This Saturday, thousands of people will head over to Churchill Downs for the 143rd renewal of the Greatest Two Minutes in Sports, the Kentucky Derby.
This year’s race should be a lot of fun to watch – there are several potential winners, a few feel-good stories, and there’s always the hope that we might see one horse take the Triple Crown.
And there’s something else I’ve noticed: there are several parallels you can draw between the Sport of Kings and portfolio management. Here are 3 investing lessons you can learn from horse racing:
First, you should understand that it’s a long race. Jumping onto the first hot trend you see might be tempting, but how many times have you seen a horse get off to a great start, only to fade somewhere along the way? Or maybe one of them stumbles out of the gate, but by the sheer will of a great jockey manages to finish in the money? The point is that acting on the short term can have really bad consequences over the long term. It may be better to take the long term approach and maintain an even keel throughout the race.
Second, don’t assume that recent champions will always stay in the winner’s circle. Often times investors will look only at certain sectors, or stocks, or funds that have managed to outperform the market in recent years, with the hope that they’ll keep winning. But it’s important to remember that investments on Wall Street tend over the long run to “revert to the mean,” and fall back in line with their long term performance. So the hot sector today may not be the hot sector tomorrow. You might try taking a broader view of the market and staying diversified.
Third, you should have some analytics to guide you along the way. In horse racing, there are teams of professionals who spend all their time evaluating each horse, looking for signs of strength or weakness that would not be obvious to us amateur racing fans. From this information, they can determine if the price of the entry represents good value. As an investor, you should rely on guidance from professionals who might help you through the ups and downs of the market, through the wins and losses. Just like there are different track lengths and conditions, not all stock market environments are alike.
So this Saturday, sit back, wear your big hat, sip a mint julep, and enjoy the race!