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A diligent equity analyst goes through her morning paces. She reviews today’s news, digging into corporate reports, trying to find an edge. She analyzes the company’s current environment, competition, and studies historical earnings, revenue, cash flow, etc. The tools of her trade include financial newspapers, websites, and database systems. It is part of a regimen and skill set honed over many years. She keeps score every day to some degree, but the primary objective is long-term in nature. After all, while some people pick stocks for hobby and sport, this is her livelihood and her selections influence many people’s fortunes. For her, today is just another building block, another day at the office, another brick on the road to success in her field. Short term results will happen, but this is a craft, not a one-shot deal.
Now, picture Caton Bredar going through her morning paces. She reviews today’s lineup of races, digs through past performance charts, checks track conditions, and evaluates each horse in terms of how they may fare among the group of horses they are competing against. Today’s work may produce immediate results today and to some degree she keeps score every day. While some people wager on horses for hobby and sport, this is her livelihood. And her selections influence many peoples’ fortunes. For her, today is just another building block, another day at the office, another brick on the road to success in her field. Short term results will happen, but this is a craft, not a one-shot deal.
Caton Bredar and that equity analyst have a lot more in common than you think.
With the Kentucky Derby set for its 143rd running this Saturday from Churchill Downs, I am reminded of the many, many parallels that exist between handicapping horses and researching stocks. As someone who grew up with racing (near the New Jersey Meadowlands, which hosts the championship of harness racing each summer) and as one who has made a living analyzing and investing in stocks, I see many analogous characteristics of both pursuits.
Recently, I sought out Ms. Bredar, one of the most prominent thoroughbred racing handicappers in the United States. Like many of the top people in racing, she calls Louisville, KY home. But she spends her winters in Hallandale Beach, FL at beautiful Gulfstream Park, where racing, like the stock market, is a year-round activity. The horse racing business has a reputation for multi-generational families, and Caton is third generation in the business, with roots via both of her parents. Her family tree includes multiple Hall of Famers in the world of thoroughbreds as well as harness racing.
Over the years, Caton has developed a deep understanding of what it takes for a horse to compete. Like a good equity analyst, she not only knows what everyone else does, she has developed her own niche, which she displays as an analyst for TVG, a 24/7 horse racing cable television channel. That niche involves evaluating each horse just before the race by inspecting them as they parade around the walking ring, identifying signs of strength or weakness that would not be obvious to us amateur racing fans. Her so-called “Paddock Picks” are a popular attraction on TVG’s broadcast.
After speaking with her at length, it was clear to me that many determinants of success in horse handicapping have equivalents in the world of equity analysis. The table below summarizes several of them.
Horse racing and stock investing: just some of the similarities
There are speed horses which like growth stocks, have the potential to lead the pack and produce a strong return. But like many growth stocks, they sprint well but run into trouble later in the race, eventually being outperformed by value stocks, which like strong horses that can rally down the stretch, have their attractiveness discovered later in time. Now, in a single race, it all happens in the time it takes an investor to place a single trade at their computer. But for those like Caton for whom handicapping is a business, each race, win or lose, is a just a small piece of a long-term endeavor with accompanying objectives and risk tolerance levels.
Equity investors, unlike traders, must ride each day’s ups and down, wins and losses, on the way to hopefully building a successful “track record.” Heck, even that oft-used phrase owes its origins to horse racing. And just as racing aficionados must decipher each race based on the classes of horses running, the distance of the race and the track conditions, not all stocks and stock market environments are alike. Thus, there are multiple environmental factors in play for both activities.
Past performance of a company or a horse is an important factor, but it does always tie directly to success going forward. In my observations, this is especially true with lower-level horses known as “claimers” whose owners put them up for sale before the race. Similarly, “maiden horses are those who have not yet won a race, and these are like the IPOs of racing. They may have the pedigree, but they have not been tested in the public realm yet.
Just as investing has evolved into a robust set of online tools to screen, compare and apply “Moneyball-like” analysis to companies, so too has horse racing stepped into the 21st century by using advanced analytics. Caton notes that there are many such systems to save time and narrow each race down to the horses that meet your preferred criteria…like a stock screener. But instead of Morningstar, Value Line or one of the many other stock screeners, she uses systems such as Thorough Management.