Wednesday, August 14, 1996

Of Foals and Fools
by GrapeWiz

One summer, during my high school days, my buddy and I decided to begin an investment program at Gulfstream Park. After being enticed by a newspaper ad promising profitable returns, we shared the $10 cost of purchasing the ultimate handbook -- "Thoroughbred Racing - Predicting the Outcome" by the infamous "Doc" Sullivan. We never bothered to check out his credentials or to research how he had earned the honorific "Doc."

Old Doc, you see, had devised a rather complex system, requiring a series of involved calculations of the various factors which purport to make it possible to determine which horse is most likely to win a given race. The math alone kept us from getting bored between races.

Each day that summer, we paid our track admission, purchased a Daily Racing Form, a program, and sometimes, just for fun, a "tip sheet" to give us the inside track. With trusty calculators in hand, we faithfully handicapped as many races as we had the time and funds in which to invest.

The net monetary result of our efforts was less than overwhelming and most days we were happy just to break even. Thankfully, due to our rather limited bankrolls at the time, and the unavailability of a margin account at the racetrack, we were effectively prevented from doing any serious damage to our future financial well-being. Twenty years later, I still find an occasional visit to the racetrack to be a pleasant afternoon's diversion, although my handicapping skills haven't noticeably improved.

What does this have to do with investing in the stock market? While not specifically listed in The Motley Fool Investment Guide's (MFIG) Carnival of Freak Delights chapter, I feel certain the Brothers Gardner would put horse racing in the same category as Vegas and the state lottery. Yet there are some parallels between horse racing and investing in stocks. Old Doc's book explaining his system for winning was the rough equivalent of the MFIG, Investor's Business Daily is like the Daily Racing Form, the "tip sheets" like all of the market gurus' newsletters and the house percentage kept by the track is like the commission we pay to our brokers.

The differences between the two disciplines are also telling.

For one thing, at the track, the horse that has the most people betting on it has the lowest odds, and consequently, if it wins, a relatively low payoff. In contrast, the more people that are "betting "on a stock, the greater the demand for shares, which drives the price up!

Perhaps most importantly, when a horse race is over, if you're not holding a winning ticket, that little piece of paper in your hand is worthless. Contrast that with a stock certificate. Sure, it can go down in value, even plummet, but unless it's a very speculative investment, it's a rare stock that will lose its value entirely. And, if it's a solid company (why would you invest in anything but a solid company?), its share price is likely to rebound. It's like getting to hold onto your tote ticket for another race!

Probably the only person to ever make money from Doc Sullivan's book was Old Doc himself, when he sold it to someone. However, a methodical stock investment strategy, such as the one outlined in the MFIG, sensibly applied over time, will , as advertised, almost surely reward you with positive, even "market beating", returns.

I think the market offers the better odds. Don't you?

Transmitted: 8/14/96