Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Speculative Investment: Risk and Return Evidence From Thoroughbred Auction Markets Pinhooking is a speculative investment where investors assume a risk position in the purchase and resale of Thoroughbred horses. Thoroughbred auction markets provide a unique data set to analyze investment risk. This study estimates the profitability of weanling to yearling pinhooks sold at the Keeneland September Sale using three years of sale data. Maximum-likelihood estimates of probability distribution parameters show that expected pinhooking profitability follows a log logistic distribution. Profitability is highly sensitive to reserve not attained, (RNA). A restriction against all RNA sales results in statistically significant expected positive investment returns. The results illustrate substantial investment risk is associated with pinhooking investments, but identifies market segments with positive expected returns. Key words: Speculative investment, Thoroughbred, risk, Value-at-risk 1 Speculative Investment: Risk and Return Evidence from Thoroughbred Auction Markets A subset of the Thoroughbred auction market provides data to analyze speculative investments. An investment strategy known as “pinhooking” is a repeated sale market involving buying young horses through public auctions, holding them for an investment/production period, and then reselling the horses through public auction sales at a later date. Pinhooking originated as an investment strategy in the 1970s when industry participants, began the practice as a means of generating extra cash flow to supplement their primary racehorse operations. Pinhooking activity expanded in the 1980s with the emergence of pinhooking specialists, who made buying and selling Thoroughbreds their primary business. In recent years pinhooking activity has expanded, and today it represents an important price leader in the Thoroughbred market. Anecdotal reports identify individual pinhooking investments yielding substantial economic returns. However no study has empirically evaluated the range of returns from all pinhooked horses in a sale. Economic studies have empirically estimated the profitability of speculative investments in specialized markets such as vintage wines (Ashenfelter) and art (Agnello; Mei and Moses) and identify characteristics under which these investments yield positive returns in an investment portfolio. The purpose of this study is to empirically evaluate the risk and returns to Thoroughbred weanling to yearling pinhooking speculative investments. The Thoroughbred Pinhooking Market Thoroughbred auctions are well-established markets that have received some academic analysis. Karungu, Reed and Tvedt; Buzby and Jessup; Chezum and Wimmer, and Vickner and Koch developed Thoroughbred yearling price models. Neibergs and Thalheimer developed a structural model of the Thoroughbred yearling market. Neibergs developed a hedonic model of 2 Thoroughbred broodmare characteristics. Neibergs and Vinzant developed maximum likelihood estimates of racehorse earnings and profitability using claiming races. To date academic studies have not evaluated Thoroughbred pinhooking markets. Pinhooking Pinhooking is a speculative investment where a horse is purchased at auction for resale at a latter date. Agents purchase horses that they perceive to be undervalued at the purchase point, or that they expect will increase in value when sold thus generating a positive return. Commonly weanlings are pinhooked as yearlings. The most common time frame of a weanling pinhook is to purchase a weanling in Keeneland’s November Breeding Stock sale, and after a ten month holding period resell the horse at Keeneland’s September yearling sale. These two sales represent the largest sales of Thoroughbred horses in the world. A second pinhooking investment alternative is to purchase weanlings or yearlings and place the horses into physical training as race horse prospects to resell them as two-year-olds in training. The capital facilities and labor inputs required to condition a weanling to yearling are much lower in comparison to other Thoroughbred market segments. Two-year-old in training pinhooks requires extensive capital facilities and labor to condition and train these horses for re-sale. Further, two-year-olds in training are tested physically in terms of time trials prior to sale and a substantial price premium is paid for speed. This increases investment risk because physical ability is tested, the process of training increases the likelihood of injury, and there are increased capital and production costs. Risk and returns are significant in both pinhook markets but this study restricts its analysis to weanling to yearling pinhooking investments. 