Canny view: Investment lessons from betting on the nags

Nick Stewart

One of the jewels in the crown of New Zealand Racing is the Hawke's Bay Spring Racing Carnival held annually throughout September and October. With marquees stretched along the home straight it is the place to be.

The Tarzino Trophy Daffodil Raceday on September 1 launches Group 1 racing for the season, bringing the big guns of New Zealand racing to Hastings, to battle at one of the country's stellar racing events.

Knowing a few recreational bettors on horse races and working with serious investors in the share market, I have found there are some guiding principles that apply to both activities.

• Avoid touts and tips

Horse racing and stock investing are ventures in which someone "in the know" is eager to provide you with a tip on the next "sure thing". Usually avoid these people like the plague because, if they really knew, they would not be telling you at the racetrack or informing millions of viewers on a TV business channel. Every year without fail, before the racing season, a so-called wise-guy's horse emerges only to badly falter when it comes time to show what he/she has.

• Watch out for insider trading

Regard all purportedly "inside information" with much scepticism. To be sure, there are times when a backside worker you know has a valuable scoop about a maiden that is going to contend in a race based on sensational recent workouts. Trouble is, while a bet on the maiden could be worthwhile, the informant has probably told enough people that the horse's odds at post time will be too low, given the level of risk.

In the same vein, say an acquaintance of yours, who is a company executive, confides that his firm's stock will receive a boost from a yet-undisclosed impending acquisition by a competitor. Remember, if you buy the stock before the information goes public, Securities Commission and Financial Markets Authority may find out and nominate you for a criminal offence with severe penalties.

Remember NZ's first insider trading trial in March 2018. A former Eroad employee and shareholder accused of selling thousands of shares after a tip-off in a text message.

• Research, research, research

Investing in stocks profitably and betting on horses just to break even require a thorough analysis of the underlying fundamentals. Regardless of what other people tell you, do your own delving into the details and rely on a trusted financial adviser with Accredited Investment Fiduciary ® (AIF) designation. AIFs are subject to the duty of loyalty and are expected to always act in the best interest of their clients.

• Be selective

After you thoroughly research stocks and horses, the percentage of companies and horses that you'd like to bet on will greatly reduce. Being patient and disciplined while waiting on promising opportunities is a mark of a smart investor or bettor.

• Never forget the meaning of value

Flashy advertisements on Bloomberg and other websites sometimes say, "stocks to own for life". Yet the late investment authority Benjamin Graham correctly taught students, like Warren Buffett, that every stock had an intrinsic value determined by the discounted value of its future earnings stream.

No matter how strong a company happens to be, its stock can be overvalued at a point in time and therefore not worth buying. Race entries, like stocks, can be fairly valued, undervalued, or overvalued.

• Diversify

This precept, perhaps the most important of all, is about spreading risk and managing money. "Putting all your eggs in one basket" is to be avoided if you want to have any eggs left.

• Control emotions

This is difficult to do when the NZX plunges in a single day and you are down 4 or 5 per cent of your portfolio. When you haven't cashed a ticket in days, it can be agonising and destructive towards your self-confidence.

However, successful investors and horse players are inevitably going to have winning streaks and losing streaks and should take them in stride. A trait of true professionals is that it is not easy to distinguish from observing them whether they have been winners or losers.

If you can't handle the emotional ups and downs of the stock market, turn your portfolio over to a financial adviser you trust.

Postscript: I wonder to myself what kind of person can risk money betting on horses in the afternoon (a few of which he or she may own), check the stock market at 4pm to see how his or her portfolio has fared in a brutal market, and then be in a sufficiently healthy emotional state to attend the sale at night as a buyer or seller of untried and expensive yearlings that may never make it to the races. These folk truly live life on the financial edge.

• Nick Stewart is the CEO and an AIF at Stewart Group, a Hawke's Bay-owned and operated independent financial planning and wealth management firm based in Hastings. Stewart Group provides free second-opinion service on your current investments, insurance covers and retirement planning.

• The information provided, or any opinions expressed in this article, are of a general nature only and should not be construed or relied on as a recommendation to invest in a financial product or class of financial products. You should seek financial advice specific to your circumstances from an Authorised Financial Adviser before making any financial decisions. A disclosure statement can be obtained free of charge by calling 0800 878 961.