Given it is Melbourne Cup day, we thought we’d share a special horse racing edition of our monthly Basis Points newsletter.

1-in-250 Australians own shares in a racehorse.¹ While there are plenty of reasons you may want to own a racehorse, expected return is not one of them.

Australia is quite unique in the horse racing world in that ownership of horses is so widely distributed. More than 100,000 Australians own race horses outright or as part of a syndicate.

To celebrate the Melbourne Cup, we wanted to dig into the numbers and understand if horse racing is a good investment.

All information is taken from the Racing Australia Fact Book 2024.

There’s plenty of money in horse racing

Australia is a lucrative country for racehorses, hosting 19,199 races annually. The total prize money allocated to racing in 2023/24 was more than $1 billion ($1,035,727,379).

For the 2023/24 season, the total number of unique individual horses racing in Australia was 28,935:

• 16,767 did not win a race

• 7,453 won 1 race

• 3,099 won 2 races

• 1,616 won 3 or more races

In terms of prize money:

• 1,333 did not earn anything

• 11,757 earned $1-$10,000

• 14,132 earned $10,000 - $100,000

• 1,550 earned $100,000 - $500,000

• 163 earned $500,000 or more

The average racehorse earned $35,794. The median racehorse sat in the $10,000 - $100,000 range.

What does a racehorse cost?

Yearlings are the most common entry point for buyers, with 4,854 sold in Australia in 2023/24. Prices varied wildly, with the most expensive going for $10 million (the Pierro, a Winx foal). However, the average selling price was $119,457.

Beyond the upfront cost, owners should expect to spend north of $50,000 per year in ongoing costs – from training frees, vets, transport, stables and everything else involved.

Can it make a return?

When the average maintenance cost is higher than average annual earnings, this is a pretty simple question to answer. Sure, there are some great stories. We’ve all heard of someone winning big (just this weekend, I [Ren] was playing golf with someone who’s colleague held a stake in a Melbourne Cup winner).

But the overall numbers tell the story: buying a stake in a racehorse is like buying a lottery ticket.

So, from all of us here at Equity Mates, enjoy the race but don’t buy a stake in a racehorse. And if you do, certainly don’t think about it as an investment.

In keeping with our Melbourne Cup theme, we asked some advisers how they’d respond if a client told them, "I want to invest in a racehorse"

Alex Luck, Everest Wealth:

I’d tell them that racehorses eat money faster than they run – but if it’s a passion project, let’s just make sure it doesn’t trample your long-term investment plan.

 Dylan Pargiter-Green, Bold Wealth:

If a client told me they wanted to invest in a racehorse, I'd say:

“Investing” is a strong word here. Yes, there are the stories of those who put $5,000 toward a horse with no name and ended up winning a few group ones on the way to a day out at Flemington, but for every one of those stories, there are hundreds that don’t make it. The stats suggest it’s a bad investment, but not necessarily a bad time. I wouldn’t suggest personally to invest for financial reasons, I’d say invest because it’s something you enjoy being a part of, and if it makes you happy, then its no different to buying a new set of golf clubs every couple of years and hitting 110 (again).

In summary:

• Treat it as entertainment, not investment – It's the financial equivalent of a day at the track: fun, exciting, but don't bet the house on it paying off.

• Expect to lose money – The odds of making a profit are about as slim as picking the winner in Race 7. If you get a return, consider it a bonus.

• If you’re keen, set a strict budget – Only use money you’re genuinely comfortable losing (think: “fun money” bucket, not your super or kids’ education fund).

• Enjoy the ride – The stories, the stable visits, the group text threads – that's where the real value is.

Luke Laretive, Senaca Financial:

Based on the fact you’ve said “investing” I’m going to assume this isn’t for fun or a hobby or a social thing. It’s designed to generate wealth for your family.

On that basis, it depends on who the client is. I suspect telling Tony Šantić he shouldn’t invest in racehorses is a bit different to telling Sandra the hairdresser from Caloundra or Barry the builder from Brighton not to invest in racehorses. However, it’s not what I do with my money, it’s not what we are good at Seneca and from what I’ve seen, there are very few people who are consistently good at generating competitive returns from horse training/racing.

It’s not dissimilar to industries like hospitality, funds management, podcasting, drop shipping, real estate ‘flipping’ and professional sports (among others) – a lot of people like the idea of it, many people try, very few succeed. Those that do succeed get put on a pedestal, while those who fail are rarely spoken about and usually, the win-loss ratio is not measured. Everyone wants to be the exception to the rule, but usually without doing anything/being exceptional. You might turn out to be exceptional (or exceptionally lucky)… but probably not.

Personally, if I’m going to deploy capital to high risk/high return opportunities, I want to be in control and active in the success (or failure). I’m not ‘investing’ in someone else, I’m investing in myself and I’m doing so because others have been willing to invest in me, in the same/similar way, for many years. That’s the long way of saying if I’m starting a business, I’m not doing something I haven’t already done successfully before, for a business I don’t own. Entrepreneurship and small business if crazy, volatile and unpredictable enough… The only variable I’m changing is who pays the bills each month.

Matt Ingram, Northhaven Financial Management:

Makybe Diva, the only horse to win three Melbourne Cups, was ridden by the father of a childhood friend of mine, the same friend who always seemed to have a better skateboard and a newer video camera than the rest of us. A quick Google search years later explains why: horse racing can be a seriously profitable business… for the very few who win the big races.

Of course, not all of us can ride the horse, so people often “invest” by buying shares in racehorses through a syndicate, hoping to claim a slice of the prize money. And while that sounds exciting, it’s worth putting into perspective.

Let’s say you buy into a syndicate, wherein around 80% to 90% of prize winnings go to the owners of the horse. Based on Melbourne Cup prize money of several millions of dollars, it could be very profitable. However, the cost of ownership, training, and upkeep can run well into the tens of thousands each year. And the odds of winning? Well, 70% of racehorses earn under $50,000 in a season and 40% earn less than $10,000. In fact, excluding the top feature races (given how difficult they are to get into), the return on an ‘average’ racehorse is a little over $25,000 per season. This is not to say you won’t earn any prize money, and I’m sure it will feel great when you do, but given the cost to buy and maintain the horse (feeding, training, transporting, etc.), you would be lucky to break even. That’s not to mention the emotional toll – both the highs and the lows – that would come with the investment.

Now it’s clear how I could easily draw a comparison to the stock market (in favour of the latter), so I will spare the details. But one point worth mentioning is that the Australian stock market has delivered positive returns in approximately 80 of the last 100 years, with the accumulation of positive years far outweighing the few negative years. Regardless of the magnitude of the return, those odds far exceed the chances of simply breaking even on a racehorse, let alone making a profit. Sure, an ASX200 index fund is not as flashy as a trophy and a photo finish, but your odds of coming out ahead are far better.

Have 3 of Australia’s 4 major banks lost their competitive advantage?

Are private markets an illusion?

Have we been measuring risk all wrong?

In the latest episode of Basis Points, we speak to Tim Carleton, founder and CIO at Auscap Asset Management, and he does not hold back.

He unpacks the flaws he sees in how private markets are valued, questions the sustainability of private credit and declares that three out of the four Big Banks in Australia have lost their competitive advantage.