3 Figure one presents a time line of average nominal weanling and yearling prices. In terms of pinhooking investments, weanling prices are primarily determined in November of year t, and yearling prices determined in September of year t+1. Then given yearling price signals in year t+1, weanling pinhook purchases are made in November of year t+1 for sale in September of t+2, thus establishing a continued cycle of investment and sale price discovery. Figure 1 presents bloodstock market trends in average weanling and yearling prices and price margin1 from 1990 to 2004. As shown in Figure one, from 1990 to 1998 there was a fairly steady price margin of about $10,000 in average yearling over weanling prices. This represents the increase in price on average that weanling to yearling pinhookers seek to profitably invest in. There has been a sharp increase in price margin from 1999 to 2004, which increased to about $20,000 in 1999 to over $30,000 in 2004. Although Figure one reflects average price margins, actual pinhook investments and profitability are made on individual animals and their characteristics. The variation across individual pinhooks creates investment risk and the examination of this variation is the basis of this paper. At the time when a weanling is sold most of its individual characteristics have been established. Pedigree characteristics are reported and publicly disclosed at the point of purchase. There may be changes in pedigree desirability between the points in time of purchase and resale as a sire’s offspring racing performance is established as better or worse than expected at the point of purchase, or if siblings of the individual purchased have better or worse than expected racing performance. Physical attribute characteristics are not publicly reported, but weanling to yearling pinhooks have less physical variation than yearling to two-year-old in training pinhooks, because of the measured physical performance required at two-year-old in training sales time 1 Price margin t = average yearling price t – average weanling price t-1 4 trials. Conformational characteristics identified in a weanling will be incorporated into the purchase price and will likely remain incorporated into its selling price. However, since yearlings are not physically tested, the extent of the conformational weakness’ effect on performance may remain disguised. Economic rationality is a key assumption of modern economics. Thoroughbred bloodstock investments have long been characterized as high-risk, unprofitable investments and in individual cases questioned the economic rationality of its investors. Thoroughbred investments negative profitability expectations have been enhanced by industry analysis that group horses of all quality classes together and report a high probability of negative profitability. For example, industry reports indicate that only thirty-nine percent of the pinhooked weanlings and short yearlings to the Keeneland 2002 September yearling sale were profitable (Biles). However this aggregate analysis does not account for variation in investment returns or differences in: weanling/yearling quality characteristics, points of original sale, length of ownership, or the impact of RNA on the profitability estimates. Reserve Not Attained (RNA) Reserve not attained is a condition of sale2 that allows the owner/agent of a horse entered in a sale to specify a minimum price, below which the horse will not sell so no transfer of ownership occurs. The owner/agent can set the reserve price directly with the auction company, or an owner/agent can actively bid on the horse as it is being auctioned. In the case where a reserve price is submitted to the auction company, the horse enters the sales pavilion where the 2 Conditions of sales are the rules and laws that govern the sale. It sets commercial law dictating all terms of transfer and dispute. Kentucky state law, KRS 330.210 and 355.2-328(4) allows an owner or its agent to set reserves and buy back a horse offered at auction. 5 bidding occurs. The auctioneer is provided the reserve price and will make a best effort to sell the horse above the reserve price. Bid prices above the reserve price result in a sale and a transfer of ownership. In the case where bidding falls short of the reserve price, the auctioneer acts as if the horse is sold when the bidding stops and the horse leaves the sale pavilion and returns to its assigned stall. The publicly reported sales results identify the last bid price and note the horse as not sold or RNA. The owner/agent can then sell the horse privately at the stall. The owner must pay the auction company a sales commission either on: the reserve price set with the auction company, in the case where the owner/agent is actively bidding the last bid price the horse received in the sale, or the private sale price of the horse sold at the stall with the sale and transfer of ownership disclosed through the auction company. The appropriateness of reserve prices has been questioned because owners may overvalue their horses and set an unrealistically high reserve price. In this case the final bid price may be an accurate valuation of the horse, and the owner has the option to drop its