Italy, Investing and Principles

Blog post #413

My wife Felicia and I were fortunate to have travelled for the past 10 days to Bologna and Florence, Italy, as well as day trips north and south of each, respectively, to visit various family owned establishments that produce Parmigiano Reggiano, balsamic vinegar and a winery south of Florence, in the Tuscan hills.

When we meet and talk with you, and in these blog posts, we often stress a number of investment themes, which we feel are important for your long term financial and investment success. It seemed more than a coincidence that some of the same critical success factors and issues in investing are vital to each of these high quality, multi-generational businesses.

  • Diversification
  • Patience and Planning for the long term
  • How to deal with events you cannot control

We first visited the Hombre dairy farm in Modena, Italy, which produces 14 wheels of Parmigiano Reggiano a day. The farm has over 500 cows, of which they use 268 cows to produce top quality cheese. While they only use one or two types of cows, they diversify by having many extra cows in their herd.

This is not a quick or simple process. The cows are milked two times per day, at 3 am and 3 pm, 365 days per year, to produce the amount of milk necessary to make the cheese wheels. Each morning’s batch of milk is carefully handled by a small team within a certain number of hours, over and over, in an attempt to ensure that all of the air bubbles are removed before the cheese is sealed.

The cheese is then aged for 24-30 months in a special climate-controlled room. The cheese wheels are cleaned and rotated weekly, to prevent moisture build up. The optimal price at market is 36 months, so the farm tries to sell them at around 30 months. Each wheel must be individually inspected by an expert with a small hammer to be graded as Parmigiano Reggiano. A wheel that is not approved is worth less than 50% of its optimal price. One error in the process can significantly affect the end price.

The dairy farm must be patient and think long term. They have taken care to produce a high-quality product by investing in their land (to feed their cows) and they have to adjust to weather and other factors which could impact any part of the production or aging process.

We visited a family owned business in Modena, north of Bologna, which produces very high-quality balsamic vinegar. La Vecchia Dispensa top products are not the typical balsamic vinegar which we would put on salads, for example. See link to Zingerman’s article, for an explanation.

The production of the balsamic vinegar they bottle and sell this year originated generations ago, back to 1925. We toured their 5-story storage facility, which was like a small tower in a castle, with very narrow, winding, cement stairs between each floor.

The vinegar is aged in wooden barrels, which are key to the aging and taste process. Unlike wine, the type of wood barrel and how the barrel has been aged is much more important to the end product than the grapes which are used. The wooden barrels last for 50-100 years and improve with age. Like our emphasis on long term planning and investing, this family treats these wooden barrels as truly very long-term assets.

Simone Tintori explained to us that they source the grapes from 5-7 separate farms in the Modena area, to ensure they are diversified, particularly if one or more of the farms has growing or harvesting problems. After the grapes are harvested, they choose which ones to use, and the skin and juice are added to barrels in an amazing process.

They have barrels of various sizes and types of wood on different floors of the tower. The barrels are not sealed; they have holes at the top which are covered with a small piece of cloth. A number of times a year, some of each barrel’s contents are transferred by a master to the next barrel in its row. The barrels themselves are not turned or rotated at all. Gradually, over years and decades, juice is moved down the row and then finally taken out of the last barrel with something like a soup spoon. That is the only product to be sold from that row, that year.

The family has a special barrel, called the starter, which can be used to begin a new batch. This carefully treasured starter juice is kept in a glass container, so it is not affected by the aging of the wood barrel. One starter container is in the tower we were in, but they also have four other starter containers in different locations of Modena, as this is so vital to all their future production.

Like the cheese above, and the wine below, their product must be inspected by experts. Blind taste tests determine whether each batch, which is a combination of many decades of grapes, aging and blending by the master, will be certified, as they hope. If a batch fails, the market value drops by 1/2 – 2/3, which Simone says happens, as the judging can be very subjective. Their top quality, traditionally produced and aged balsamic vinegar can sell for $100 to hundreds of dollars per bottle.

Just as we can control with you how much risk should be taken by setting your allocation to stocks, they can control the aging and treatment of the barrels.

They are patient. They are diversified over decades, as each barrel contains juice from many years that has been added and taken out. The taste of each years’ grapes is beyond their control, as that is impacted by weather conditions, particularly near the harvest.

Similar to a mutual fund that may contain hundreds of individual company stocks, no one company stock can have a significant impact on your financial future. This can be a positive or negative, but it is prudent from a long-term perspective. Likewise, no one season of grapes has too much impact on any year’s final production, as the balsamic vinegar that is bottled in any year is the result of decades of grapes, aging in aged barrels, combinations and care. It is very well diversified.

The last food related tour of Italy was a boutique winery about an hour south of Florence, called Fattoria Fugnano, in San Gimignano. We arrived on a rainy day, as they were in the midst of their harvest of grapes. Unlike the balsamic vinegar producers, who are not dependent on a specific year’s harvest, we were greeted by the winery’s owner Laura Dell’Aria, who said she hadn’t slept for days due to the very rainy weather at this most vital time of the year for them. She explained that the grapes could not be harvested for a number of days after the rain stops, as the additional moisture of the rain negatively affects the grapes. Fortunately, as our terrific visit ended hours later, the storms had stopped and the sun shone brightly.

As we often discuss, we focus on things which matter and things you can control. It must difficult to be in a business like a winery where weather, which cannot be controlled, can have such a material impact on one’s livelihood. As financial advisors, we have to deal with uncertainty in many aspects, but if you plan with us, have a long-term perspective or timeframe to meet your financial goals, then shorter term volatility and uncertainty usually can be offset.

Laura is the second-generation owner of the winery, which she took over at age 23 after her grandfather passed away in the late 1990s. Laura explained that she has made some mistakes and learned many things over the years. And she is still learning and trying new things.

Since we founded our firm, we have learned to help our clients remain disciplined and not be as affected by emotions or investment fads. We know that diversification is critical. Just as Laura and her staff educated my wife and I about their wines (which were great, and we highly recommend visiting her winery), their land and even about their bottles and labels, we try to educate you, our clients, to view your portfolio as a whole and for the long term.

Each of these products, Parmigiano Reggiano cheese, balsamic vinegar and the wine, must meet local regulatory approval to be labeled as the highest quality they desire. Not all of the products will get top approval each year. Some years, some products will not fare as well. However, the companies do not give up on their long-term processes, dedication and commitments to quality.

Similarly, in a globally diversified investment portfolio, some asset classes will outperform for a year or many years….and some asset classes will underperform for a year or many years. Just as the wine maker does not give up if a year or two is not as top quality as they desire, we do not feel it is in your best interest to give up on an asset class that has not performed as well for a lengthy period of time, unless there is new data that justifies such a change.

We had a fabulous trip. We also took 2 cooking classes and learned how to make various pasta dishes from scratch. But don’t worry, I’m not giving up my day job to make ravioli full time!

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