The Parallels Between Investing and Punting

Melbourne Cup Day!

I love the horse races at this time of year. It’s the only time I punt. I usually start on Cox Plate day, and finish up with the McKinnon Stakes at the end of the Melbourne Cup Carnival.

For what it’s worth, I’ll give you a few tips for the big race in a moment.

But right now, I want draw your attention to the parallels between investing and punting on the horses. At least there is the way I do it.

First, let’s start with investing. The investment process I use in my Crisis & Opportunity investment advisory uses a combination of fundamental and technical analysis to pick stocks.

That is, I’m looking for stocks that have good fundamental aspects (whether it be cash flows, industry positioning, good valuation, or what have you) AND where the chart looks healthy. A healthy looking chart indicates that money is flowing into the stock, which in turn supports your analysis of the fundamentals.

Put another way, I want to buy into a company where the share price is trending higher. While this is not a fool proof investment method (there is no such thing), it is a way to put the odds on your side. And successful investing is all about putting the odds on your side.

Investing is a numbers game. You’ll make plenty of bets in your investment career. If you can make bets using a system that you know increases the odds of being right, you’ll come out ahead over the longer term.

An investment approach helps get results

Now, as you know, punting on the horses is all about odds.

I find that using a system similar to my investment approach usually gets results.

Having said that, I punt once a year for a few weeks. So the system is hardly tried and true. But hear me out anyway, and see what you think.

When it comes to fundamentals, I’ll do a bit of research but will mostly let the market guide me. That is, I don’t look at rank outsiders in the hope of getting a win on long odds.

I’ll seriously consider the top few favourites. That’s because the market — people with much more idea than me — has done the work and cast its vote. So I’ll take strong note of that.

I got some good results on Cox Plate day using this method. And backed it up again on Derby Day. For example, I backed the favourite in the Tab Stakes, Osbourne Bulls, on the nose at $2.80. The market was telling me it was a very strong chance, and, being a sprint, I thought it was worth a crack. It won.

In the Lexus Stakes I backed the second favourite, A Prince of Arran. The trainer was very confident going into the race and $4.40 for the win; it was a pretty good price. That was two from two.

For the next race, there wasn’t a clear cut favourite so I went for some value with Encryption, paying $17 for the win and $4 for the place. I should’ve sat it out, but that’s what two wins from two punts does to you! So I gave some back in that race.

I gave the next race a miss and waited for the Derby. I’d done a bit of research on this during the week. The favourite, Thinkin’ Big, was too short given it had an easy run in its last win. I didn’t like the odds, given the form.

I thought Chapada was primed for the run and at $16 for the win, and $4.20 the place, it was worth an each way bet. It was a case of what could’ve been…

Chapada had no luck and could not get a run until late in the piece. It stormed home for third, so that was some consolation. But a win at $16 would’ve been much better. Keep an eye out for this horse. He’ll win plenty of races.

So Derby Day was a good one. A combination of listening to the market and looking for value where appropriate served me well…as it does in the stock market.

Having said that, I’ll probably hand it back to the racing gods in the Melbourne Cup today.

My top three picks for Melbourne Cup

With that in mind, here are a couple of tips for you to take or leave.

The favourite, Yucatan, deserves it. I’ll probably have a few bucks on it for the win. The second favourite, Magic Circle, is also a quality horse, although it hasn’t raced since May. It’s a stayer though so can run the distance. I’ll have some on it, too.

For some value, I like Youngstar. Currently showing $15 for the win and $4.50 for the place.

They’re my top three.

Apart from that, watch the market movers closer to race time. This tells you where the money is going, and is akin to watching a stock price break out.

Following the money doesn’t guarantee you a win, but it does improve your odds of victory.

Happy punting!


Greg Canavan,
Editor, Crisis & Opportunity

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

Money Morning Australia