Quit Worrying About China’s Economy, Let’s Head to the Racetrack

Dear Resource Hunter,

Reality set in for investors last week: Tremors are shaking up the global markets.

A “no” vote from the Greek referendum last Sunday, the vast stock market selloff in China, and the volatile movements in the price of U.S. crude oil have made it clear the worldwide economy is collectively riding the brakes. The 3.5-hour halt in trading on the NYSE also added to investors’ unease.

The track at my local state fair is unique, to say the least. In fact, I’d bet it’s one of the only tracks, if not the only track, that operate a mere seven days a year. It’s also one of the smallest tracks in the country — a mere five-eighths of a mile long (Churchill Downs, for example, boasts a mile-and-a-quarter-long oval).

Needless to say, these unique qualities make for quite a racing experience. Over the past 15 years as a spectator, I’ve seen plenty of crazy things — horses bucking their jockey and running around the track backward, plenty of three-horse races, a horse that jumped the rail and got loose in the infield — indeed, plenty of equine shenanigans.

I’ve also seen plenty of huge paydays — long shots beating the favorite and various chances to turn one buck into a thousand!

Now, you’re probably thinking, what the heck does this have to do with my investments? More than you think, I’d bet…

The Secrets of the Track: Revealed!

Really, there’s no better analogy to investing than horse racing.

For starters, just think about horses as stocks. The start of a smart bet is based on the past performance of a horse, much as any investment would be made on past performance and history of a company. You can also look to the bloodline of a horse to get a feel for what it’s capable of — much as you can look at specific sectors of the market.

The trainers/owners of a horse are much like the CEOs/insiders of a company. Prior to a race or an earnings announcement, these representatives may paint a rosy picture — “my horse is in fine shape” but how much can you really trust them? (Heck, they could even have some skin in the game.)

There are also locals who know the field. Whether you’re at a horse track or an investment seminar, these experts will have an upper hand over the general public. After all, this is what they study every day, so naturally, they know the specifics — whether it be horses or stocks.

From there, it comes down to the betting itself. Much like a stock price, each horse has odds — these odds are generated by public sentiment.

If the majority of the public’s money is on one horse, that horse is the favorite — this is completely independent of the horse’s credentials. Just like if a majority of the public thinks Enron is a good stock — the stock remains high… until, of course, the gates open and the truth runs loose.

Importantly, though, much like the stock market, in horse racing, your main goal should be to beat the public. The public sways the odds of horses much like it sways the valuation of stock prices. And when you get down to it, this is one of the most critical parts of investing, beating the public bet. (Even in picking your favorite resource stock!)

A Method to the Madness

The horse track is a clear-cut analogy for the stock market.

So what are the take-aways?

For the answer to that question, I’ll have to go to one of my favorite books, Secrets of Professional Turf Betting by Robert Bacon. I even keep a copy of the book at my desk:

To be clear, I don’t normally read books about horse racing — I’m not that into it. Indeed, there’s more to this book than meets the eye.

First off, the book is out of print and was first published in the ’50s. The reason that it has some real staying power is that the subject matter directly relates to the financial markets.

Bacon pioneered the sociology of horse betting. And he did so in a way that can be directly related to your investment strategy.

A main thrust in Secrets is that you need to be able to beat the crowd. Here’s how he words it in Chapter 1:

Professionals win because they know the ‘inside’ principle of beating the races, the same principle that must be used to beat any speculative game or business from which a legal “take,” house percentage or brokerage fee is extracted. That principle is: “COPPER THE PUBLIC’S IDEAS AND PLAY AT ALL TIMES!” That is not abstract theory — it is practical percentage, as will be learned in later chapters.

The word “copper” in this sense means “bet against.” So the key to professional winning is to bet against the public. You may have heard this same thing said different ways — “buying when there’s blood in the streets,” “buying the dips” and “contrarian investing” all require you to copper the public.

Another important idea that Bacon brings up is revealed in Chapter 5, “The Principle of Ever-Changing Cycles”:

The would-be professional player must always understand that the form moves away from the public’s knowledge. (Just another principle of beating the races that has never before been explained in print for smart readers!)

As bettors/investors become wise to a certain investment, it will naturally become overvalued — therefore making it a poor bet/investment. At the track, this would be represented by a horse that “should” return you three times your money getting bet down by the public to where it would only return two times your money. It’s a bad bet, and a flawed investment strategy.

Bacon also warns of another important pitfall, what he calls the “switches.” The key behind this principle is to stay with what you know… don’t get emotional and switch your bet:

Some amateur players carry inconsistency to such a degree that they demand consistency from the horse, while at the same time being utterly inconsistent in their methods of play. It’s not the races that beat these players — it’s the switches!

For example, say you are at the races all day betting just one horse to win in each race — then, after a losing streak, you “switch” your betting method to something else. Bacon portends that this is an amateur’s trap.

The professionals will have a betting method and stick to it — consistency is what helps them win.

This rings true in our investing strategy, as well. Not every stock will be a winner, but you need to develop a system that allows you to profit, nonetheless.

So how does this relate to what we do here?

First off, we’re lucky because we’ve got some “local” help. Contributors to Daily Resource Hunter know how to evaluate a gold miner or oil company far better than any Tom, Dick or Harry in the public.

Plus, we’re investing in a good bloodline. Although we’ve seen some real volatility over the past 18 months, investing in hard assets has its benefits. And believe it or not, not all investors think that way — we’ll just leave the banking and retail stocks to them.

In today’s market, there are still plenty of undervalued long-term resource plays — with nice “long-shot” odds. This may prove to be our best chance in over five years to “copper” the public and buy into some long-term winners at a nice price.

That’s all for now. If you really want to brush up on your investing skills — and enjoy yourself — this weekend head out to the track…maybe you can write it off as a business expense!

Keep your boots muddy,

Matt Insley

P.S. Ever wonder how you can make a lot of money from oil without owning a well? Or whether or not you should buy gold and silver? Or is fracking just a flash in the pan? Get insight, insider scoops and actionable investment tips twice a week with Daily Resource Hunter? Just click here for a FREE subscription!

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