At TSW, we spend most of our time sequestered away in our offices reading. We tend not to have much to say about macro issues, as we believe focusing on individual stocks is where our time is best spent to maximize value for our clients.  There are times however, when we, as bottom-up fundamental analysts, have market insights we believe may be of interest.  As such, the following piece is intended to share some of those unique and contrarian viewpoints on the current environment, and evoke my love of horseracing, too.

Being raised in Kentucky, horse racing has been a big part of my life. And my experience as a horseplayer was the kernel of my development as a value investor.  There are no other types of successful “investors” in horse racing other than value investors.  The difficult thing about equity investing is that success is determined in short-term increments (3-5 year time frames, if you are lucky), but the actual results are quite long-term (even up to decades).  This fools many fund managers and their investors alike, because although the market tends to be efficient over the long-term, it is quite inefficient most of the time.  Due to the heavy takeout in horse racing, there is no way to make a profit without having an edge.

Therefore, every horseplayer who has a career longer than a season must accurately assess the odds of the bets that are being made, or they will quite literally pay the price.  Value investing was inherently the only path that made sense to me due to my background as a horseplayer.

The best thing about horse racing, except for the horse itself as a creature and handicapping as an intellectual exercise, is the world of the track.   Although simulcasting and online betting have opened new opportunities for betting and handicapping, I feel fortunate to have spent (or mis-spent, depending on your viewpoint) a good amount of my youth around the racetrack.  The racetrack is a place where you will meet people from all walks of life. I have never been in a place with a more fantastic cast of characters.  And where you find the true characters is away from the maddening crowd, back where the horses live and the people who make the industry run spend their time - on the backstretch.  Most people who watch horse racing probably have watched it on TV, the excellent production value of NBC or ESPN showing the Kentucky Derby in all its pageantry and glory.  It is exciting, but it cannot replace the sound of the hooves and the roar of the crowd when you are standing in the grandstand or clubhouse.  However, there is an even better way to watch the races if you ever get the chance, from the backstretch. It is much quieter, you can still hear the crowd in the background, but you can really focus on the sounds of the horses and their jockeys and you get a ground level view of what really happens during the race. Also, you are surrounded by the people who work with the horses every day and if you keep your ears open, you can probably learn something not many people know.

I will never forget trudging through the muck of the Kentucky Derby infield in 1994 post race, a race day that I was probably more interested in the goings-on around me than on the track, but I certainly laid down a reasonable amount of money.  I concentrated my play on Holy Bull (one of the better three-year olds I ever saw) and Tabasco Cat, who finished 12th and 6th respectively - a rather ignominious result for me.  I was smarting even more because Go for Gin had almost gone wire-to-wire in the race at a big price, and that is typically the type of race that I crush.

I ran into an old friend, who I had spent several previous seasons in the trenches with, and he seemed much happier than me.  He had a rather sizeable hit on Go for Gin. I asked him how he played that with Holy Bull in the field, who should have by all rights burned that one out.  With both horses at their best, if Go for Gin attempted to run with the Bull early, he would have likely finished last.  Still plugged in, he informed me that the word on the backstretch was that Holy Bull was “off his feed” and did not seem right and he thought that made Go for Gin a huge overlay, which was the correct analysis.  There was much speculation in the following days about what happened to Holy Bull. Initial rumors of an infection later turned to whispers over the years that he was possibly drugged.  Whatever the reason, he was not right that day, and that was a major opportunity for the handicapper with that insight – one available to an inquisitive visitor to the backstretch.  Holy Bull went on to win the rest of the races in his career in spectacular fashion.

On the backstretch, you see information about how horses are training, you learn the scuttlebutt about which trainers might be involved in nefarious activities of one type or another, and you definitely get a unique view of what is happening, informing outcomes in the afternoon.

The view from the backstretch during a race is not quite the advantage it was before the advent of the internet and endless availability of race film, but it still can give you a different view.  To be value investors requires us to often be contrarian, and certainly to have a different view than the crowd.  Today is a very dangerous time in the investing world where the conventional wisdom of the CNBC-soundbite crowd, and of institutional investors (i.e., clubhouse bettors) are potentially missing out on what is really happening.  As we work through the Golden Age of Fraud, there has never been a more important time to watch what is happening behind the scenes.

Thanks for your readership, I hear the call to the post.