Using Lessons from Picking Horses to Pick Better Stocks

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Casual horse racing fans often follow the Kentucky Derby and Triple Crown races, but little else with more than a passing interest. However, the true professionals study the sport year-round. Recognizing angles and developing the base of knowledge to more accurately predict likely winners in future races takes time and commitment.

For those who find success in picking horses, many of the same techniques apply to make some money in the stock market. Here are several principles from successful horse racing that can also use be used to build a winning investment portfolio.

Observe Trends That Make Winners

This is the whole point, right? In both horse racing and the stock market, the idea is to take home more money than you brought to the table. Unfortunately, we tend to get greedy, and it’s tempting to pick the underdogs simply because of the potential for a higher payout. In most cases, this is a mistake.

When investing, the best stocks will continue to provide you with positive returns long-term. For example, beverage giant Coca-Cola (NYSE: KO) has delivered annual returns to investors that average 12% over 30 years.

While individual thoroughbreds certainly don’t race for 30 years, similar principles apply in horse racing. For example, winners of the Kentucky Derby have most commonly come into the big race on 2 to 3 weeks of rest. Horses who last raced outside of that range historically have much lower odds of winning.

Consistently following daily horse racing results and observing trends with certain horses and tracks will also improve a bettor’s odds over the course of a racing season.

Diversify Your Picks

If you’ve ever put all of your money on a single horse and lost, you probably learned that this isn’t a sound long-term strategy.  An experienced bettor will diversify and hedge their bets. If you are playing a Pick 3 or Pick 4, for example, you can achieve this by selecting multiple combinations of horses to win. You’ll want to use a similar strategy with your stock picks. Avoid placing all of your investment in one stock or even one industry.  To truly diversify, pick several diverse mutual funds or ETFs in different sectors.

Avoid Jumping on “Inside Tips”

Have you ever received a “tip” on a horse that didn’t quite pan out? After losing on a couple of long shots, you probably stopped taking such scoops so seriously. You’d do well to use the same approach to investing. While you can get some valuable stock analysis from investment experts, be leery of “inside information” on stocks for several reasons. The first is because there is often a hidden motive, such as a commission, attached to pushing a stock. The second is because insider trading is illegal and could land you in jail.

Factor in the House’s Take

When you place any sort of bet, you have to figure in the race track’s cut, which could be as much as 25%. The higher the house’s take, the lower your winnings. The same principle applies to investing. If you invest in mutual funds, there are management fees. If you trade individual stocks, there is a transaction fee, which could be as low as $3.00 per trade or $0.005 per share.

Don’t Bet More Than You Can Afford to Lose

Gambling can be stressful if you’re putting money on the line that you need for other purposes. The same goes for investing. There is no such thing as a sure thing in horse racing or the stock market, so don’t bet more than you can afford to lose in either circumstance.