulteurs. If we picture our lives as a vineyard, we should seek to understand the landscape, embrace what works, and continuously refine our skills (while honoring tradition).
Understand the Landscape
We’ve all been shaped by our family of origin, our friends, our teachers, and others. Each of us has a value system informed by those relationships, the education we’ve received, and our lived experiences. Like the soil of Burgundy, our lives have a “subterranean layer” that impacts our personalities, our outlook, and the ways we perceive the world around us.
Understanding the terroir of our lives is important in general (as Socrates once said, “The unexamined life is not worth living.”), and it is certainly important to how we approach investing. It enables us to make decisions with which we can be comfortable and provides us with a clearer idea of what we’re truly aiming for in life.
As an example, I’ve worked with several clients who grew up during the Great Depression. Their spending and consumption habits were heavily impacted by their experience of that traumatic economic event. Financial security was, consequently, very important to them, as was instilling a sense of fiscal responsibility in their children and grandchildren. These attitudes, in turn, informed the investment decisions that they have made over the course of their lives, as well as the ways in which they have aimed to provide for their descendants.
Whether you’ve experienced a seismic macroeconomic event like the Great Depression or not, your personal history will inevitably impact the way in which you think about, spend, save, and invest your money. Understanding your personal history and psychology is the first step towards successful investment planning.
Embrace What Works
In Burgundy, the terroir is ideal for two grape varieties: Pinot Noir and Chardonnay. Consequently, that’s what the region produces. Nobody tries to grow Malbec or Cabernet Sauvignon or Merlot just because those varieties are grown elsewhere. Instead, they embrace what works and strive for excellence within those restraints.
I am sometimes asked about the performance of our clients’ accounts, as though the performance was uniform and we had a single, blanket asset allocation strategy for everyone. The truth is that what works for one investor may not work for another, and there is usually some degree of variation from one portfolio to another.
For example, one investor may be more comfortable with market volatility than another, which results in a higher allocation to stocks. One investor may have lower liquidity needs than another, which enables them to take positions in alternative investments such as private equity. One investor may have concentrated stock positions with significant embedded capital gains, which limits their flexibility and diversification. Knowing your risk tolerance, risk capacity, liquidity needs, and time horizon can help you create a framework for making investment decisions and find an approach that you can embrace.
Warren Buffett is a prime example of someone who found an investing approach that worked (buying great businesses at attractive valuations with the goal of holding them forever) and embraced it. He once quipped that the reason more people don’t copy his investment strategy is because no one wants to get rich slowly. Being patient is hard work. Whenever we hear about trendy new investment strategies promising big returns in a short amount of time (e.g. meme stocks, options trading, crypto, etc.), or we see that a certain stock or asset class has had a recent run of success, it can be very tempting to chase after them. But if Chardonnay is what grows well in your vineyard, you shouldn’t tear out the vines and replace them with Sauvignon Blanc just because someone from New Zealand is producing great Sauvignon Blancs. Instead, focus on an investment strategy that works for you, and that you feel comfortable adhering to for the long run.
Refine Your Skills (While Honoring Tradition)
As we’ve already discussed, Burgundy has an “old world” mentality when it comes to winemaking. It’s all about the terroir, and the varieties don’t vary.
That said, Burgundy is continually refining its approach to winemaking. Equipment and sustainable growing practices have come a long way since wines were first produced in the region approximately two thousand years ago, and as the climate changes and new technologies are introduced, Burgundy’s viticulteurs will continue to adapt their methods.
Similarly, the best investors pay heed to both the past and the future. They are market historians, well-versed in the results and patterns of prior market cycles, and they are forward-thinking, focused on the trends that will drive the economy forward and the companies poised to lead them.
As Mark Twain once said, “History doesn’t repeat itself, but it often rhymes.” Honoring tradition in the context of investing means familiarizing oneself with market history to recognize its rhyme structure. At the same time, simply honoring tradition isn’t enough. As my colleagues Andy Means and John Watkins observed in a recent thought piece, “the relevant question is not how much a stock moved in the past, but whether the underlying business is likely to be worth less in the future. A rearview mirror is a poor tool for navigating the road ahead.”
This is a particularly salient point today, as we consider a future whose narrative seems to be increasingly dominated by the stuff of science fiction (AI, robotics, space exploration, etc.). The pace of technological advancement necessitates a forward-thinking mindset and the constant refinement of our investment decision-making. At the same time, all that glitters is not gold, and not every upstart company will prevail in the long run. There are still opportunities to be had investing in established companies that operate in established industries with attractive revenue growth, solid balance sheets, strong management teams, competitive advantages, etc.
If you want your vineyard to flourish, begin by seeking to understand the landscape of your life. Embrace what works. Refine your skills while honoring tradition. And if you ever find yourself in Burgundy, enjoy a nice glass of Pinot as you survey the terroir.
And Now For Something Completely Different…
*The second guy to do it, Yomif Kelejcha, accomplished the feat 11 seconds later…in his first marathon attempt!