I spent a day this week at Belmont Park, site of the final leg of the Triple Crown. I was with George Bolton, an investment adviser who once owned part of Curlin, winner of the 2007 Preakness Stakes and the current record holder for the most money won by a thoroughbred horse.
On Wednesday, Orient Moon, his 3-year-old filly — a young female horse — was the favorite to win the third race. And for good reason. She was trained by Todd A. Pletcher, who has two horses in the Kentucky Derby on Saturday, and was ridden by Johnny Velazquez, who won the Derby last year. But seconds after entering the gate, she got spooked, threw off Mr. Velazquez and was scratched from the race.
“That’s only happened to me once before,” said Mr. Bolton, who paid $320,000 for the horse two years ago. “In two weeks, she’ll run again. But we would have won this race.”
I concluded after my day at the races that while putting money into moviemaking has its pitfalls, horse racing is probably the passion investment most fraught with risk and emotions. There is the joy of winning, of course, but also the sinking feeling that afflicted Mr. Bolton when his horse threw the jockey. And with the elation of a big victory come the dreams of high breeding fees, but smart owners know that the price paid for a horse has nothing to do with its fate.
“We’ve sold Derby winners for less than $20,000 and a Derby winner for $4 million,” said Nick Nicholson, president and chief executive of Keeneland, the premier auction house for thoroughbreds, in Lexington, Ky., which sold all three winners in the Triple Crown races last year.
Many people who get into the horse world after making money in some other field know that the sport has a high cost of entry. If they’re wise, they will realize there are many ways to make money in the sport that are aboveboard and far from the sordid schemes of racing horses to death at the lowest rungs of the sport.
But if these novice investors are not careful, they can just as easily end up overextending themselves and spending more money than they ever imagined on horses, with little in return.
“The toughest part of my job is to tell successful people attending their first sale that you need to go through a learning process,” Mr. Nicholson said. “All their lives, people have told them you can’t do it this way and they’ve become multimillionaires by going against the grain.”
Mr. Bolton, who grew up riding horses in Maryland, knew enough to know that he needed a plan. He went to college with Bill Farish, whose family owns the top-notch Lane’s End Farm in central Kentucky. He started off slowly in 1989 by buying fillies. He said he thought that if they did not race well, he might still be able to make his money back breeding them.
“I figured with fillies, if she got hurt she might be worth 50 cents on the dollar,” Mr. Bolton said. “That’s better than a colt who gets hurt and is worth nothing.”
The fees to breed male horses — known as colts until they mature into stallions — are where fortunes can be made. A stakes winner could fetch $20,000 to $50,000 a breeding session and be bred with 100 to 150 mares a year. For that fee, the owners of the mares get the foals at a far cheaper price than buying them at auction, along with the hope that the horse will go on to greatness.
This was what happened with Barry Irwin, owner of the racing syndicate Team Valor International. He bought a filly named Dalicia in Germany for $400,000, raced her a bit and then decided to breed her. Her first foal was Animal Kingdom, who won the Kentucky Derby last year. To establish the value of the horse for a syndicate, Mr. Irwin put Animal Kingdom up for sale at Keeneland’s auction for 1-year-olds, or yearlings, and bought him back for $100,000. He said the horse was now worth $6 million.
Still, after three profitable decades in horse racing, Mr. Irwin is cautious when people talk to him about buying horses to make money. “When you write your check to me, you’ve got to kiss that money goodbye,” Mr. Irwin said. “We’re going to do our best. We’re going to try hard. But that money could completely evaporate.”
How someone buys a horse matters for its investment potential. While everyone has a hunch about where and how to find the best horses — Mr. Irwin gets most of his horses from Europe — what all successful buyers share is an awareness of the risk involved with any one horse. These are animals, after all, and this Saturday one or more horses in the Derby will surely be scratched before post time.
In buying, the options are simple: either buy one at a time like a stock picker, or pool your money into a syndicate like a mutual fund that will buy several racehorses — and hope that one big horse offsets the cost of the others.
David DiPietro, a part owner of Orient Moon and a former vice chairman of global equities at Deutsche Bank, said he favored the stock picker approach. “The highs and lows are pretty extreme,” he said. “But I dealt with those in my prior career, so I just move on.”
Mr. Irwin’s racing group, which has a horse called Went The Day Well in the Derby that will be ridden by Mr. Valezquez, is a classic syndicate. People can buy a 2.5 to 10 percent share of any horse, and everyone then pays a portion of the expenses, which can run to $60,000 a horse annually, and gets a portion of the winnings. Mr. Irwin said he made money by marking up the price he paid for the horse, taking 10 percent of the profits and receiving a commission when the horse was sold.
Jerry Crawford, a lawyer, prominent Democratic fund-raiser in Iowa and head of Donegal Racing, a newer syndicate, takes a different approach. He sets up funds that own all the horses he has for a year instead of sharing ownership of single horses.
His first fund owned Paddy O’Prado, the surprise third-place finisher in the 2010 Derby. This year, Donegal’s fund is running Dullahan, a Derby favorite.
Mr. Crawford said he came up with the idea of everyone buying into the seven or eight horses from experience: he remembered buying into a promising horse only to see it fail while an unsung horse from the same farm thrived. “By having one partnership a year, every person has a piece,” he said. “So if we have one big horse in a year everyone wins.”
Still, most investors buy 1-year-old horses. At that age, there are a lot of unknowns in how the horse will perform when it is 3. One hedge is a practice known as “pinhooking,” where individuals or groups buy yearlings and work with them before selling them as 2-year-olds.
One of the odder investment stories in this year’s Derby is that of Union Rags, another favorite, which has been owned twice by Phyllis Wyeth, owner of Point Lookout Farm and wife of the artist Jamie Wyeth. She sold the horse as a yearling for $145,000 in 2010 because her accountant told her she needed to book a profit that year. A year later, she bought him back for $390,000 at a 2-year-old sale.
“She had this gut feeling about this horse,” said Braxton Lynch, co-owner of Royal Oak Farm, where Union Rags was born. “Little did she know the horse was going to earn $1 million racing.”
In the year she didn’t own him, Eddie Woods, a pinhooker in Ocala, Fla., broke, trained and profited from Union Rags.
“It’s a crazy business,” he said. “The ones for $1 million usually don’t show up at the Derby. You never know where these horses are going.”
He said he broke even or made money about 75 percent of the time, and that attracted investors. The day before we spoke, though, Mr. Woods said he sold a horse for $30,000 that he had bought for $100,000.
Of course, what would a story about horse racing be without a tale of high risk and high reward? In 2007, Mr. Bolton and two partners acquired Curlin, who was 3 and had just won his first race by a 12 3/4 lengths.
They bought him for an undisclosed sum, widely estimated to be $3 million to $4 million. Curlin went on to finish third at the Derby, first at the Preakness Stakes and second at the Belmont Stakes. Nine months after buying him, Mr. Bolton sold his stake at the height of the horse bubble, with Curlin’s value estimated to be near $50 million.
“When your horse is worth more than your house,” he said, “you have to sell.”