Invest like the Melbourne Cup

Invest like the Melbourne Cup

Many professionals in the equities industry would quite reasonably baulk at the suggestion that horse racing and investing in listed businesses carry similarities. The inference that either involve chance, speculation, disappointed punters or esoteric vernacular paint the least salubrious image of both fields. However if we dig below the 1st order thinking perhaps there are similarities between the ASX and Flemington worthy of cerebral comparison.

Firstly both horse racing and share investing are mainstream and incredibly popular arenas. Last year over 2.7 million people watched the Melbourne Cup and according the ASX data published in 2015 there were 6.48 million shareholders in Australia. So both spaces have significant traction across society and are part of the furniture when it comes to the national identity. As such they are events that require you to answer what will be your strategy? Will you join the party, continue to evolve as a participant or do you want to politely decline the opportunity? Each answer is a valid one but unlike water polo or investing in wine they are much more likely to be part of your decision making each year.

Secondly both the Melbourne Cup and most investments in one particular company involve an uncertain outcome. Certain sports lend themselves to more predictable outcomes, rugby union and test match cricket for instance tend to favour the more experienced and competent side, huge upsets are reasonably rare. Of course nothing in life is guaranteed but within finance products such as term deposits are much more inclined to be predictable than investing in even blue-chip names. As such both create more excitement than the more vanilla competitors in their respective fields. You are much more likely to hear apocryphal stories of 50-1 shots that romped home in the 70s and helped an uncle buy a house than you are to likely to hear of when a friend of a friend that backed Ireland to beat Pakistan in the Cricket World Cup. This connotation of both lends many a sensible soul to hedge risk but for some people either the Melbourne Cup or the stock market can change their year, for better or for worse

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Both areas are heavily influenced by conditions. Experienced analysts of horse racing like to know in detail about the weather that day and the state of the ground as they know that certain horses like firmer fields to run upon whilst other equines are suited to softer soil. Whilst the distance stays the same each year the conditions on the day shift, thereby tilting the odds in the favour of certain entrants and away from others. Likewise in the business world the local and global macro terrain is always rotating which helps other firms and hinders others. When domestic interest rates rise certain businesses suffer more than others, whenever laws change it might support certain sectors more than others and so on.

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As we have touched on both this year’s Melbourne Cup and the movements of each business on the ASX200 are unpredictable events. Nevertheless there are strategies in each which make success more or less likely. In racing huge sums of money are spent on getting access to the best trainers, vets and stables. Likewise certain jockeys are in high demand based on their track record, experience and judgement. In the private sector firms spend considerable energy looking to hire the best talent across each department and hope to appoint seasoned managers and directors that can navigate shifting conditions. In both cases it never hurts to look beyond the horse or the listing code and research who owns and who manages the performance of each asset.

Another similarity we wanted to share with you today is that each contest allows a diverse and unbounded avenue for you to enjoy them. Today millions of Australians will engage in their own unique ways with one of the fixtures of the annual calendar. Many will wage small sums of money towards a winner in a harmless spot of fun but of course many more won’t bet at all. But there is every chance the abstainer on their punting will enjoy it just as much as the most avid gambler in town. Perhaps their highlight will be the lunch they have planned with their colleagues, perhaps they have a family tradition of watching it with loved ones, perhaps they have a youngster watching it for the first time they are explaining it to. The same is true in the stock market, some people see it as the sole asset to grow their wealth, many use it as part of a blend of investments whereas others engage with it on a purely academic level to monitor business concepts and accounting procedures. Whatever each space means to you with the right frame it can be an intriguing and engaging endeavour to embrace on your own terms.

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Finally both allow an industry of professionals to augment their skills to each to carve out their own livelihoods based on the notion they can add value. That may very well be true in certain cases and less so in others, as with all industries the skills of the human capital engaged will be heterogeneous across a broad spectrum. Whilst any one horse backed by a celebrated pundit might underwhelm, or a large financial institution could have a conviction buy which suffers considerable capital loss, one concept is true in each, for all the uncertainty, surprises and bruised egos of analysts, the house always wins. In horse racing it is the venue with its caterers, branded tents and huge ticket sales that can reliably budget for a successful event year after year. In the stock market any particular share, LIC or ETF could prosper, drift or dip but overall the exchange grows over time as more businesses list and higher volumes are traded. The ASX (Australian Stock Exchange) is unique in world bourses in that it is listed domestically ie on itself! It is an operation without debt, a monopoly with strong free cash flow and sales growth over the past five years making it a quality business with tailwinds, a strong thematic and extremely robust moat. So as we enter Melbourne Cup morning it is plausible to hypothesise that the ASX (ASX:ASX) is oversold at current levels and worth further analysis as a potential buy. This is general advice only as should be counted upon as specific to your situation, circumstances or goals. Please consult professionals, gamble and drink responsibly and have a wonderful Melbourne Cup.

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