I have a vague recollection that I went through a comparable example when Smarty retired, but the simularities between the owners & posts are such that it might bear repeating. Let\'s start out with the not unreasonable assumption that Alex\'s value as a stallion is the same as Smarty, $39 million. Next yr\'s premium for ASD/Fertility coverage, assuming there is capacity for the full amount, will be approx 8% of that, or $3.125 million. In other words, to race Alex as a 4 yr old, each of the 4 partners of Cash Is King stable, none of whom is \"loaded\", would have to write a personal check for $780k. In contrast, if he\'s syndicated at the end of this yr, each partner would receive a check for $9.75 million. That\'s a lot to ask relative newcomers to the game to sacrifice for the good of the sport. Even though I\'m guessing this assumption is wrong, let\'s also assume the partners understand these numbers. The question then becomes what do they get in exchange for paying the $3 million plus premium. A chance to break even if Alex wins the BC Classic & just about every other race he enters, plus the possibility, as Ritchey points out, that his value as a stallion increases as a result of his 4yr old campaign. There\'s also the chance that his value decreases, something the owner of Giacomo understood when he sold a good portion of his breeding rights before the Bel. Let\'s arbitrarily set the increase/decrease at $10 million, in which case each partner would be looking at making a $750k bet at a little better than 3-1 on the upside. The problem is that the downside isn\'t capped by the amount of the bet, so it\'s entirely possible that you\'re out the $750k for the premium plus $2.5 million for the decrease in value. No matter how much one loves the game, that\'s a pretty hard bet to make, & it doesn\'t even take into consideration what happens if, heaven forbid, something happens to the horse. In short, the bottom line consideration driving these decisions as much or more than anything else is the cost & availability of insurance coverage, which dictates that you reach into your own pocket to pay a King\'s ransom for the privilege of forgoing vast sums of money, just so you can act in accordance with the best interests of the sport. It might happen this time around, but I wouldn\'t hold my breath.
Mall,
Excellent post. I can imagine a few deals they could work out, but it would be tough to overcome the risk/reward scenario you outline here. HP
Mall I remember that post and you were right on the money with Smarty and Co. The economics simply do not work out.
I think Stronach decided to take some money off the table with Ghostzapper. He currently stands Ghostzappers Stallion (Awesome Again) and I said last year after the Breeders Cup it may make sense to continue to race Ghostzapper because if he was immediately retired there would be some cannibalization of his own sire, that being Awesome Again. He promply bumped the Stud Fee on Awesome Again and briefly raced Ghostzapper. Who knows maybe he was able to get enough of a premium off that one race to justify the loss of a years Stud Fees. When confronted with a similar proposition Stronach\'s new partner probably insisted on he wanted no part of Race Horse he has just sunk $20-30M in. The nuclear scan Ghostzapper was given may have had more to do with a vetting process for a Sale than it had to do with any unsoundness he was suddenly suffering from.
Now I am hearing a lot of the same retoric from Trainer Ritchie. \"He was worth $20M before the Belmont whats he worth now\". \"The owners are committed to keep racing this horse thru his four year old season\". All comments that could be percieved as attempts to get the price up. And if thats the case then he would only be doing his job, while filling his own bank account at the same time.
Call it poker of different brand and when somebody throws $30M worth of chips in your corner of the table, its hard to image the next thing someone says is \"I\'m All In\". I know I sure as hell wouldn\'t.
How much a Nothern Afleet/Afleet/Mr Prospector is worth, who knows. We went thru the same thing last year with the Elusive Quality/Gone West/ Mr Prospector line. Don\'t be surprised if you see history repeat itself.
I agree with your analysis. No one would argue with the economic logic of retiring these horses early. However, I think it misses the point of why these economics exist. That\'s what I was talking about yesterday.
In your example, the cost of insurance coverage is related to the value of the horse. The value of the horse is related to the amount breeders can charge for services. That in turn is related to the prices for yearlings.
IMO the prices for yearlings are insane though. That\'s demonstrable by calculating how owners are doing financially as a group. I don\'t have those current stats, but I\'d be willing to guess they are taking a massive bath these days.
Even though there are intangible benefits to ownership (I know I owned a piece of one once) and many owners are willing to take a loss in return for the excitement, there is obviously some point at which the cost is WAY too HIGH in relation to the upside. IMHO, we are way past that point. IMO, it\'s not much different than if you charged me $1 million for a 100K boat. I might like the boat but I am still a dumbass if I bought it!
If yearling prices would fall to a level that makes economic sense, everything else would fall too - including insurance, the price you could get to retire your horse to stud, the cost of breeding etc..... As a result, the economic choice between retirement and racing would be more in line with the joys of ownership instead of so obviously weighted towards early retirement for the lottery winners.
