Five Investing Tips I Learned at the Track

5. Be Aware of Derivatives

Horse racing has its share of exotic bets. These include the Daily Double (picking the winner in two consecutive races), Pick 3 (picking the winner in three consecutive races), Pick 6 (picking the winner in six consecutive winners), Exacta (picking the horses in order to win and place) and Trifecta (picking the horses in order to win, place and show). These types of bets are far more complex than just picking a single horse in a race. Additionally, the cost of these bets may be greater than a single win bet if you "box" (select several horses in all combination and permutations) or "wheel" (key-in one horse and then combine it with others). However, the payouts in these exotic bets can be enormous. My friends and I invested $2,000 in a Pick 6 in 2001 that returned $106,500, including "consolation" tickets. Not bad for a day at the track.

In the investing world we have our own version of exotic investments. These are called derivatives. Derivatives come in many forms such as options (via "calls" and "puts"), swaps, convertible securities and futures. All of those securities have risk profiles which could return much greater payouts than just owning an individual stock. However, the cost and risk are also greater.

Betting exotics at the race track or derivatives in the financial markets is not for the unsophisticated participant. However, the rewards are far great, so with careful study and experience you can include these investments in your portfolio.

Your Homework

As you can see, there are many ways in which skills developed at the race track can be applied to trading or investing. Here are some suggestions for developing those skills:

Spend a day at the track. I would suggest the more popular tracks such as Belmont, Saratoga, Arlington, Monmouth, Del Mar or Churchill Downs.

At the track, observe (without betting) how odds are made, how bets are made, how bettors place exotic bets and the race itself. Then see the payouts to winners after the race is over. Pick up a copy of the Daily Racing Form or the local track program (with past performances) and use that to simulate some bets.

Read and then reread Picking Winners by Andy Beyer. This is the horse racing equivalent to Benjamin Graham's Security Analysis.

Look at your portfolio. Do you have any bad favorites? Should you eliminate perpetual losers?

 

                                                                                                                                                                                                                                                                                                                                                                                  1 What would best describe your stance heading into the coming week of trading?                                  Bullish Bearish Neutral         2 Which of these sectors do you think is set to move up in the coming week?                                 --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities         3 Which of these sectors do you think is set to move down in the coming week?                                 --Choose One--Aerospace and DefenseAirlinesAutomobilesBeverages and Food ProductsBiotechnologyCommercial BanksComputers and PeripheralsConsumer NondurablesEnergy Equipment & ServicesHMOs and HospitalsHomebuildingInsuranceIntegrated OilInternet, Software ServicesInvestment Bankers and BrokersMediaMultiline RetailPharmaceuticalsPrecious MetalsSemis, Semi EquipmentTelecom EquipmentTobacco and AlcoholWireless CommunicationsUtilities                                              View the results without voting              Â