Taking Stock - by Dan Liebman

Financier Warren Buffett once said there is only one certainty about the stock market: It will fluctuate.

In fact, all markets vacillate, and the business trends of buying and selling Thoroughbreds are certainly among them.

The difference is the stock market tends to react quickly to news while the Thoroughbred market, by its sheer nature, often cannot and does not.

Companies announce performance numbers on a daily basis, and Wall Street and international markets react swiftly. That is a big difference from a Thoroughbred breeder who makes a mating decision in 2006 that produces a foal sold as a yearling in 2008.

Like the stock market, everything related to the breeding of a Thoroughbred is a gamble. Just getting a mare in foal is not as easy as it sounds. Then there are the many maladies and conformation faults a foal can experience. Also, there is the worry that a hot sire at the time of the mating will be a cold sire at the time of the sale.

All of those normal concerns seemed to take a backseat at this year’s Keeneland September yearling sale, where the domestic and world economic problems set the tone from the outset. While the hardest thing to do with any market is predict it, that did not present a problem in this particular case.

Prior to the Keeneland sale, the largest of its kind and traditionally a barometer of the market’s overall economic condition, every consignor and breeder interviewed felt the sale would be down 10-20%.

At this writing, with two days of selling left, the gross was off about 15%, the average 11%, and the median 6%.

Like many industries, the Thoroughbred business has a huge trickle-down effect. Thus the drop in gross of more than $55 million means a breeder might have to postpone replacing fencing, buying a new truck or tractor, or building a new barn.

It also more than likely means a huge catalog for the Keeneland November sale, with breeders figuring a couple of ways to save money include having fewer mouths to feed and stud fees to pay.

Of course, the next big thing to happen is for those that stand stallions to set the fees for the 2009 breeding season that begins in February. That $55 million missing from the marketplace certainly means some will have to lower their sights when planning their next round of matings.

Certainly all stud fees should not decrease in a down market, just as all stud fees should not increase in an up market. Stud fees should be determined by what is happening on the racetrack.

The easiest solution might be to alter stud fees only slightly, while reducing book sizes considerably. The revenue from stud fees would go down, but it might translate into higher demand at the yearling sales, which would more than compensate for revenue lost from those stud fees.

If you have a bad foal, it doesn’t matter if he is one of 10 yearlings at a sale by his sire or one of 80. But if you have a good foal by the sire, bidders might be pushed to pay more if there are fewer offspring of the stallion available.

Breeders are quick to point out that they comprise a perfect example of a free market, where no one is forced to breed to a certain stallion, no one is told to cap a book of mares, and it is up to each individual to decide what he or she believes the horse is worth.

Buffett says a key is understanding the difference between price and value. He has said: “Price is what you pay. Value is what you get.”

According to Buffett, then the Keeneland sale illustrates the Thoroughbred market is doing all right. 

2 Comments

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Richard R

The "It will flucuate" comment, vis-a-vis the stock market, was first attributed to J P Morgan in 1912.  Buffett might have said it but it's notoriety goes to Morgan.

I hope nobody is surprised that sales of unproven horses is trending downward.  For sure, the market uncertainty is being felt, but so is the growing indifference to the game by not only the general population but by its core constituents.

You have to be a pretty strong contrarian to be bullish about the horse racing business today.

23 Sep 2008 12:00 PM
STEVE STONE

Hello Dan.. Its so ironic though in your current op-ed piece that you reference "successful" financier Warren Buffett..whom announced just today that he is investing $5 billion into the beleaguered Goldman Sachs investment banking firm on Wall Street..in an bail-out attempt...Its most unfortunate that he didn't instruct the pilot of his private plane to land at Blue Grass Field vis-a-vis New York's LGA or JFK when he could have salvaged the recently concluded Keeneland Sales. That type of investment would unquestionably have made all of the consignors there..not mentioning the sales company itself... very very happy horse people and kept smiles on their faces for months and months to come..Its quite obvious that there are still an modicum of investors out there whom appear to be impervious to both domestic and global financial meltdowns such as the one that we are currently witnessing today..Perhaps in the future all of the sales companies should be courting the Warren Buffetts of this planet and have them spread some of their good cheer around...After all..they certainly can afford it..and probably wouldn't miss it...And he did note that he will certainly glean the value for his substantial investment......Thank you always for the window Dan and best wishes always.. Steve Stone..East Hanover...New Jersey

24 Sep 2008 9:16 AM

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