That balance would be a huge benefit for racing because if our biggest stars didn\'t retire there would be better racing, which in turn would attract more fans, which in turn would generate more handle, which in turn would raise purses, which in turn would make the choice of racing vs. retirement even easier.
This is a virtuous circle from which good things flow.
What we have now is a vicious circle from which nothing but bad can occur.
How we got into this mess I can\'t tell you because I didn\'t follow the details closely, but it\'s a bubble just like we\'ve seen in other markets likes stocks, real estate etc.... It will eventually burst and IMO it can\'t burst too soon because the game is being destroyed even if a minority of people are getting rich due to the insanity (just like a few do in all bubbles).
How do you \"get the prices of yearlings to fall?\" This is what these guys are willing to pay. There\'s nothing you can do about it. Use your boat example and put yourself on the other side of the equation. You have a 100K boat and a guy offers you 500K and then some other nut calls and offers you a million. So you sell your 100K boat for a million. There seem to be plenty of \"kooks\" out there who are willing to lay out big bucks for the yearlings. It\'s just like the stock market or any other kind of market. An item is worth whatever people are willing to pay...and plenty of them are willing to pay crazy prices for horses.
HP
There are many reasons why the cost of insurance, assuming it\'s even available, has become prohibitive, & most have very little to do with the increase in the value of horses. Stallions with the same & higher values could be insured at much lower rates 10, & even 5yrs ago, & there were a lot more than the six Lloyd\'s syndicates which currently participate in the market. Many left after suffering huge losses, but the competition for capital has played an important role. Thus, when the last major Am carrier, Chubb, announced it was withdrawing from the market last yr, it acknowledged that the business was profitable, but left to deploy its capital in lines which were more profitable.
The yearling market is an international one, & many of the most expensive horses are purchased by foreign interests. Given the depressed value of the dollar in recent yrs, & the size of their purses, it might make perfect sense for a Japanese buyer to pay a great deal more than an American buyer for the same yearling. And many of the Arab buyers are, for obvious reasons, not constrained by economic principles. American racing suffers, but it\'s hard to blame a breeder for trying to produce a horse which will bring the highest price from whoever\'s willing to bid at a public auction, especially if you keep in mind that most breeders, like owners, lose money.
I agree with you. You can\'t get people to stop overpaying in the short term, but the economics of a situation don\'t change just because people are being idiots. Ultimately, those that are dramatically overpaying for yearlings will lose so much money they will either be forced out of the game or come to their senses. At that point, the prices will fall or remain flat for a very long period of time because there will be fewer bidders and more sound thinking. It often takes awhile for a bubble to pop though.
I don\'t blame anyone for acting in their own best economic interests (owners, breeders, or insurance people).
If some capital in the insurance industry has moved to other more profitable lines, then it makes perfect sense that prices would rise. However, some if not most of the cost HAS to be related to the values of the horses.
Your point about the Japanese purses etc.. is a good one. It could make more sense to a Japanese buyer if the purses are larger in Japan (especially since I assume the competition is weaker). Over time I would expect market forces to bring that into sync too. Over time more US (and other) owners will take their horses there to race and pick up those bigger purses. In the end, I think the prices of yearlings have to be related to purses even if owners are losing in aggregate. It\'s a matter of what that level is. Right now, I believe prices are WAY TOO HIGH. I\'m not an expert. I\'m not even moderately informed. It just screams so loudly that that\'s the case based on basic economics that I feel very confident in my opinion that a bust is on the way.
Class, I don\'t think owners can \"take their horses there to race and pick up those bigger purses\" because Japan racing is a closed shop. Unless I remember incorectly, or, unless things have changed, only a few races over there are open to all comers.
Interesting.
Are the purses based on handle in a similar fashion to ours?
Classhandicapper: Your post reminded me of an expression one of my favorite colleagues, a wise & cynical curmudgeon, invariably used to describe a Chicago exec we both knew: \"Never in doubt. Often in error.\" This is not the place for a long dissertation on what has happened & what is happening in equine ins. markets. Suffice it to say that you have no idea what you\'re talking about.
magicnight: My understanding, which was gained when the Japenese were more active than they are now, & could be wrong, is that a yearling purchased in the US & taken to Japan from the sale is eligible for Japanese races. I think, but am not sure, that their restrictions are designed to keep horses from other countries from shipping in to take a shot at their massive purses. My impression, for what it\'s worth, is that the current trend is to relax, & in certain big races, eliminate those restrictions. In any event, I don\'t think it changes the overall point I was trying to make.
CH wrote:
\"Are the purses based on handle in a similar fashion to ours?\"
No, there\'s a group of Samurai warriors that plunder the countryside to supply the purses...
