Wednesday, May 16, 2007

Free-agent horses: a better hobby than an investment

A few months ago, I wrote that professional sports teams return very little profit compared to other investments. My argument was that owning a team is the way for rich people to gain fame and have fun playing fantasy sports with real money.

Here's an argument from William Baldwin of Forbes that says horse racing is the same thing – a supposed business that's really just a hobby. Baldwin calculates that, across all racehorse owners, the cost of upkeep is $2 billion, but there's less than $1 billion in purses to go around. Conclusion: owners know that they stand to lose half their investment, but continue anyway because they're not in it just for the money.

Baldwin's article is actually an editor's note commenting on another article that appeared in the same issue.
That story, by Dan Seligman, talks about a horse auction where animals go for millions of dollars, a lot like promising free-agents. Seligman is one of my favorite journalists (although I haven't seen much of his work lately). He's not afraid of numbers, and he understands what they mean and what they don’t mean; I don't recall a statistical argument of his that I thought was unsound.

In this article, he does a bit of original sabermetrics, finding a correlation of 0.4 between horse "tryout camp" results and eventual sale price. I trust his findings a lot more than if he had gone out and
quoted some supposed expert somewhere.

Additionally, the article suggests that free agent horses are wildly overpaid. Of 22 horses that sold for over $1 million, only one earned back his million in purses. A lot of their income comes from stud fees -- old blue-chip horses siring young speculative horses.

If Forbes is right about the horse business, you should expect to find it all privately owned (like baseball teams and Picassos). It would be difficult to sell shares in a a business where you lose more than 50% of your capital every year.

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