Picking Winners

In light of Big Brown's participation as the centerpiece of IEAH's hedge fund, there was a fascinating column in Sunday's Philadelphia Inquirer by Charles A. Jaffe comparing the criteria one uses for picking a winner in a horse race to those he uses to determine a good investment. Contrary to what you might assume, he finds a lot of similarities between the two endeavors.

Some of these variables do seem to exist in both worlds. Just as one analyzes the length of the race and the style of the horse, one should decide whether one wants immediate returns or those that pay off over longer distances. And that old maxim about changing horses mid-stream seems to hold true. According to Jaffe, "Unlike a horse race, you can change funds as they round the turn and head for home, but studies show you are likely to be better off if you stick with your horses for as long as possible."

Other factors to consider include the jockey (fund manager), the field (all of the offerings in a certain asset class), track conditions (market conditions), the stable, trainer and bloodlines (a name brand investment fund or a start-up) and the weight of the jockey (fees). Jaffe also compares the horse's past performances to those of a mutual fund and the odds to bond ratings and evaluations by independent firms.

He even tackles the subject of the "hunch" bettor who goes on intuition or a gut feeling. That to Jaffe, is "comfort level" and to a certain extent, it all comes down to what you as a bettor are comfortable with. You are, indeed, betting on both portfolios--horse racing and investing--and while one may seem like more of a "sure thing" than another, risk and success are both subjective.

"In fund investing and horse racing, you can be rewarded even if you are not the big winner," Jaffe notes. "You get smaller payouts betting on a horse to finish in the top three than picking it to win, but pursuing smaller, more consistent payouts may suit you more than betting all-or-nothing on a favorite."

None of this means that I am advocating participating in a syndication like IEAH or even suggesting that you invest in a mutual fund or the stock market. To the contrary, I agree with Jaffe that investing should be a life-long endeavor, a "marathon rather than a short sprint." If those who "invested" in horse racing had the same attitude, we might have less emphasis on earnings and procreating and more on the sport itself.