ZED Run Purchase Error #2: High ROI Horses
Introduction & Recap
This is a second in a series of articles that examine common missteps I have seen in the market when it comes to prices paid. In this series I dissect these errors and show why not paying attention to price could be seriously undermining your stable’s profitability.
If you missed my first article on how to value a horse, I recommend reading that first here.
If you missed the first in this series breaking down the most common error when buying horse, you can read that here.
For those that are caught up, let’s dive into it!
Error 2: Higher ROI = Better Returns
Another common refrain in the ZED discussion forms, “I’m only looking for high ROI horses.” My take on this statement is if a person is looking at a 10% ROI horse vs. an 8% ROI horse on Hawku, they would bias towards purchasing the horse with the higher ROI with the belief that it will recoup their investment faster. I will breakdown how this line of thinking, though intuitively correct, falls short when deep diving your expected returns.
Let me start by saying that we all want high ROI horses and should err towards purchasing those with higher ROIs. However, there is a major deficiency in only looking to buy high ROI horses based on the information reported on Hawku and Know Your Horses. These systems only report ROI based on entry fees invested, not on the total investment which includes the cost of the horse. The true ROI of a horse needs to account its purchase price, total entry fees, and total profit. The formula looks like this: ROI % = [Total Profit] / ([Purchase Price] + [Total Entry Fees])
This calculation allows us to derive the real ROI of any horse in the game, even the now common “∞ %” horses in the market with the addition of free daily tournaments with payout. For those that are evaluating their own bred horses, you can substitute [Purchase Price] with [Breeding Cost] to derive the real ROI.
Let’s take a look at a practical example. Imagine you are looking to buy one of the horses below:
Notice here, the only difference between these horses is their price points and their reported ROIs, which only take into account their entry fees. These prices are close enough together that a lot of buyers would opt towards shelling out the extra $200 for High Roller due to their perception that the higher ROI will allow them to get their money almost twice as fast than if they bought Jamie Diamondz. However, without analyzing this information much further we cannot be sure that High Roller is the better purchase.
To determine how quickly we will make back our investment we will first need to determine our projected cash flows from these horses. We do this by determine the projected payout per race for each horse. You read how to do this in detail in my previous article, so I will show the outputs here without walking you through each step.
Knowing that we only get money when we place 1–3, we need to determine how often we expect to finish in these three positions, as well as how often we will lose, then multiply by the payout for each of these finishes; currently 6x entry fee for 1st, 3x for 2nd, and 2x for 3rd, and nothing for any other position.
For simplicity’s sake, if we assume a $1.00 entry fee, we know what we will get $6.00 for every 1st, $3.00 for every 2nd, $2.00 for every 3rd, and lose our entry fee for every position below third. Multiplying these payouts by their expected probabilities yields the following expected payouts per race:
This level of analysis shows us that each horse will statistically produce the same amount of winnings in the long run. In this example, we see that for every dollar we put into racing, we can expect to get a dollar in payout, a 100% return on the entry fee. Phenomenal! These horses are definitely worth the money, but which one will yield the highest returns?
Let’s look at a hypothetical month of racing these horses 10 times a day for 30 days in $2.50 races and see how the returns look on Hawku and KYH:
So here again, we see that these horses are projected to provide the same amount of ROI based on their entry fees. This makes sense given that the expected return on each dollar of entry fees was a dollar, a 100% ROI for each horse.
Now, here’s where the horses start to differentiate themselves as investments. If we now take into account the purchase price of the horse we begin to see differences in returns:
Factoring in the purchase price of the horse, we now see that High Roller yields the lowest ROI, and Zero Down and Jamie Diamondz provide the same ROI. Why is that the case? It is because factoring in the higher cost of High Roller increases the size of the denominator when dividing out your total profit (i.e. larger denominator = small percentage for the same profit). Since Zero Down and Jamie Diamondz cost the same, their total denominators are the same and thus they provide for the same real ROI.
Ok, so now you see that there are only 2–4% differences in the monthly return of these horses, so what? The so what is that you make your money back on your initial investment ~17% faster if you bought Zero Down or Jamie Diamondz than if you bought High Roller:
Ok, so I get my money back 8 days faster if I bought the cheaper horse, what’s a week to me? Well, if you plan on continuing to play the game then it makes a huge difference:
By the end of the fourth month, you can see that you would have returned 3x your initial investment into Jamie Diamondz and only 2.5x your investment into High Roller. Play their stats out over a full year and you have made 9x your investment with Jamie Diamondz, compared to 7.5x with Higher Roller. Now imagine that every time you doubled your money you used it to by another horse comparable to Jamie Diamondz and, well…you see multiples of these multiples in returns.
Hopefully this article further hammers home the point that the price you pay is the critical factor when buying a horse of any given caliber. As we saw here, horses the same on every level except their reported ROIs yield vastly different returns when you take their purchase price into consideration. All else being equal in projected cash flows, err towards paying a lower price to increase the chances of getting your money back out of the horse either through racing or reselling into the market. A lower price point for a given level of performance will always be a safer bet than paying more for a horse of similar caliber.
If you have questions on how to value a horse or are interested in us doing an analysis for you, please contact us at RainierRacingCo@gmail.com and we will get back to you within 24 hours.
Pricing & Valuation Resources
Rainier Racing Co. — Check us out to get market data and read our ZED Run Market Reports. Use our Transaction Screener to get an idea of the prices you should expect to pay for a given Bloodline, Breed, Genotype, and racing stats.
Hawku — Use to find new listings, screen for similar transactions, and review racing statistics.
Know Your Horses — THE place to do a deep dive on your horses and other stable owners.
Zed Ranks — Great place to get a rough estimate of a horse’s value.
StackedNaks — See your horses statistics ranked against other in the game.
ZED Run — The game!