Why 2022 Has Become The Kentucky Derby Of Investing

In the race to investment success, you can learn a lot from the Sport of Kings

Today’s Kentucky Derby, horse racing’s most well-known event, is an unmistakable metaphor for so many things I see in the current investment markets. First, let’s review those markets, then the metaphors. That way, if you happen to be watching the race today, maybe it can help you put 2022’s frantic markets into perspective.

For help with the racing part, I called on a rising star in the racing industry, Ashley Mailloux. Ashley works for 1^st Racing, whose businesses include racetracks like Gulfstream Park (where I interviewed Ashley this week for her insight) and Baltimore’s Pimlico, where in 2 weeks, the Preakness, second leg of racing’s Triple Crown, will take place. Ashley’s commentary, both on the nature of the sport and today’s race, is incorporated below.

We are at one of those rare moments in time where historic, memorable events will occur. For owners, trainers and jockeys in the Derby, its about what is commonly known as “The Most Exciting 2 Minutes In Sports.” For investors, the stakes are even higher: these are exactly the kind of stock and bond markets where fortunes are lost and made, where retirements are secured or reversed. Let’s examine why:

· The bear is in the “walking ring,” so to speak. The walking ring is where horses parade around before a race, so that bettors can see how they are looking and acting. This is also where “riders up” is called, and the jockeys hop aboard. Bear markets in stocks and bonds are essentially here. But in terms of where we are along the way from the walking circle until the race is over, we are probably just getting started.

· Here’s why: the chart of the S&P 500 Index is still just in a trading range, albeit a decided downward-focused trend that started back on January 4. The big deal here is that the angle at which the market fell keeps getting sharper. That’s just not a good atmosphere for optimism. If the recent range breaks down (roughly below 4,000), the next downside target is…make sure you are sitting down…first 3,700, then…wait for it…2,000. There’s a lot more for bulls to prove before our intermediate-term bearish stance can be negated.

· What to do about it? Take a lesson from what jockeys and trainers will be doing to get the most out of their horses in the Derby today. In fact, racing and professional investing have similar “chains of command” to pursue success. Investment strategists set the broad perspective and track larger trends, just like a trainer gets a horse ready, but leaves the actual race strategy to the jockey, once the starting gate opens. In that sense, the jockey is more like a portfolio manager, navigating a moving market.

What does that make the horse in this analogy? The 20 horses competing in the Derby this year essentially make up the “market” that bettors can “invest” in for all of 2 minutes. Just as the markets offer a variety of choices to place your money, the same can be said for any race, but especially one with 20 3-year-old horses entered. That’s 2-3 times the size of a typical race field.

And, like the markets of today, a Derby victory may have a lot to do with what Ashley referred to as “tactical” moves made by each jockey/horse combination. As someone who is best-identified as a “tactical” investor, I like that label. Because if there is any investment strategy that is ready to be put out to stud, its buy-and-hold investing. That doesn’t mean you should become a day-trader. But as with the riders later today in Kentucky, 2022 is a time when having a gameplan, but being willing to adjust in mid-stream is essential to finishing “in the money,” so to speak.

When it comes to race-time tactics, some horses want to beat others to the lead, while others like to chase and catch the leaders before the finish line. There are also conditions like weather, which can be notoriously rainy on Derby Day sometimes. Just as many investors have not seen a true bear market in stocks or bonds, many entered in the Kentucky Derby have not dealt with inclement weather, 19 other horses around them, a crowd of perhaps 100,000 or more, or myriad other unique factors that greet them on this first Saturday in May.

For an investment portfolio, the ETF market has made so many tactical and hedging tools available to investors, if they don’t avail themselves of these tools, they might as well back out of the starting gate and stay behind as the race starts. Because they are not likely to earn competitive returns for the next several years.

For some quick highlights on some of the competitors in the 148^th Run For The Roses, here’s more from racing industry executive and expert handicapper Ashley Mailloux (post positions in parentheses):

· Simplification (13): will hang back, likely “stalking” the pace and let others battle for the lead, then try to chase down the stretch.

· Epicenter (3): strong chance to win, but in a 20-horse field, a post toward the inside is typically a disadvantage. Ideally, you’d want a horse in the 5-15 range, but since post times are drawn, not chosen by the competitors, it’s a luck factor. Epicenter’s style of running makes the post somewhat less of a concern.

· Zandon (10): the early favorite to win, but his 3-1 odds imply that this is a wide-open race.

· White Abarrio (15): a South Florida pairing of jockey Tyler Gaffalione and trainer Saffie Joseph Jr., should stay relatively close to the pace, and have a chance.

· Barber Road (14): at 30-1, is one of the more intriguing longshots in the field, as he’s the type of horse than may let the aggressors battle it out in front of him, then “pick up the pieces” down the stretch as the others tire.

So, enjoy the Triple Crown Races: the Kentucky Derby, The Preakness on May 21 and The Belmont Stakes in June. And more importantly (unless you are in the racing business), treat today’s market environment as a challenge along the lines of winning a 20-horse race. These are not the markets of the past, and every investor needs to not only take notice, but navigate their way through unprecedented economic and market conditions. Its no time for horsing around with your investment portfolio.