What a sobering and depressing string. It is very hard to argue with Mall\'s astute analysis. Even guys who have more money than they can spend the rest of their lives unfortunately are operating this way, I think. I guess we just need to hope for some more of the like of Forego and Kelso (looks like an \'o\' at the end helps -- maybe it signals the emptiness?)
Mall, your quote about the wise guy exec in Chicago, was apparently also often applied to Jeff Skilling at Enron (a wise guy from Illinois if my memory is correct). We all know how that turned out!
Mall,
I do not know the details of the equine insurance market but as a shareholder of Berkshire Hathaway for the last 18 years (and a bunch of other insurance companies over the years) I do understand the cyclical nature of the business and how capital flowing in and out changes pricing and returns on capital etc... I am quite certain that the value of the item being insured is almost always a major component of the price of the insurance - generally much more so than the cyclical ups an downs and other factors.
This is not the forum to discuss it further, but as an avid insurance investor if you are correct in saying that capital has been flowing out of the industry, I might be interested in making an investment. Capital flight is usually accompanied by increased profitability from the remaining players soon after - as they are free to raise prices to levels that generate adequate returns on investment. If you have any information that could shorten my reseach path, please let me know. A few company names would help - especially if they specialize.
I understand and agree with you points about the Japanese and Arabs. From what I can see here in the US, the prices being paid for yearlings that are racing here still don\'t make economic sense for our owners.
If US buyers of yearlings are losing massive sums of money in aggregate, they will eventually be forced to drop out or they will come to their senses.
That may leave the Japanese with their higher purse structures and Arabs with unlimited capital and economic stupidity to bid on the yearlings. I would think that Americans dropping out at the margins would still work towards lowering prices. However, if the Japanese purses are supporting these yearling prices and their owners are doing well, IMO US racing is in very deep doodoo - even worse than I thought.
It\'s difficult for me to imagine an industry in which owners are hemorrhaging red ink (as they are in the US) being successful over the long haul. There are two simple paths to better results for owners. Lower prices for the horses or higher purses for doing well. The problem is what I stated. When the prices for horses are high, the pressure to retire succesful horses early is high. That works in the direction of reducing fan interest and growth, potential handle and purse growth etc...
It\'s obviously not a healthy situation when so many players within an industry are losing money except for a handful of lottery winners. Speculative prices that are not supported by income streams usually lead to heavy losses and that usually leads to a major bust in prices.
\"No, there\'s a group of Samurai warriors that plunder the countryside to supply the purses... \"
Well that was pretty funny, but if they have a higher purse structure I\'d be curious to know if they also have a much higher handle or whether a higher percentage of the handle goes to purses instead of government etc....
Mall,
\"Many left after suffering huge losses, but the competition for capital has played an important role. Thus, when the last major Am carrier, Chubb, announced it was withdrawing from the market last yr, it acknowledged that the business was profitable, but left to deploy its capital in lines which were more profitable.\"
By the way, being profitable is not the standard by which an insurance operation should be measured. An insurance operation can be profitable while still being a terrible business. It must earn a high enough return on invested capital to justify its existence. All of this screams that the insurance prices were inadequate to cover the values of the horses and the risks associated with the coverage. So if prices are soaring now, it is probably warranted to a large degree.
This is the value thread?
I don\'t know, seems much ado about something upon which nothing can be done.
Yes, top stud fees and unproven horse prices are overinflated.
Yes, there are collectors in this game that don\'t care about price and many will pay more than they reasonably should.
Yes, horses will continue to retire when their breeding value significantly exceeds their racing value or the anticipated value continued racing can add.
Most retirements come because the horse is off, but sure, Smarty Jones and Ghostsprint went out on residual value issues. If a truly great horse comes along, its gonna take a sportsman to bear the risk of losing the residual breeding value. Paulson or Phipps or someone of that nature is necessary to make a horse great, provided he\'s not a gelding.
Class,
\"If US buyers of yearlings are losing massive sums of money in aggregate, they will eventually be forced to drop out or they will come to their senses.\"
No, they won\'t. I mean they might, but only if their other money dries up or their businesses go bad. The people buying these high priced YEARLINGS for the most part don\'t care if they lose money on them. They really don\'t. I don\'t know what part of this that you don\'t understand. That there are people in the U.S. that have enough money not to care what they are spending on a yearling. There are times when money dries up, but you just can\'t look at it with the economic model of other businesses. It\'s a unique and idiosyncratic situation.
There have been lots of insurance IPOs in the past year (I write about them for a living) so you have ample opportunity to test your theories...
My dad has been in the insurance business for over 40 years and a lot of your assumptions are wrong, but you are right that this isn\'t the place for a long dissertation.
