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Saturday’s Kentucky Derby had Wall Street links
After a pandemic-driven move to September last year, the most famous U.S. thoroughbred horse racing event is back in its familiar spot. The Kentucky Derby will be run tomorrow, the first Saturday in May, as is it’s tradition.
There is a lot of tradition on Wall Street, and in the process of investing one’s hard-earned wealth. And, as a fan of both investing and horse racing, I can’t help but see how the two tie together.
In particular, the humans who ride the horses, the jockeys, are essentially the investment equivalent of portfolio managers, albeit for 1-2 minutes at a time. A jockey does not just sit atop a horse and say “run.” Similarly, an investment manager or self-directed investor does not just pick a fund off a list at random, and consider their work complete.
There are many similarities between what 20 professional jockeys will do this past Saturday at Churchill Downs in Louisville, and what investment managers do every day. Here are 4 that I think are particularly relevant to today’s investor. And, in the spirit of the big race coming up, I sprinkle in some observations about this year’s Kentucky Derby field.
Understand what you own
So often, I hear someone describe their portfolio, and it occurs to me that they think they own something that don’t. They think they are diversified, when they really own a collection of index funds that are heavily-skewed toward yesterday’s winners. Or, they think their bond funds are full of “safe” securities, despite the fact that the Federal Reserve has been propping up major segments of the bond market for several years.
Similarly, jockeys need to know about the particular horse they are about to ride. For a big race like The Derby, this is a much more detailed process, and there is much more preparation, as compared to a random race on a Thursday. The jockey has to have a sense of the horse’s running style, and other factors
In this year’s Kentucky Derby, Rock Your World (opening odds of 5-1) has raced 3 times, and won all 3 times. Still, the competition, track and conditions were different each time. Saturday, we’ll see if star jockey Joel Rosario can take what he knows from limited races aboard this horse, and be there at the end.
Know your competition
Financial markets have changed a lot in the 35 years I have been working in them. The rate of that change has been exponential the past few years. There is so much more “impatient” money, from algorithmic traders and now, from new retail investors. They think in minutes, hours and days. Even if you don’t you need to be aware of how they operate and what they can potentially do to make your account balance more volatile.
This is why I have been imploring investors and financial advisors to better understand technical analysis, the study of price chart patterns. The increase in trading-oriented investing versus buy-and-hold investing has made this essential. That’s because traders use charts much more than long-term investors do. Charts tell you buy/sell pressure, and at the market’s most emotional points, that is often the only thing that matters in investing.
The racing business has had a format for “charting” races for a very long time. That is just one resource the jockeys this Saturday will have to prepare.
Those folks in the saddle know most of their peers quite well. They share a locker room at each track, and go out there hundreds of times a year against each other. So, they have a good idea what type of riding styles and capabilities they will be surrounded by when the starting gates open on Derby day.
Still, in the case of Kendrick Carmouche, who will be aboard Bourbonic (30-1), this is his first time riding in the Kentucky Derby. He will also have to figure out how to score from the far outside. Bourbonic drew post #20, making this likely the first time Carmouche has started from the 20 post in his 21 year riding career.
Do your homework, and have a process
They don’t call it a “track record” for nothing! One thing that investment management and horse racing definitely have in common: serious analytics. Investors can now perform an incredible number of quantitative analyses on stocks, ETFs, mutual funds, interest rates and economic data.
Still, in both cases, past is not always prologue. Every fund ad reminds you that “past performance is no indication of future returns.” That’s a very valid point that I wish more investors would truly take to heart.
Similarly, horses in this race that might not be given a chance by oddsmakers are hoping to find a way to get to the finish line first. Those include Soup and Sandwich (30-1) to be ridden by South Florida native Tyler Gaffalione, and Super Stock (aptly-named for this article, also 30-1), who will be steered by Ricardo Santana, Jr.
Have a plan, but be prepared to adjust as things play out around you.
Here’s an old Wall Street expression to keep in mind: “what everyone knows is not worth knowing.” What we think will have a cause and effect in the markets in the future (stimulus plans, pent-up demand, inflation, rising rates, etc.). But then something else comes along and becomes the spark that changes the trend.
That is why I am a big fan of adding a tactical investing component to your portfolio. All that means is that you have a portion of your total set aside to capitalize on shorter-term moves, and have a systematic approach to identifying buy and sell opportunities. Tactical investing focuses more on what data and trend analysis is telling you now, as opposed to guessing about the future.
In the Derby this past Saturday, even with all that is known about the horses, the race course, and other factors, the race might not play out as many would expect. These horses are 3-year olds, and as good as they had to be to reach this grand stage, they are still relative babies. That element of surprise is what makes this and the other Triple Crown races (which include the Preakness in 2 weeks, and the Belmont in June) so exciting for sports fans.
An example of that in this year’s race is the fact that the favorite, Essential Quality (2-1, jockey is Luis Saez), drew post 14, far away from the rail. That means he will have to start fast to avoid being shuffled to the back of the pack.
Let’s hear it for the jockeys
One last note on thoroughbred racing jockeys. They are some of toughest people you will meet. In fact, the racing industry has a charity devoted specifically to jockeys who become permanently disabled as a result of the rigors of their work (The Permanently Disabled Jockeys Fund - PDJF). Here’s hoping for another in a long line of classics from the Kentucky Derby, and that all of the pilots aboard those top-notch horses have a safe trip around the iconic Churchill Downs track.
Related: A Short-Cut To Understanding the Current Investment Climate