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Investing in racehorses

Just think: If you had invested in horses instead of that technology stock, it could be you grinning broadly in the winner's circle at the Preakness.

For many adventurous investors, a racehorse investment combines the excitement of a thrilling hobby with the very real possibility of making a profit.

The love of horses and racing are the main reasons many investors consider horse racing, says Tony Cobitz, a racehorse expert who acquires and manages horses.

"The beauty and grace of the animals, the remarkable cross section of people who are found in racing -- professionals, owners and fans -- and the incomparable thrill of being closely associated to a good class horse are all invariably contributing factors," he says.

"And then there's the potential to earn money."

Kathleen Jones, a partner in the successful Kentucky-based partnership Team Valor, agrees it can be a powerful personal experience.

"Investment in racehorses is an indulgence in a hobby that can have the cachet of investing," she says.

The hobby is the main reason she's involved, she says, but the horses she's involved with have done well.

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Roping in the dough
Investments in racehorses can range from a handful of twenties to millions of dollars, with an average between $15,000 and $20,000.

There's a wide range of money to be made, as there is a wide range of investments. While some horses are relatively inexpensive, thoroughbreds can go for hundreds of thousands. One of Jones's horses, Star of Cozzene, was sold to a syndicate of investors at an original value of $235,000. Since then, he's been a financial star, earning more than $2 million for the investors and selling for $3 million at the end of his career.

Cobitz's horse, Terrorist, was bought for around $50,000 and won purses up to 10 times as much. Another horse of his, Turk Passer, was bought for $130,000, and he won in excess of $750,000. A third, K.J.'s Appeal, was bought for $125,000, subsequently won a $500,000 race, set a track record and was sold to Saudi interests for "a substantial sum."

Jones is quick to warn that not all horses will realize such a return. Unlike traditional investment properties, horses are living creatures that can get injured or sick. She recommends joining a syndicate that will look out for your best interests. But, watch out for syndicates that require you to purchase part of every upcoming offering, many experts warn.

Thoroughbred racing has the reputation of being the pastime for the extremely wealthy who can afford an extravagant, speculative hobby. Some even point to statistics indicating that the average owner loses money consistently. But that's all exaggerated and misleading, insists Cobitz. While he admits that it is true that investing in racehorses is speculative when compared to more traditional investment vehicles, he says that one major piece of common-sense advice can make it all worthwhile: Only invest disposable income.

But when smart, conservative business principles are applied, especially at the beginning, Cobitz says, such an investment can prove to be far less speculative than many would believe possible.

Puffed-up purses bring bigger payoffs
According to Cobitz and Rose Sylvia, owner of the Texas-based Equine Info and Flying Rose Ranch Thoroughbreds, purses are increasing for many reasons, including the consolidation of American racetracks and simulcast wagering increasing the revenue at smaller tracks. As a result, Cobitz says, there is a tremendous amount of prize money to be won, especially by higher-class, well-managed horses.

"Residual values of fillies and well-bred colts have also risen steadily in recent years," he adds, "so the robust breeding market often rewards those who race high-class horses."

Sylvia suggests that as long as investors get professional advice, investing in racehorses can be profitable.

"Purses are higher and the number of horses competing is lower than ever before, resulting in a higher potential return," she says. "Alternative forms of betting such as off-track and phone wagering and the use of slot machines and other devices to support purses will continue to increase purses.

According to the Thoroughbred Times, the economic environment has never been better for racehorse owners, as average purse per race and average earnings per runner continue to show strong since 2000. Total purse money in the 1991-2000 decade increased 56.6 percent; average earnings per runner increased 50.6 percent; and median earnings per runner doubled. In 2000, racing boasted total purses of almost $1.1 billion and average earnings per runner of $15,798.

But while risk is a word heard often, racing can be compared to penny stocks, with the potential risk for each individual horse (or stock) being high, but the return on investment for those that hit being high enough to make the risk worthwhile. (The IRS ruled that the expenses of racing are deductible because although the risk is high, the potential return makes the risk acceptable.)

Love it or leave it alone
Don Engel, president and general manager of the California-based Thoroughbred Information Agency warns that investing in racehorses is not what's traditionally considered a sound investment.

"It's a gamble, not an investment," he warns. But he adds that "the potential gain can be enormous, if the investor/gambler buys wisely, manages investments carefully and experiences above-average good luck.

Everyone who invests should value the fun of the experience, he says. "Investing just for the purpose of making a profit would be foolish, a low-probability enterprise."

Audrey Pavia, a horse expert and author of Horses for Dummies says, "Investing in a racehorse is much like investing in a high-stakes game of roulette. If you get lucky and the horse turns out to be a winner, you will get your money back and then some. But the odds are against you. The great majority of racehorses do not achieve the kind of fame and earnings of a Secretariat or a Silver Charm. It's a huge risk to put your money in a racehorse. You should only do it if you have money to burn and owning a racehorse has been a lifelong dream. But don't do it expecting a definite or immediate return."

Just as you wouldn't put all your money in one penny stock, you shouldn't risk your entire investment in one horse. "Whatever level a new owner can afford to participate in, they should own a small part of each horse either concurrently or serially," says Sylvia.

Investing tracks vary
There are different types of investments. Partnerships are becoming increasingly popular. But just as important as the form of ownership is the area of investment. Some investors like the breeding aspect, while others only want to be involved in racing. Some like colts who have a Derby future and potential skyrocketing profits. Others prefer fillies, who don't make as much as colts, but have a residual breeding value after their careers are over.

Investors need to define their goals clearly. Some high-level partnerships buy the most-expensive prospects to race with the intention of making them valuable for breeding. These usually require investments of more than $20,000. For investors who disregard breeding potential, investments range from as little as $500 to $50,000 or more. Some require all the money in advance while others allow for monthly or quarterly payment of expenses.

Regardless of the form of investment, Sylvia warns, a potential investor needs to find an experienced adviser, one familiar with the sector of the business in which the investor wants to place money. Someone successful in one area may not be familiar or successful in another.

"I strongly encourage anyone new to racing to first get involved with a group with a track record for establishing partnerships," Sylvia says. "The most critical decision is choosing the right adviser."

-- Posted: June 6, 2001

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