horse-racing

This story originally appeared on CanadianBusiness.com

This September, thousands of hopeful horse racing enthusiasts will descend on Keeneland, Ky., home of the world’s largest thoroughbred auction house. Over the course of 11 days, 3,604 one-year-old horses are up for sale. Here, racing’s high rollers spare no expense for a possible Kentucky Derby winner, and everyday Joes can seek out a stable star for a bargain. Intermixed are buyers like Edmonton’s Cory Wagner, who is finding success in the industry through an investment strategy known as “pinhooking.”

Read: Place bets on racehorse investing

Similar in concept to flipping real estate, pinhooking involves purchasing year-old, untrained racing prospects, breaking them to race, and selling them for a profit as race-ready two-year-olds at auction the following spring. Think of it as preparatory school for the ponies. Two-year-old-in-training sales offer buyers the best chance to see a horse’s potential before its first race. And buying a horse at racing age eliminates most of the costs associated with getting a horse to the track. For pinhookers, while the stakes are high (it costs roughly $25,000 to board and train each horse for the sale), the rewards can be higher.

“I’m arbitraging people’s patience. I’m taking a risk that someone is going to spend some money on a race-ready horse,” explains Wagner, who also co-founded the investment education website investopedia.com and sold it to Forbes Media in 2007.

As founder of thoroughbred investment syndicate Affirmed Bloodstock, Wagner saw a 22% return on investment in 2011 after selling 11 horses acquired the previous year. Affirmed typically offers its horses to outside partners, but retains a share. This year he made headlines after selling a two-year-old he owned in partnership for US$435,000.

These days, the pinhooking market is strong. The recession gave way to reduced foal crops, which has increased the demand for quality stock. Over the past decade, the number of two-year-old-in-training sales has risen, Wagner notes, a symptom of racehorse investors’ looking for a quick route to the winner’s circle.

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According to thoroughbred publication The Blood-Horse, in 2012 pinhookers’ rate of return (over the time they owned the horses) was 83%, up from 72% last year.

And for Canadians, investing in racehorses just became more tax-efficient. In August, the Supreme Court of Canada ruled that taxpayers who devote a “significant emphasis” to farming activity that is subordinate to their primary source of income are no longer limited to the $8,750 deduction limit under Section 31 of the Income Tax Act for losses from business ventures such as thoroughbreds.

But sellers must still be in tune with the market to make a profit. “It’s tough to pinhook certain sires,” admits Wagner, referring to a horse’s pedigree. And in this buy-low, sell-high gamble, knowing a horse’s value and setting the right reserve price is key, otherwise “you’re left holding the bag,” he adds. Moreover, developing young horses so fast can be hazardous, and the smallest of training setbacks can prevent a youngster from even making it to the sale.

But it’s this game of chance that excites entrepreneurs and horsemen like Wagner. “There’s a lot of interesting stuff that leads up to selling the horse. They’re only in the sales ring two minutes, but it’s a bit of a poker game.”

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Originally published on Advisor.ca

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