As the two-year-old sale season begins, we thought it might be useful for those who haven’t had the experience of attending a thoroughbred auction in person to read a little more about the process. Of course, nothing beats being there, which is why every year we encourage people interested in racehorse ownership to join us for an eye-opening experience.The OBS March sale is the premier two-year-old sale of the year, with horses sold in all price ranges but focused on higher priced-quality horses. Over the years, Kenwood has been successful finding value priced horses that “fall through the cracks” here (and elsewhere). There are also sales at OBS (Ocala, Fl.) in April and June, Keeneland (Lexington, Ky.) in April, and Fasig-Tipton in Maryland in May, which collectively comprise the vast majority of the 2yo thoroughbred auction market.

If you’ve never attended a sale in person, you might naturally assume the process begins by analyzing pedigrees. Every year around this time, we receive multiple emails like these two actual examples:

“Hi Robb, I’m just checking in ahead of the April sales. I’m sure your initial list is very long but let me know if there a few horses (even if it’s 100+) that are already on your radar so that I can check them out on paper in advance. Thanks, Jim”

“Hey Robb... Book came today for the sale. I'll be reading it tomorrow. I know everything is secret, but if you can give me a heads up on numbers I should look at, it would be nice. I know you already are evaluating. It will give me more time to do my due diligence. Thanks, Jeff”

In reality, the bulk of the decision making and analysis by skilled buyers is made AT the sale grounds, based on how the horses move on the training track and appear upon physical inspection, rather than beforehand based on catalog pages – pedigrees.  Pedigree matters, but generally buyers use pedigree to narrow the list down after watching horses work and inspecting them in person. You are buying a living, breathing animal, not a catalog page!  To the extent the catalog is used prior to the sale, it’s frequently to eliminate horses out of the buyer’s price range or with pedigrees that are in some fashion unacceptable no matter how well a horse moves. In other words, in a sale like OBS March with about 700 horses listed, Kenwood Racing might eliminate a couple of hundred from consideration prior to our arrival at the sale grounds. The way skilled buyers actually ‘work a sale’ is part of the education process and why attending in person is so valuable. Of course, it’s essential to carefully review the sales catalog and other written information prior to the sale, but only rank amateurs use that information as their starting point. Keep in mind also that it’s a sales catalog. In other words, the catalog is a vehicle to sell horses, it contains condensed information designed to highlight the best features of a horse’s pedigree. If you want a comprehensive look at pedigree you need to employ additional information available for purchase through various independent sources.

At the sale, the main work is done by buyers over a period of days, long before the first horse walks into the auction ring, by what is usually a team of several people working together to cover a lot of ground. At least one member of the team is on hand for the under-tack show held the week prior to the sale, where each two-year-old is required to post a timed work (usually 1/8 or 1/4 of a mile). It will take 2-4 days depending on the number of horses cataloged for this to take place and a serious buyer will either be there for that entire time themselves or employ a ‘clocker’ to attend on their behalf, or at a minimum view all the workouts on video. The workout times mean a lot less than how the horse does it and how it gallops out afterwards, something that can best be observed in person.  The works can be viewed on video afterwards for the duration of the sale. Typically members of the team will view the works live and then again on video. It is at this point that the initial “check list” people ask about is usually created. You are trying to buy a horse that runs fast; how it actually moves on the track is the first step.

The second step is for the team to physically inspect every horse that made the initial check list. This will take many hours and a lot of walking; frequently the team will split up into two groups for the initial look to save time and see as many horses as possible. This part of the process is called “short listing”; the goal is to eliminate the large number of horses that have sub-par physical conformation and are unlikely to withstand the rigors of training. Remember, it’s one thing to look good going 1/8^th of a mile, it’s entirely another thing for a horse to have ability and remain sound going much longer distances for years to come. This part of the process takes at least 1-2 days, at which point you will have a “short list” of horses that merit more detailed inspection and analysis. Now is when the pedigree comes into play, as well as other factors such as the reputation of the sales consignor and the people who raised and/or own the horse. The team will typically make a second visit to view each horse on the short list that has a reasonable shot of falling within whatever budget the buyer is working with, at which point they will do an even more thorough inspection of the horse and perhaps ask questions of the consignor. More horses will fall off the list for various reasons through this process and the remainder will end up on a “final bid list”. Those horses will then given to a vet the team works with, who will look at x-rays in a repository as well as inspect the horse itself. Typically a significant percentage of horses on the final bid list will be eliminated by the vet due to issues on the x-rays, scope, etc. The remaining horses that have passed all the above screens will then be ranked by the team, estimates will be made as to likely prices, and a decision made as to which horses to bid on and how much to bid. If you are working with a budget, the order of the sale plays an important role. For example, if you like hip #20 but love hip #s 50 and 200, do you buy #20 at a fair price or pass in hopes you’ll be able to afford one or both of the horses you like even better selling later on in the sale?”

It's absolutely essential to understand the economics of the business when attending a sale. The only way to have a shot to make money is to not overspend, even for horses you love. Purse monies, even including the value of quality horses for breeding upon retirement, simply do not support paying top dollar for the supposedly 'best' horses at sales. As many of our previous blog posts explain, the majority of the highest priced horses at every sale end up being duds on the racetrack. Spending millions does not guarantee you will end up with an allowance horse, let alone a major graded stakes winner.

