It is dubbed the “Race that stops a Nation” and boy does it ever. I love the racing season. It’s a great time of the year, just before summer starts everyone is in high spirits as this one carnival transforms Melbourne into a fashion party bonanza. Brand retailers go into meltdown with some businesses raking in 70% of their annual business just from this carnival. But it’s not just the swanky suits, sexy dresses and cool fascinators, the Cup brings everyone together. It’s Australia’s National Day and it’s hard to stress its importance. It overshadows all other holidays and unites the entire country drawing more than 100,000 people to Flemington Racecourse for a fun filled day of punting, bubbles and horsing around.
The race is televised live to an audience of about 650 million people worldwide. You’ll have until 3pm to place a bet on any of the 24 horses that run. Betting and horse racing go hand in hand. People have been betting on horses since horses have been running and it can be quite a fun and profitable event, even if you don’t know what you’re doing. What is uncanny is that the principles of horse betting and stock investing are quite similar. In-fact there are a few things you can learn from horse racing than you can apply to the stock market.
Here are our 5 tips:
- Analyse the playing field – The first thing to do is analyse the entire market as you would do with the final field in the Melbourne Cup. Putting it into context the ASX is a much bigger playing field than the Melbourne Cup. The ASX has over 2000 stocks whereas the Melbourne Cup runs only 24 horses. Therefore your odds of picking a winner are much higher in the Melbourne Cup than they are in the stock market (4.16% chance in Melbourne Cup vs 0.05% chance in the ASX). But in the stock market there can be more than one winner, whereas with the Melbourne Cup there can only be one. So you’re more likely to build wealth on the stock market than lose it all by punting on one horse. Many limit their field to the ASX 20 or ASX 50.
- Pick a handful of hopefuls – Limit your playing field to just a handful of hopefuls, this applies for both horse racing and investing. Scratch the duds, so to speak. In horse racing scratch out horses that have virtually no chance of winning. While there is no hard and fast rule to eliminating duds, you can with a bit of confidence eliminate horses that are longshots. They are the 100-1 or 50-1 horses. These duds are longshots for a reason. Of-course you get the occasional upset win like last year with Michelle Payne, but anything with low odds stay well clear of. The fact that no savvy punter wants to back these camels is reason enough. In the share market – the same analogy is staying clear of penny stocks or companies that have little or negative earnings. They are usually worth nothing and have a small market capitalisation. For investors opting for a quality portfolio will likely yield the best results. Of-course some of you like to pick duds in the hope that they miraculously turn good. Best of luck using that strategy.
- Play the Favourites – Here are the facts: By playing the favourites you have a 31% chance of winning. Betting the race favourite to place (comes in 1st or 2nd) pays off 53% of the time and betting the race favourite to show (comes in 1st, 2nd, or 3rd) pays off 67% of the time. Therefore there is merit in picking favourites but a lot of people assume that the most favourite horse is always the most likely to win. This is not the case. A horse can be the clear favourite but it still might not win. There are all kinds of other factors that affect the likely outcome of a race. But by narrowing you’re playing field to horses that have good odds, you increase your chances of picking a winner. What-ever you do though, don’t bank all your money on one horse. Spread your risk among a few. Only bet on horses where the odds aren’t worse than 30-1. This is a similar strategy that can be used in picking stocks. When picking a quality portfolio of stocks you want to limit your stocks to ones that are blue chip. They’re less likely to falter and your chances of success are higher. Don’t be fooled into betting on everything, it will prove hopeless. Having too many stocks in your portfolio means you need to be on top of every company and you’re wins aren’t as meaningful. Stick with 7-15 quality stocks. My biggest pet hate is seeing a portfolio with +40 stocks. Face palm.
- Look at the past as a guide – Whilst there is a lot more to picking stocks than horses, there are similarities. With horse picking you will need to look at the past. Know the horse. Know the trainer. Find a horse who has a trainer who has achieved success in the past and then try to see if the trainer has won anything with their current horse. Favour the trainers who have won at least 10-15% of their mounts. heck the last 10 races it has run and see if there are any trends. Check if the horse is healthy and its preferred running conditions. And finally check who the jockey is and their past performance. The past performance is always a good indication of how well and consistent a horse will run on the track. You will also look at weight penalties. The same goes for picking stocks. It’s what research analysts do, they use past data to predict future cash flows. Look at stocks that have positive and consistent earnings growth. Stocks that have beaten expectations in the past and filter your hopefuls on the quality of earnings, cash flow, dividends, trend, ROE and EPS growth. A healthy balance sheet. What you should end up with is a handful of quality stocks that are clear favourites with encouraging fundamentals.
- Know when to lock in your takings– This is probably the hardest part of investing and gambling. Whilst you may be good at picking the right horse, the problem is knowing when to lock in your profit and when to walk away. You may be on a roll and it’s a great feeling when you’re on top of the world but it’s at that moment of overconfidence that you can lose it all. While you’re on a winning streak it’s time to play it cool. Don’t go to the ATM and empty you’re bank account because you’re kicking butt, you’ll end up in the dog house. The worst thing you can do is start to chase your losses. Same goes with investing. You’re not going to pick winners all the time. Many of the stocks you pick may go sour for one reason or another that you couldn’t foresee. That’s fine. It’s being able to manage the losers and stop losses from becoming big losses and letting your winners run. The best way to do this is by employing a rolling stop loss. There are many ways to calculate stop losses. In the end it doesn’t really matter how you calculate it, it’s having it. It takes the emotion out of investing and helps you stick to rules. In stocks it’s a little easier because investors can set a trailing stop loss which automatically rises as the share price rises. This provides the investor with greater flexibility to profit, or limit a loss. As long as the share price remains above the stop loss and is in uptrend nothing happens. When the stock changes and crosses the stop, the position is exited. In stocks it’s a little easier because investors can set a trailing stop loss which automatically rises as the share price rises. This provides the investor with greater flexibility to profit, or limit a loss. As long as the share price remains above the stop loss and is in uptrend nothing happens. When the stock changes and crosses the stop, the position is exited.
Here’s what you’ve been waiting for. The UWJ six favourites for the Melbourne Cup.
Six horses out of twenty four. That’s a good size. I’ve picked Alamandin and Humidor obviously because they’re the favourites and because of their record. I’ve also picked Marmelo after it ran well in the Caulfield Cup and money on Wall of Fire, Rekindling and Single Gaze as potentials.
Whilst horse racing is a game of probability and chance, it takes years of experience and being in the know to really have great insight into punting and even then nothing is guaranteed. It’s all a gamble. Whilst there are similarities in both practicse, stock investing is investing your money into a real business offering profitable returns whereas betting on horses is a game of chance, betting on the outcome of something involving probability. All or nothing. When you buy shares you aren’t just betting on which companies will succeed but providing capital and funding to accomplish goals and become more profitable. That’s the big difference. There is a dark side to the spring racing carnival of problem gambling that is swept under the table that people don’t see. In horse racing the odds are stacked against you. No matter how smart you think you are, as a punter you are at a disadvantage. Luck may favour you on the day. But luck is flick and unpredictable.