RISKY RIDE : Big Returns on Small Investments Are an Exception in Horse Racing

When it comes to instant millions, everyone seems to remember the Seattle Slew story.

The colt was purchased for a mere $17,500 and went on to win the 1977 Triple Crown. Slew was then syndicated for millions and has continued to be a money machine at stud for Three Chimneys Farm outside Lexington, Ky.

There are other thoroughbred success stories.

Mercedes Won, a leading 3-year-old, was purchased for $5,700, but has already won more than $600,000. Devil’s Bag, purchased for $325,000, was sidelined for the 1984 Triple Crown because of a leg injury but was still syndicated for $36 million. Conquistador Cielo, the 1982 Belmont winner, was bought for $150,000 and had a first-year stud value of $36.4 million.

While horse racing gives the appearance of an industry of big returns on a small investments, it actually is just the opposite. For every winner, there are eight to 10 losers--some carrying price tags in the hundreds of thousands of dollars.

Last year, Secretariat’s son Risen Star, the winner of the Preakness and Belmont, had one third of its syndication rights sold for $14 million. Meanwhile, a Secretariat gelding, Ft. Clark, sold for a mere $1,000 at California auction after an unsuccessful racing career.

Many of the big-money returns also came before the horse market went into a skid three years ago--a fact the inexperienced investor seldom takes into consideration.

“It’s super risky,” said Leland Faust, a San Francisco attorney and investment counselor. “It’s on the extreme of investments. Even if it is done properly, it’s risky. A lot of people get into the industry with the thought of making a fortune and really don’t check it out. It’s an industry you really have to know to invest in.

“So many things can go wrong. A horse can have the appearance of a winner, but never make it to the gate because of an injury.”

A thoroughbred--unlike a stock--needs daily care, feeding and training. Costs can mount of so quickly that the horse can literally eat its owner out of house and home.

An investor can hedge his potential losses by putting his money in a company like Centennial Farms Management Co. The Boston firm sells limited partnerships--consisting usually of a half dozen or so horses--in its $12 million stable of 30 horses.

“Don Little (Centennial’s founder) has racing in his blood and he saw a definite need in the marketplace for a company like this,” said Sara Cohen, Centennial’s executive director. “The marketplace was ripe and the purse structure was such that you could make serious money in horse racing.”

Centennial’s investors, who put up between $15,000 and $50,000 apiece, share the winnings and split the proceeds when the horses in the limited partnerships stop racing.

Last year, for example, Centennial’s Silent Account--which won $480,475 in its racing career--was sold for $410,000. The investors in the limited partnership that included Silent Account split up the $890,475.

However, Cohen says the company gives no illusions to the investors.

“We lay it right on table at the beginning,” she said. “The horse business has a great deal of risk attached to it. We tell them we will try to minimize the risk to the best extent possible.”

Centennial cuts its risks by buying into only the successful bloodlines and by purchasing a number of fillies. “There are ways to minimize the risks,” Cohen said. “We buy into the top end of the market. Historically, the greatest overall returns have been with the best bred, best conformed horses.

“We also put together programs that have a number of horses in them, usually five to seven race horses. So all the investor’s money is not in one horse. We also put a substantial amount of money into fillies. A filly may not be a winner on the track, but she can become very valuable as a broodmare.”

Currently, the company has about 350 investors.

While not as risky as investing in a horse, buying shares in a thoroughbred farm still comes with some dangers. Case in point is the ongoing Spendthrift Farms Inc. trial in San Francisco federal court.

In 1983, a group of investors was lured by the thoughts of big returns by buying into Spendthrift Farms -- a Kentucky thoroughbred institution. Ironically, Seattle Slew was the star of the farm’s breeding stock.

The offer attracted 14 individual or groups who invested $12 million in stock shares. Among the investors was fashion designer Calvin Klein and his partner, Barry Schwartz; Washington state lumber tycoons George Layman Jr. and Sr. and Zenya Yoshida, Japan’s leading thoroughbred breeder.

The investors say they were defrauded. The defense claims the investors filed the suit as “sour grapes” and should have known the risk. A federal court judge will decide later this month who is right.