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Do yearlings offer good value?

ust about everyone in racing, and certainly millions of Americans who are not racing fans, now know the story of Real Quiet. A $17,000 Keeneland September yearling sale purchase, this former ugly duckling very nearly won the Triple Crown and now is worth millions as a stallion prospect.
    Still, an underlying question remains: Do yearling purchases offer good investment value, particularly with sale prices moving upward annually in lock step with the stock market? Is the underlying asset worth the investment risk?
    The authors were asked this question on an investment segment of CNBC Television. The conclusion: Yes, if you do it right. Doing it right means having a business plan and a suitable group of professional advisers.
    The following are the items that should be covered if you want to buy smart in the yearling market.

Preliminary steps

• Review the catalogs and prepare an A list and a B list based on pedigrees or horses you were familiar with when they raced;
• Assemble a team, which should include a veterinarian, a trainer and a pedigree expert;
• Physically examine the horses and talk to the consignors. A note of caution here. The horses that you are inspecting have been fussed over for weeks leading up to the sale, and they probably will not look as good for a long, long time - perhaps until they win a Grade 1 stakes. Expect the pre-sale glow to dissipate as the youngster grows and matures into a racehorse. It is a normal process, as is asking yourself, "Did I pay too much?" Buyer's remorse is a part of the game and, indeed, you should be questioning yourself - reasonably - through the sale process;
• Have your veterinarian go to the veterinary repository (if available in your state) and review the records; and
• Establish a budget of what you want to spend.

Have a business conference

    At this business conference, narrow down your A list and B list and classify the horses from one to ten based on pedigree and physical appearance. Next, estimate the selling price of the horses and decide on your strategy.

Look for opportunities

    Inspect the catalog and anticipate soft spots in the sale. Very often these soft spots occur at the beginning or end of a sale, after a very expensive yearling is sold, when the offspring of a less-accomplished stallion is in the ring, or even during normal dining hours.

Understand reserve prices

    Many people have questioned why sales companies allow reserves and why those minimum sale prices are not posted publicly. The short answer is that the process is fair to the seller and ultimately to the buyer. Every person who sells a horse has the right to a fair shot at making a profit, and the seller should not be forced to accept a low-ball price.
    As a buyer, you can and should figure out what costs the seller has incurred, such as stud fees, investment in the broodmare and other costs. You then should add into these numbers a fair return on investment for the expenses and risks that the seller has incurred.
    Also, from the statistics that are available, such as the Thoroughbred Times Buyer's Guide, you can ascertain if the horses were pin-hooked - that is, bought at a previous sale and placed into the current sale for resale. If so, you should anticipate that if someone bought a horse for $40,000 with plans to resell it, that person is not going to take $20,000 unless something drastic has occurred.

Establish credit

    As a prospective buyer, you should have applied to the auction company for a line of credit well before the sale. This means you must decide on just how much you are going to spend and, once it is decided, the decision should not be changed significantly in the heat of bidding.

Insure your purchases

    Once the hammer falls and you are the highest bidder, you own the horse. If the horse runs off through the sales ring or gets injured in the stall, that horse is yours and your problem. To protect your investment, is is important to arrange with an insurance agent for mortality and other coverage for your purchase or purchases. The worst thing you can do is wait two or three days to get the insurance coverage. Catastrophes happen in seconds, and your investment can disappear just as quickly.

Logistics

    Also remember that, if you purchase a horse, the horse has to be transported somewhere. Usually by the day after the sale, the sales company expects you to have the horse removed from the sales grounds. In short, you must know which van company will ship your yearling, and you must have a place to send it. To help with the first part of the transportation, van companies have representatives in the sales pavilions.

Evaluate potential value

    Several articles have been written about sales prices and these analyses conclude that the strongest part of the current market is the upper end, where the best pedigrees and conformation are found.
    From the viewpoint of prices, that conclusion is indisputable. But racehorses are not judged by their prices, and value can be found at lower levels. Softness in prices around the median price or below is not necessarily a bad thing for buyers looking for value.
    Here are some tried-and-true strategies for finding value below the sales toppers:

• What flaws can you and your trainer live with? Some physical attributes may not be aesthetically pleasing but will not hinder the horse from performing well. Real Quiet, known as "The Fish" for his narrow chest, is a prime example.
• Learn something about what the yearling's sire and/or dam looked like. Which does the yearling most resemble? Is this good or bad?
• Consider the age of the horse. Horses change so much as they grow. Therefore, inspecting these young horses, you have to factor in the tremendous growth that occurs in four or five months.
• Analyze the type of horse you want. For example, a two-year-old sprinter is much different from a horse that will run over classic distances or on the grass at three.
• Does the yearling have residual value for breeding? If you are involved in breeding, you may be willing to accept a well-bred filly which may not have all the conformation traits you are looking for.

Decision time

    Now that you have made your evaluation and gotten your hit list down and graded it, it is time to make the biggest decision of all. That decision is how much to bid for each horse. Remember, you have made a game plan and decided how much money you are going to allocate and how many horses you are going to purchase. Also remember that your number one horse rarely is the first horse to come up in the sale to buy. Remember that if you do not get one horse, there is always another horse. Also, there are other sales.
    There is nothing that says that you must buy a horse at every sale, no matter how much time and effort you spend on preparations. The key is to buy the best horse you can with the best conformation and pedigree for the amount of dollars you have allocated. Having said all that, our operation allots a 10 percent overage factor - meaning that we will bid up to 110 percent of the target price if a horse makes the highest grades.

Bottom line

    Year in and year out, people can and do make money buying yearlings, and some even land catches like "The Fish," Real Quiet. But this lightning usually strikes based on careful preparation and practice - attending the sales and learning what works and what does not for your stable or operation. This is a very satisfying sport and business for those who are properly prepared.

Thanks to Leonard Green, CPA, and Jon Green, partners of Thoroughbred Profitability Consultants, for permission to reprint this article. They may be reached at (732) 634-5100 or e-mail mail@greenco.com.

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