When you have a horse that’s a bust on the racetrack, it’s a disappointment, however much or little you paid. People find it hard to believe that so many horses don’t make it as racehorses; even ones with amazing pedigrees who worked like lightning bolts at the sales and people paid millions of dollars for frequently never get to the winner’s circle. This is how performance athletics works, human and equine. How many young men dream of earning millions on the national stage in the NBA or NFL and how many actually make it? The race records year after year at all sales demonstrate how hard it is to win races, no matter how much you are willing to spend.

Sales companies and syndicates with a product to sell are happy to showcase top horses winning grade 1 stakes. They aren’t lying, every year a handful of horses end up being superstars, but they certainly aren’t giving you the entire picture either. If they said “less than 3% of all horses will win a stake at some point in their career, less than 1% will win a graded stake and about 10% will be profitable” it would be truth in marketing. No matter how much you pay and no matter how promising a horse appears before they run, you are going to find that 20-25% will end up unraced, another 20-25% will race but never win, and most of the rest will be modest priced claiming horses. Almost all of the horses that end up to be profitable runners will be horses purchased for $150,000 or less, simply because the economics of the business (purses vs. training expenses) with very few exceptions don’t support paying more than that for any horse (let alone paying millions for a sales topper). Our friend and business partner, Ralph Pastore, recently made a statement in an email that sums up exactly the reality of this game; “My Philosophy is to Expect minor wins and Hope for lighting to strike eventually”. Really, you can’t explain this business any better than that.

So how far do you go when the time comes to raise your hand in the bidding ring?  That’s a question each buyer confronts at every sale and a large part of the answer lies in your budget and your goals. If your budget is unlimited and you are doing this for purely sporting results with no concern about financial returns perhaps it doesn’t matter if you overpay for what you really want. Then again, the results for sales toppers indicate you still are likely better off paying $100,000 each for ten nice prospects than $1,000,000 for the ‘best’ horse in the sale if your goal is a really good horse on the racetrack. 

What about if you DO care about the financial results, at least to some extent? The key is having the discipline to limit your purchases to a price range where IF the horse IS successful on the track you will make money. This, more than perhaps any other factor, is the difference between a racing stable run as a business, and pure entertainment with no real chance of any financial return.  

One year at the OBS April 2 year old sale, Kenwood’s top pick was a colt by Exchange Rate (a sire we love) out of a nice Include mare. A late April foal, he moved beautifully on the track and seemed to be just coming into himself. In short, he ticked all the boxes. Our trainer shared our enthusiasm, as did another one of his clients. We agreed to bid on the horse as partners, thinking we might be able to purchase him for $120,000 - $150,000. When he came into the ring, it became apparent several other prospective buyers shared our opinion of his potential and the bidding quickly went past Kenwood’s limit of $150,000. Our trainer and the other partner kept going, and eventually the horse was hammered down to them for $225,000. Much as we absolutely loved the horse, the numbers say that paying over $100,000 - $150,000 for almost any colt makes little economic sense. We liked this particular colt so much we were willing to stretch the budget quite a bit, but we just didn’t see how the economics worked at $225,000.

All of us were correct in our evaluation of the colt; who went on to break his maiden at Del Mar, place 2^nd in a Grade I stake and win a grade III stake at Santa Anita, earning $285,000 in a fine career ended by an injury and retirement at age three. No doubt the colt was a racing success but from a purely economic perspective, we saved a lot of money by passing on him at $225,000. Take 10% each for jockey and trainer out of the total earnings and you are left with about $230,000. Figure another $60,000 in training expenses for a year + and you are left with $170,000. Add in insurance and stakes nominations and you end with a profit of roughly $150,000, enough to have likely broken even at our $150,000 limit but a substantial loss at $225,000. Of course, all of the above numbers assume no markups of any kind on the horse; end users in a syndicate with the usual 100% - 200% markup would have likely seen a total loss of their investment  even with a horse who ended up to be a graded stakes winner! Bottom line, when you come up with one of the top 1% of racehorses in the country and still lose money obviously something isn’t working, at least on a business basis.

This horse was an obvious success story. The problem is, even a grade III stakes winner has no value at stud; unless a horse wins a major grade one stake and has pedigree to boot, when its racing days are over you have a riding horse, so you have to make the purchase price back on purse money alone. It’s a little different with a well-bred filly; given potential residual broodmare value IF successful on the track, you might make a case for paying more in some situations.

One of Kenwood’s trainers and a long-time personal friend used to say whenever we were looking at paying top dollar (for us!) at public auction for a prospect we really liked “it’s a long way down the elevator”. What he meant was, since the majority of top prospects given to excellent trainers end up to be claiming horses at some level (assuming they make it to the winner’s circle at all), if you pay a lot going in you are bound to lose a lot on the back end with the vast majority of horses you purchase. If you buy a horse for $40,000 - $100,000 and it turns out to be a decent claiming or allowance horse, you have a shot to get most or all of your money out. If it turns out to be a major stakes horse you have not only have a sporting success, you’ve actually made serious money that will help pay for your less successful runners. Remember that the majority of stakes winners at almost every auction venue year after year do not come from the sales toppers, but rather are sold for $150,000 or less, many-most for well under $100,000. As stated above, how high you bid depends on your budget and your goals. If the financial results matter, how many times you put up your hand for the horse you love at the sale is the difference between a racing stable run as a business with a shot at a profit, and a money pit.

This is just an overview of a very detailed and complex process. Suffice it to say, a lot more goes into selecting a racehorse at a sale than looking for black type on a catalog page.