Bourbon & Bones
You can invest in bourbon barrels?!
The Weekly Upside team joined some friends to hit the Bourbon Trail last weekend. The Bourbon Trail snakes its way through Kentucky, taking you through industrialized operations like Buffalo Trace and Jim Beam to micro-distilleries like Limestone Branch and Willet. Bourbon was consumed. Markets were made in who had to sleep where, including the foot of the bed, a la Michael Scott from the famous ‘Dinner Party’ episode:
We also went on a few tours. Prior to sampling Kentucky’s finest, each distillery walked you through their history and their specific variation on what is essentially the same process: heat up corn in a big barrel, age it for a few years, bottle and sell. That’s it. And yet, prices for bourbon can range from $15-$20 per bottle all the way up to $400 for a 7 oz. pour. Pay that much and there’s a good chance you’ll be sipping a brand called Pappy Van Winkle.
Bourbon nerds consider Pappy Van Winkle – a brand produced by Buffalo Trace – to be the golden fleece of bourbon. A bottle costs around $150, but good luck finding one at that price. It’s not uncommon to pay north of $1,000 for the privilege of owning a bottle. We did our best to finance a Pappy purchase with reckless bets on the Suns to beat the Bucks, but alas, fortune didn’t favor us (or Chris Paul’s big-game reputation).
You can invest in bourbon by purchasing a barrel, which starts around one thousand dollars and scales up from there. Investing in bourbon is a long game: it takes at least three years for bourbon to age into something palatable (trust us: don’t try white dog).
Typically, the younger the bourbon, the less you can charge for it. Your average bottle of Maker’s Mark, retailing for about $40 per bottle, ages around six years. By comparison, Pappy ages at least fifteen years, usually more than that. Our guide at Buffalo Trace remarked they’ve opened some barrels and found it completely dry; the angels demanded full remuneration that time, apparently.
It’s an exercise in trade-offs: the older the barrel, the higher the premium it commands, but the longer you need to wait to see the returns on your investment. Bourbon evaporates the longer it ages by an estimated 1-5% every year, meaning that your supply diminishes each year that passes. Given those realities, the distilleries’ motivation to spin a lofty narrative just makes good business sense. If you’re losing supply every year, you’d better make sure there’s pent-up demand!
Bourbon is just one part of a large universe of investments known as ‘real assets.’ Real assets are tangible things, like a house, an office building, or a bourbon barrel; in contrast, financial assets represent an investment into something intangible, like stocks or bonds.
In most cases, real assets are essential to some process, product, or customer (you can’t have a distillery without bourbon barrels!). As a result, they tend to be less sensitive to changes in the broader economic climate. From a strategic standpoint, if we rely on stocks for growth, and bonds for stability1, then real assets can play a third role that combines features of both: lower returns than stocks but less sensitive to changes in the economic climate, with potentially higher income potential than bonds.
Right now, rapidly rising inflation represents the greatest threat to a portfolio overly reliant on stocks and bonds – which is most portfolios. Inflation is the rise in the general price level of goods and services. Historically, rising inflation means trouble for financial assets like stocks and bonds, which takes the form of higher volatility and lower returns.2 On the other hand, real assets historically benefit from periods of rising inflation: think about how much your home has appreciated in value over the last six months.
In our view, learning about the impact that economic forces like inflation can have on your portfolio puts you way ahead of most investors. It emphasizes the contribution that real assets (and other, non-financial assets) can make towards holding up your portfolio’s value over the long term, particularly when stocks and bonds stumble.
As a retail investor, there are only so many investments you can work with, so we recommend learning more about how the changing economic environment can impact your portfolio. To get started, here’s a great video from a friend of the Weekly Upside team, Eric Crittenden of Standpoint Asset Management. He walks through how an investor could position their portfolio to weather all four economic environments. Eric excels at making complex topics simple.
Pour yourself a bourbon and give it a watch!
Video: Talkin’ Shop: Different Market Environments by Standpoint Asset Management (6 mins)
Eric, CIO of Standpoint, talks about the four economic environments and how the investments that make up a portfolio will perform differently in each of the four ‘quadrants.’ A stock and bond portfolio may do well in a high growth and low inflation period like the 1990s and 2010s but can really struggle during other environments like the 1970s and 2000s. An all-weather approach is a solution to help round out a stock and bond portfolio.
Assumes short duration bonds
Performance depends on sectors. Generally, the closer the stock is to the underlying real asset, the better it performs in higher inflationary environments, historically.