HP
HP,
I understand that owners are willing to lose money and have said so. It\'s a matter of degree. An owner might be willing to lose \"x\" to have the enjoyment of ownership, but when his losses start exceeding \"Y\" some will reconsider. I\'d be willing to guess we may be at \"Z\" these days.
I would only be interested in companies that are writing insurance in lines of business where losses have been high and capital is leaving.
When you say insurance IPOs, I don\'t know if you are referring to those in the line of insurance we are discussing or in general. However, if there have been a lot of IPOs in a particular line, I wouldn\'t want to get involved because almost by definition that means new capital is heading in that direction and will thus depress insurance prices and business returns in the near future. Also, typcially IPOs occur when the prices for the securities within the industry are high.
I am a value guy. I like to buy companies at cyclically depressed bottoms when others are leaving and new players aren\'t entering. THat\'s the way Warren enters and exits insurance and his theory has served me well also.
Much ado about nothing.
Every time TGJB asks for the board to return to TG and handicapping issues, we get innundated with more and more fluff.
For every overhyped superstar that is retired early, there are being foaled 20 or 30 New York Breds who never should have been bred in the first place. In 3 years some of them will come together in a NY Bred maiden race in the dead of winter at Aqueduct that will be impossible to handicap and will produce a chaotic result. There will be less than 2000 people in the stands on that day and god willing I will be one of them.
I agree of course that it is much more fun to handicap and watch a card with the quality of the Belmont day races, but too many horses are being bred and too many races are being run for this type of racing to be anything but the exception to the rule.
Racing can survive without superstars, and can survive without the casual fans who are only drawn to the Triple Crown and Breeders Cup Day races. There are more and more ownership syndicates bringing new owners into the game, owners who could never have afforded participation in the game are now in. Delaware type
(read \"slots\") purse structures (8K claimers running for 15K purse money) will make it easier for owners to stay in the game.
Technology has turned every living room in the country into a potential OTB parlor.
So put away your tissues and respect TGJB\'s anti- fluff edict. If you are really concerned about retiring horses, don\'t worry about Smarty and Ghost and Alex... they will be fine, and maybe we should all pay a little more attention to the Excellers and the Ferdinands of the racing world (and many lesser known animals
facing similar predicaments), and make certain that their fates are not duplicated.
EDIT-- oops, sorry guys, I didn\'t realize that this was the Berkshire Hathaway
chat room.
X, Y, and Z have been trues for many years now. Behavior hasn\'t changed.
Actually Richie, I think the host lauded the original post in this thread and the rest of it is merely discussion, but tend to agree with you. We all want fair top quality racing and can agree to disagree on whether the New York Bred Slow Rats are bettable.
richiebee Wrote:
-------------------------------------------------------
> So put away your tissues and respect TGJB\'s anti-
> fluff edict. If you are really concerned about
> retiring horses, don\'t worry about Smarty and
> Ghost and Alex... they will be fine, and maybe we
> should all pay a little more attention to the
> Excellers and the Ferdinands of the racing world
> (and many lesser known animals
> facing similar predicaments), and make certain
> that their fates are not duplicated.
>
> EDIT-- oops, sorry guys, I didn\'t realize that
> this was the Berkshire Hathaway
> chat room.
>
>
>
> Edited 1 times. Last edit at 06/16/05 11:29AM by
> richiebee.
Chuckles:
I agree with TGJB that the original post was brilliant, and to me, it stated all which was needed to be said with regards to AA\'s likely future. Mall reasonably and logically reached the conclusion that AA would be too expensive to race as a 4YO, without commenting on what that meant to racing. Mall really was looking at it from the OWNERS point of view, which was refreshing.
When the ensuing discussion followed the path of what that OWNERS\' decision meant to RACING, I found that the posts became a bit subjective, and you could read them and think racing would disappear off the Earth in short order. Too much hand wringing and disclosure of poster\'s personal portfolios for me, anyway.
Racing continues to regress in terms of overall quality, but the early retirement of a few superstars is not enough to bring it down around us...
Richiebee,
I don\'t see racing collapsing either.
I see online betting as a long term bright spot unless Sen. Kyle manages to convince enough fools in Washington to screw things up (something I think is a very low probability event). UBET posted great Belmont numbers. IMO, the internet is a way to get at the younger crowd.
However, I do think the current economics are a mess. I think a price bust is virtually inevitable and the sooner it happens the better off the industry will be even though it will cause a lot of pain for some for awhile.
The average person wants to see stars, marquee matchups, etc...
If the industry economics don\'t allow that to happen, then the fan base will continue to erode, handle will not grow at the rate of people\'s incomes (let alone faster), and the game will be further marginalized. At the core of that is the economics of retirement vs. purses for racing (risks and rewards).