Stocks Are Off to the Races

Investors who treat the stock market like a horse race always get burned...

Posted May 23, 2022

Dear Outsider,

Baltimore’s Pimlico Race Course hosted the 147th Preakness Stakes this past Saturday. Last year’s races were limited to just 10,000 attendees due to COVID-19 restrictions, so it was good to see a semblance of normalcy return to the racetrack.

If you’ve never been to Pimlico, it’s worth seeing before it’s completely rebuilt, which is slated to happen after next year’s Preakness. The Maryland Senate recently approved $375 million in funding for much-needed racetrack upgrades, with this concept design...

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Now, I don’t like losing money, so I tend to stay away from the gambling side of horse racing. But there’s nothing wrong with paper betting, and it’s hard not to get excited when you make some picks and watch the horses take off from the gate.

Your dopamine levels spike when your horse is ahead... and your stress hormones kick in when your pick starts falling behind.

Sound familiar?

Over the last few years, amateur investors and “expert” stock pickers have played the stock market like a horse race and used social media to whip up stock prices.

Of course, we all know investing and gambling are two completely different things. With investing, you can limit your losses and take money off the table. You rarely lose all the money you invest if a trade goes against you, as you can get out at any time. With gambling, it’s all or nothing; you place a losing bet and there’s no getting that money back.

But investors often conflate the two, even the famed fund managers. I wonder if they bet on the historic Pimlico Special that ran last Friday...

The Pimlico Special

People have come from all over the world to experience Pimlico since its constructionin 1870, and it’s remained a beacon of light through countless setbacks for Baltimore, including the Great Fire, the Great Depression, the riots, and lack of upkeep.

The Pimlico Special takes place the day before the Preakness and was created in 1937 by Alfred Vanderbilt, the master of Sagamore Farm, a thoroughbred horse breeding farm in Reisterstown, Maryland. In 1937, Triple Crown winner War Admiral won the race.

The following year, on November 1, 1938, Pimlico hosted probably the most well-known Special, where the underdog Seabiscuit defeated War Admiral, which gave hope to the U.S. while it was reeling from the Great Depression. An estimated 40 million people listened to the event on the radio.

As worldwide GDP fell 15%, international trade fell by 50%, and unemployment rose to 23%, the U.S. needed a hero.

Now, Seabiscuit wasn’t your typical race horse. He was small in stature, but when he was just two years old, he won five races and placed second in seven  an impressive feat. After that, with only four wins out of 12 starts, Seabiscuit had fallen out of favor with his owner. Rich car salesman Charles Howard bought him, and along with trainer Tom Smith, the two would go on to witness Seabiscuit’s rise to stardom.

The Match of the Century

For much of the horse’s career, Seabiscuit was paired with jockey Red Pollard, and the two won important races in 1936 and 1937. But Pollard suffered crippling injuries as a jockey. He was blind in his right eye from an early riding accident, which he kept a secret for fear of losing his job. 

And just as Seabiscuit was reaching the pinnacle of his career and training for the Special, a horse fell on top of Pollard, caving in his chest and breaking multiple ribs. He was replaced by jockey George Woolf until he could ride again.

After recovering and just before a head-to-head match with the favored War Admiral, Pollard was training another horse when it got spooked, threw him, and nearly sheared his leg off below the knee. The injury wouldn’t heal in time for the Pimlico Special, called the “Match of the Century” in the media.

match

Jockey Charles Kurtsinger stepped in to ride Seabiscuit at the big race. If you haven’t watched the match, I suggest checking it out on YouTube.

It’s a truly inspiring story, and I don’t want to take anything away from the jockeys because it takes an incredible amount of skill, but there’s a reason the hero status is always placed on the horse, not the jockey.

Bet on the Horse, Not the Jockey 

Jockeys typically don’t become household names. Even though they’re essential to the game, as we saw with Seabiscuit, another one can step in and do the job. If the horse is good enough, it may not matter who’s riding on top after all.

The same goes for Wall Street, where the jockey may change, but the horse remains the same.

In the stock market, investors have a bad habit of pinning financial success on hedge fund managers who ride the Wall Street horse. These fund managers often take on rockstar status and become household names, famed for their prodigious stock-picking abilities. The Main Street chumps see these funds rising and they get FOMO, or the "fear of missing out." So they buy in and bid up stock prices. But it rarely ends well...

As Burton Malkiel explains in A Random Walk Down Wall Street, investment fund managers pop up in the public eye, espousing their latest investment vehicles that will “outperform the market.” People think, “They’re uber-wealthy, so they must know how to beat the indexes, right?” Think again.

Malkiel shows that time and time again, fund managers cannot time the market. They may outperform in the short term because of hype and fanfare, but their funds always come back down to Earth. The public gets starstruck and decides that it’s fashionable, in Malkiel’s words, “to bet on the jockey rather than the horse.”

Take famed hedge fund managers Cathie Wood and William Ackman, for example. Wood’s a multimillionaire who manages the ARK Innovation ETF (NYSE: ARKK), while Ackman’s a billionaire who manages Pershing Square Tontine Holdings (NYSE: PSTH). Both funds are down year-over-year. When the major indexes fall, these hot funds tends to fall even harder.

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ARK is down nearly 60%, with Pershing Square down 21%.

Since the stock market isn’t a horse race  even though it may feel like it from time to time — make sure you bet on the horse because the jockeys get trampled. Slow-and-steady indexing always wins the race.

One more takeaway is that you can determine market sentiment in a sector through fund managers’ portfolios, as the performance of their specialized stock pics tends to reflect and exaggerate current market behavior.

And speaking of Cathie Wood, just last week she dumped a chunk of her Tesla holdings, which previously held the top spot in her investment fund. However, she still maintains a $4,600 price target on the shares.

The current shakeup at Tesla won’t last forever, especially now that Musk is touting the power of his newest batteries that use a little-known mineral as vital to human existence as water. Without it, our lives would change forever.

Though heavily relied upon for farming, this mineral is now being gobbled up by EV makers, including Tesla, Volkswagen, Ford, and Hyundai.

But you don’t have to buy Tesla stock to play the trend.

In fact, there's a sub-$1 company that's sitting on the highest-quality reserve of the mineral right here in North America.

Luckily there’s still time to get in before the masses catch on.

Stay free,

Alexander Boulden
Editor, Outsider Club

After Alexander’s passion for economics and investing drew him to one of the largest financial publishers in the world, where he rubbed elbows with former Chicago Board Options Exchange floor traders, Wall Street hedge fund managers, and International Monetary Fund analysts, he decided to take up the pen and guide others through this new age of investing. Check out his editor's page here.

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