WHAT I LEARNED ABOUT INVESTING IN STOCKS FROM BETTING ON HORSES

As a longtime recreational bettor on horse races and a serious investor in stocks, I have found that guiding principles apply to both activities.

Avoid Touts and Tips. Horse racing and stock investing are ventures in which someone “in the know” is eager to provide you with a tip on the next sure thing. Usually avoid these people like the plague because, if they really knew, they would not be telling you at the racetrack or informing millions of viewers on a cable TV business channel. Without fail, every year right before the Kentucky Derby, a so-called wise-guys’ horse emerges only to badly falter when it comes time to show what he has.

Watch Out for Insider Trading. Regard all purportedly “inside information” with much skepticism. To be sure, there are times when a backside worker you know has a valuable scoop about a maiden colt or filly that is going to contend in a race based on sensational recent workouts. Trouble is, while a bet on the maiden could be worthwhile, the informant has probably told enough people  that the horse’s odds at post time will be too low, given the level of risk.

In the same vein, say an acquaintance of yours who is a company executive confides that his firm’s stock will receive a boost from a yet-undisclosed impending acquisition by a competitor. Remember, if you buy the stock before the information goes public, that pesky Securities and Exchange Commission may find out and nominate you for a compulsory stay at a federal minimum security facility. Tips on horse races don’t have this downside.

Always ask yourself why you are the privileged recipient of the inside information and why the tipster thinks so much of you to let you in on the secret.

Research, Research, Research. Investing in stocks profitably and betting on horses just to break even require a thorough analysis of the underlying fundamentals. Regardless of what other people tell you, even experts, do your own delving into the details.

Be Selective. After you thoroughly research stocks and horses, there will be a lot more companies and entries that you don’t want to bet on than there are that you do want to bet on.  Being patient and disciplined and sitting on your hands with a cash position while waiting on promising opportunities is a mark of a shrewd investor or bettor.

Never Forget the Meaning of Value. Advertisements on CNBC, Bloomberg, and other websites sometimes bill “stocks to own for life.” Yet the late investment authority Benjamin Graham correctly taught students like Warren Buffett that every stock has an intrinsic value determined by the discounted value of its future earnings stream. No matter how strong a company happens to be, its stock can be overvalued at a point in time and therefore not worth buying. Race entries, like stocks, can be fairly valued, undervalued, or overvalued. Whether it is picking stocks or picking racehorses, look for the overlays and avoid the underlays. Otherwise, your cash pile will contract over time. Neither Havre de Grace to win at 1-9 odds nor Apple at $2,000 per share is a prudent buy.

Diversify. This precept–perhaps the most important of all–is about spreading risk and managing money. “Putting all your eggs in one basket” is to be avoided if you want to have any eggs left to invest or wager another day. Pick-six syndicates allow a bettor to own a fraction of a big ticket with lots of combinations, just as ETFs allow one to buy, say, the S&P 500.

Hedge. Since no one can consistently predict short-term market movements, cautious investors use various options strategies like puts and calls and simultaneous short/long positions to temper market risks. Likewise, savvy bettors rely on exacta boxes and other methods of hedging just in case the favorite gets nipped at the wire.

Control Emotions. This is difficult to do when the Dow plunges 500 points in a single day and you are down four or five percent of your portfolio. When you haven’t cashed a ticket in days, it can also be agonizing and destructive of self-confidence. However, successful investors and horse players are inevitably going to have winning streaks and losing streaks and should take them in stride. A trait of true professionals is that it is not easy to discern from observing them whether they have been winners or losers. If you can’t handle the emotional ups and downs of the stock market, turn your portfolio over to an expert you trust. If you can’t handle the emotional ups and downs of betting horses, wager only enough to introduce some fun and chance into your day at the races, but don’t bet enough to care much even if you lose it all.

After this week’s global stock-market sell-off, if you are still invested in stocks and remain reasonably calm and sane, you have passed this emotional-stability test with flying colors, although your judgment may be in question.

Minimize Takeout. Stock broker commissions can eat away at profits if you trade frequently, although the advent of online trading has greatly diminished trading costs. On the other hand, the relatively high takeout percentages on horse-race bets (as opposed to other gambling games of skill) have generally not diminished in the Internet era—which is why wagering on horse races can be an entertaining diversion but is an unattractive way for making money. Unless you bet enough to demand sizeable rebates, you are almost certain to lose over a sustained period of time.

Postscript: I was visiting Saratoga Springs, New York, in early-to-mid August 2011 at which time world stock markets were trading erratically, but mostly on the downside–the U. S. markets lost nearly 20 percent ot their value in a four-week period in July and August.  While I was in Saratoga, the races were going on in the afternoon and the Fasig-Tipton sale of yearlings was being held at night.  I wondered to myself what kind of person can risk money betting on horses in the afternoon (a few of which he or she may own), check the stock market at 4 PM to see how his or her portfolio has fared in a brutal market, and then be in a sufficiently healthy emotional state to attend the sale at night as a buyer or seller of untried and expensive futures in the form of yearlings that may never make it to the races. These folks truly live life on the financial edge.

Copyright © 2011 Horse Racing Business

Comments

  1. While I enjoy reading your thoughts regarding the racing industry and do agree with most of what you have written, I must respectfully disagree with your first piece of advice regarding Touts and Tips.

    The issue I have with that section is that it fails to separate the Touts that purport to be “in the know” from the group of professionals that take great pride in providing useful information that may help the bettor to make a profit, and at the least (in my case and those of others I know) to also provide the methodology for the selections given to help bettors and handicappers to strengthen their arsenal of handicapping and wagering tools.

    Particularly considering the handicapping process consists of a myriad of variables, often unique to the type of race being handicapped, reading another person’s opinion of the contenders in the field and the reasons why those particular horses have a higher probability for success than the rest may be of value as it may point out a valid factor or contender otherwise missed, or perhaps just as valuable, point out a vulnerable favorite.

  2. Bill Shanklin says

    Ellis,

    Yes, it is wise to consult informed analysis from reputable and paid investment research services or services like yours. Since people normally pay for these, they don’t return as customers if the advice is continually unsound. But there is a lot of advice about stocks and horses from people who don’t know what they are talking about or have an agenda. Why would an individual give a stranger a tip on a stock or horse for free? Wouldn’t it be better to keep the play for himself or herself?

    When you buy the DRF, the picks are paid for in the price of the publication. Same for the analysis I pay for from various stock research services. I don’t consider these to be touts and tips.

  3. One huge difference, which magnifies racing’s disadvantage vis-a-vis stock trading: the very different tax rules, which, among other things, impose ludicrous withholding requirements on big scores in exotic wagers and prevent the deduction of losses in excess of winnings. Neither of those limits apply to the thieves on Wall Street.

    This is something I know a bit about. See Zorn, “The Federal Income Tax Treatment of Gambling: Fairness or Obsolete Moralism,” 49 Tax Lawyer 1 (1995). Still valid.

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