Fact, as reported by the Wall Street Journal, September 21, 2009:

“With the economy still listing, numbers were down in every category during the first four days of Keeneland’s September auction.”

Fact, as reported by the Louisville, Kentucky Courier-Journal, September 21, 2009:

“During the first four days of the [Keeneland] 14-day sale–a period when the finest horse are usually auctioned–buyers spent 42.52 percent less on yearlings than last year. If the trend continues, the sale is shaping up to be the third straight September Sale to record lower gross sales, average prices, and medians than the year before. It would be the first time since 1992 that those key financial measures fell for three straight years.

Though the decline is already leading to fewer foals–which eventually may set the stage for healthier sales–industry leaders say this year’s low prices may force some breeders out of business.

‘We’re going to see farms close,’ Keeneland sales director Geoffrey Russell said of the weak thoroughbred market.”

Perspective and Context

“The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.” English economist Arthur C. Pigou

Business cycles ebb and flow as predictably as the sun rises in the morning and sets in the evening. The highs and euphoria of the boom times eventually must yield to the crushing lows of recessions and sometimes depressions.

When markets are soaring it is easy to confuse genius with the power of a bull market. David F. Swensen, the chief investment officer of Yale University, wrote two bestselling books for investors on how to make money like the Yale portfolio. Swensen averaged in excess of a 17% return for Yale for the ten-year period prior to the stock-market plunge that reached its lowest level in March of 2009. When the stock market turned from bull to bear, the Yale portfolio was ravaged and Swensen did not look so much brighter than everyone else.

Similarly, Fortune’s cover story on May 27, 2008 proclaimed that Ken Heebner is the world’s best mutual fund manager. Heebner’s funds plummeted in the recent bear market and his reputation was tarnished.

As with these investment gurus and many others hailed as great minds, when the bloodstock markets are escalating, it is easy to attribute a breeder’s outstanding success to his or her intricate knowledge of the business. The individual who sells seven-figure yearlings has a canny knack for putting together pedigrees and conformation typologies, or so the thinking goes. Like Swensen and Heebner, he or she must be the smartest guy or gal in the room.

The bubble mentality of a roaring bull market for bloodstock encourages more and more  people to join in the speculation by breeding relatively slow or unraced mares to relatively slow or unraced stallions. For awhile, the bloodstock market rallies not on economic fundamentals, such as increasing racetrack purses, but rather, it does so on crowd psychology.

As markets inevitably correct for the excesses of boom times, the savvy breeder does not look so savvy after all and the marginal players in the industry run for the exits. Pigou’s “error of optimism” dies in the crisis and the new error of pessimism “is born not an infant, but a giant.”

Opportunity, as seen by two of the eminent investors of all time:

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” John Templeton

“Be fearful when others are greedy and greedy when others are fearful.” Warren Buffett

If one reads the prevailing sentiments in the press by participants in the bloodstock market, things may never be the same again. The bloodstock market is at or  near the point of maximum pessimism and what John Templeton and Warren Buffett counseled is occurring. Look at what two prominent players had to say about the situation at the Keeneland sales, as quoted in the aforementioned Courier-Journal article:

“Despite the problems, some consignors — including [Case] Clay — said they’ve [Three Chimneys Farm] had calls during the first days from potential buyers wanting to take advantage of the reduced prices.”

Likewise, Barbara Vanlangendonck of Summerfield Sales said:  “I’ve had three and four calls just this morning alone, saying, ‘look at the market, let’s jump in,’”

These are green shoots, signs of a new beginning.

Keeneland’s Russell commented: “We knew this day was going to come. The financial crisis matched with overproduction — here we are. This is the new world.”

Mr. Russell is partly correct. The day was coming, brought on by the error of optimism and not enough people  being fearful when others were greedy. The halcyon days of an auction company selling an unraced 2-year-old in training for $16 million have led  to a severe rationalization of prices.

But Mr. Russell is incorrect about “This is a new world.” It is not a new world, but merely the same old world of the business cycle oscillating and wringing the excesses out of the market…and not just in the horse-racing business.  For example:

as reported by Reuters, September 21, 2009:

“Caterpillar Inc. said…that dealer sales of its heavy equipment fell 48 percent in August, with the sharpest declines in the U.S. blue-chip industrial’s truck and bus and industrial segments.”

A consoling thought amid all of the pain and angst in the downdraft: the greatest market recoveries have followed the deepest market declines. What we don’t know is whether the bloodstock market will rise to or exceed  its previous highs or whether a relatively permanent restructuring is in the offing, with fewer foals and lower auction prices. 

The Wall Street Journal says that “yearling sales figures are generally considered the leading indicator of the health of the sport.” On the contrary, yearling prices are more likely a lagging indicator and the severe dropoff is a delayed economic reaction to the plunge in pari-mutuel handle. 

Further, when auction prices are depressed, the end result will be a decrease in stud fees. Therefore, anyone buying a high-price yearling colt had better hope it can win stakes races because the prospect of getting a return on investment from stud fees is diminished. This has the effect of rationalizing prices, especially  for impeccably-bred yearling colts.

Copyright © 2009 Horse Racing Business


  1. Bill,

    Thought-provoking argument, as always.

    However, one comment on finding a bottom in this market. Looking at the sale the other day on TV, I was surprised that the decline was not greater. If one uses the Dow as an arbitrary yardstick, then prices should have fallen more than 50 per cent from last year’s sale to this year’s sale – and if I am up to date with the day by day statistics, the drop off has been big but not that big.

    But we have other negative factors to consider: I would think it a mortal lock that there will be far fewer races carded when these yearlings reach racing age. How many tracks will close between here and then, for example? Three, four, five? I don’t know, but the likelihood is that that these yearlings will have fewer races in which to compete and, with the continuing decline in handle, lower purses to compete for.

    You have used excellent quotations in your article. But one you could have added (and I have to paraphrase here because I don’t have the exact wording to hand): Baron de Rothschild once said: ‘Buy when there’s blood in the streets.’

    One could argue that there is some blood in the (bloodstock) streets right now, but I have a hunch there will be more. Some horses bought or bred at higher prices are not being sold at the moment, but there will come a time when they will be (or the owners will need racing silks.) You cite calls from interested parties as indications that ‘green shoots’ are appearing. I would wait until the ‘phones are not ringing at all and when there is absolute pessimism afoot before I would venture to call a possible turn. I don’t think we’ve reached that point yet.

    I see little to be optimistic about in racing’s future, with its disorganized, dysfunctional structure, its loopy medication laws and enforcement and its lack of a strategy to retain old fans let alone attract new ones. And, correspondingly, I see little reason why anyone would want to race a horse right now, unless they needed tax losses. (Having said that, I am silly enough to try, again and again.)

    And then you might be right. The market might be about to turn. But mark me down as a pessimist on that score. I think that this bear’s appetite has not been satisfied sufficiently for it to hibernate.

    Keep up the great writing and all the very best.


  2. Bill Shanklin says

    Following is the quote Graeme refers to:

    “I invest only when I hear the sound of cannon fire and see blood running in the streets. I sell when I hear the sound of the violins.”

    The Baron Rothschild

  3. Hi there,
    Thanks for article. Everytime like to read you.