The Ramblings of an Investor in the Sport of Kings - Value, What is it? 1st November 2011

In this Ramblings note I want to try and answer the question of value as it pertains to the horse racing. What does it mean? I’m not sure. I do know that some of the so-called  experts in the horse racing game tend to bang on about this value stuff, but I don’t think they understand what it means either. My problem is that I can’t see how value and horse racing can go together. I have a sneaking suspicion that like the term ‘analysis,’ people use the term value in a vain attempt to impress others with their knowledge. We’ve all heard it; the value horse in the next race is ‘such and such’. Ok, but why is it the value horse? They don’t tell you that. If they mean something like, ‘such and such’ a horse is a chance to win at long odds, why not state that?

I understand that trust, integrity, and honesty are highly valued commodities of a great friend. If you’re in a relationship, I understand that if you break one of the aforementioned, then it’s probably out the door for you. I understand that there’s no value in that, especially if it happens to be a cold winter’s night. I understand what Warren Buffett means when he says, Price is what you pay; value is what you get. He of course is referring to the share market and the purchasing of shares. I understand value as it applies to all of the above.

I also understand this. If you buy a race horse and it wins more prize money than the cost of its purchase price; that’s been a value buy. The more prize money the horse wins above its purchase price, the greater the value. I get that, it’s simple to get. But that’s not what people mean when they mention value in the same breath as horse racing.        

Let’s take a romp though the dictionary and see if this will help us understand the term, value. The word value is defined as: 

• Relative worth, merit, or importance.
• Monetary or material worth, as in commerce or trade.
• The worth of something in terms of the amount of other things for which it can be exchanged or in terms of some medium of exchange.
• Equivalent worth or return in money, material, services.
• Estimated or assigned worth; valuation.
• Not one of those definitions has anything to with a horse race or a race horse. No help from the dictionary.

Many years ago, I asked a number of people who liked to spruik on about a value runner or the value bet in a horse race, what they meant exactly. Most couldn’t answer the question which I thought was interesting, to say the least. Others tried to answer the question, but only confused themselves by attempting to talk about something they couldn’t explain. I came away none the wiser on value, but certainly wiser in knowing that people who talk about value in reference to horse racing would appear to be using the term to impress others. To me, they’re like peacocks trying to mate, they fluff out their tail feathers as if to say, ‘My tail feathers are the best. Come and get it on with me.’ Seeing as I couldn’t see the value for me in mating with any of the previous mentioned people, nor could I see the value for me in attempting to mate with a peacock, I went searching the meaning of value elsewhere. To the best of my knowledge, the aforementioned people are still holding down jobs, so I guess there was no value in their value. Reference the peacock, there are some things my wife just wouldn’t understand.

I searched high and low for the answer to my question. I looked under cupboards, in drawers, in the garden, in other people’s houses, I asked horses, I asked intelligent friends, ‘Help me I screamed, what is meant by value in a horse race.’ No one could help. This concerned me greatly. A lot of people use the term, but no one knows what it means. Hello Houston, we have a problem.

Like the leading actor in a Dan Brown movie, I continued on with my quest to find the answer. I was on a mission to find the Holy Grail. The Holy Grail of racing, what the hell is meant by the term value?

I finally stumbled upon where the term may have originated from, I think. The term value is an old handicapping term. It goes back to the days of the legendary Pittsburg Phil. Pittsburg Phil, aka George Elsworth Smith (1862–1905) was gambler and horse enthusiast in the USA in the 1800’s. His racing Maxims, published posthumously in 1908 are considered to be the foundations of many modern handicapping strategies and formulas.  

There we have it, it’s do with handicapping systems which for reasons beyond me, some people like to call ratings these days. It’s handicapping, call it what it is. Handicapping race horses assigns a numerical value to a horse’s chance of winning a horse race. In short, the horse with the higher numerical value is assessed as having the best chance of winning the race. Handicapping methods were made popular in Australia in the 1960’s, predominately on the back of the writings of Don Scott in his books, Winning, the Winning Way, and Winning More, and also a book titled the Relative Weight Handicapping Approach by Rem Plante.

Once every horse in the race has its numerical figure allocated, each numerical figure in a race field is converted to betting odds. This is done by converting the horse’s number to a percentage figure, and finally converting the percentage figure into an odds figure. As most bookies betting markets are set in a range between 105% and 120% of the field, the handicappers or the ratings guys will do the something similar with their odds. If they believe that a horse’s chances of winning the race are at say 8/1, and they can obtain 10/1, they’ll call it an overlay, and back it, as it represents value. Or maybe they call it an underlay. If the same horse is at 5/1 they won’t back it as it’s doesn’t represent value. A couple of points here if I may:

• I’d rather back a 5/1 winner instead of a 10/1 loser, especially if I’ve assessed the 5/1 horse as the best in the field.
• The only lay I’m interested in has absolutely nothing to do with a horse.    

The ratings folks would also try and have us believe that they have designed some unique or specialised way to win. Rubbish. All the ratings people have done is to copy the ideas on the weight/ratings scales that were set out in the 1960’s, make a few modifications such as adding in speed ratings and other superfluous information such as where a horse should be positioned in the race (neither of which work), and they then pass this off as their own brilliant ratings design. At university we called acts such as these, plagiarism. In the horse racing game, it should be called illegal.

I don’t like handicapping a horse race. Handicapping is not Form Analysis, the two are very different. Handicapping relies on a set of given numbers that are usually derived from looking at the last run of a horse, or the second last run. For example, one beaten length equals 1.5 kg of weight. Handicapping is too stringent for me; anything that allocates a number is something that is governed by rigid rules. There is no room for your own assessment. Form analysis, when done correctly gives you room to assess and conclude with a likelihood of an outcome. Say the handicapping guy has assessed a horse on it last run and its second last. He’s discounted it from further calculation, as it number is not high enough. A Form Analysis guy will assess the same race and the same horse and may ‘load up’ on it, as his analysis tells him that the horse usually needs three to four runs to reach its peak. While the Form Analysis guy is counting his winnings money, the Handicapping guy is busy drying his eyes with a couple of tissues.

As I’ve mentioned on my website and in previous Ramblings, I run my betting operations as a serious business, and the business of making money is serious stuff. Therefore value from my perspective is not about handicapping a horse or a horse race. I couldn’t care less about what magical equation is going to give the value bets in a horse race or two. I’m not after the value, I’m after the winner. My value is expressed as the Return on Investment (ROI) I achieve over two business quarters, four business quarters and a couple of years. You see, that’s investing.

To conclude let me say that as far as I’m concerned, the term value as it pertains to horse racing, is a nonsense term that is totally irrelevant, in every possible way to the outcome of the race. It’s tough enough to get in front, don’t make it any tougher by looking for value, look for the winner, that’s where you make your money. By the way, Pro-Punters analyse form, they don’t handicap or rate.

Until next time

Good punting

Hayden