reserve and accept the final bid. Or potentially, horses may be entered into a sale to establish market value and the horse owners bid up the price to establish a higher than appropriate market value on a horse. Or alternatively, the yearling has a higher expected value based on its individual characteristics than the final auction bid price achieved at the sale. This would indicate that the reserve set by the owner is appropriate, and identifies a market inefficiency on this particular horse. In all cases, a RNA sale represents an economic cost to the owner. Owner management strategies can impact the role of RNA’s. Owners may sell their horse without reserve because they want to divest that horse. Owners may overvalue their horse relative to current market conditions. Other owners may be interested in maintaining a minimum market value of a pedigree line and are willing to pay the commission rate as a form of 6 advertising. Economic gamesmanship occurs in establishing reserves and buy backs. One of the aspects of this paper is to empirically evaluate the effect of RNA on pinhooking profitability. Weanling to Yearling Pinhooking Profitability Model Pinhooking investments provide a unique opportunity to analyze speculative investments. All of the data necessary to calculate profitability are publicly disclosed: the initial purchase price of the weanling, the terminal value of the investment from selling the yearling, and the number of days in-between purchase and resale to estimate production costs. Pinhooking profitability can be specified as: (1) πi = YSPi (1-c-s) – WPPi (1+t) – DiR - FC Profit, πi, from the ith individual pinhook investment is the yearling sale price, YSPi, net of the fixed commission rate charged by the auction house to sell the yearling, c and the sales agent commission, s. Keeneland charges a 4.5 percent commission rate. Most owners use sales agents that charge a 5 percent commission fee. The initial investment cost is the weanling purchase price, WPPi, plus the state excise tax, t, of six percent.3 There are several points in time, where weanlings/short yearlings can be purchased as pinhooking investments. Production costs depends on the number of days between weanling purchase and yearling sale, Di, times the day rate to maintain the yearling for sale, R. The day rate is $17.67 from time of purchase until the last 21 days before the sale when the day rate increases to $26.26. There is a fixed cost, FC of entering a horse to the sale for the catalog fee and conformation x-rays required for the x-ray 3 Horses are subject to tax unless they are transported out of state. 7 repository, of $1,420. The pinhooking investment’s return on investment, ROI can be specified as: (2) ROIi = πi / WPPi Data Sources and Analysis Procedures Several sources of data are required to estimate the model. The Blood-Horse Auction Edge provides information on horses cataloged in a sale. It identifies if the horse is a pinhook investment, the sale where purchased, the purchase amount, and if the prior purchase was a RNA sale. The Keeneland sale catalogs provide hip number and sale day. The Blood-Horse magazine reports yearling sale prices and yearling RNA sales by hip number. The commission rate, catalog fees and the tax rate are fixed parameters obtained from secondary sources. Daily production costs were obtained through expert opinion. Sale data was collected for three years from 2001 through 2003 for weanling to yearling pinhooks sold at the Keeneland September yearling sale. The Keeneland September sale is the largest sale of Throughbred yearlings in the world. The data are reported and analyzed in nominal terms, because of the recent time frame of the study years, Thoroughbred day rates and production costs were stable over the study period, and for ease of comparability to industry market reports and sale summaries. Pinhooking Risk and Return Characteristics The majority of the pinhook investments were purchased from the Keeneland November sale. Table 1 summarizes the sources of weanling purchases. There were 1,435 weanlings or about 70 percent of the pinhook purchased at the Keeneland November sale, followed by the 8 Keeneland January and July sales with 291 and 52 purchases. Keeneland sales account for about 87 percent of the purchase locations of the pinhooked horses entered in the Keeneland September Yearling sale. The remaining 13 percent come from Fasig-Tipton sales in Kentucky and from other sales around the country. Table 2 identifies the number of horses sold as pinhooking prospects controlling for RNA status over the three year study period, 2001 to 2003. The greatest number of pinhooking prospects were cataloged in 2001, but after controlling for RNA classification the number of yearling sales per year are similar. Yearlings that were entered into the sale, but failed to go through the sale are called outs and there were 217 outs in the data set. A total of 2,054 horses over the three year data set went through the Keeneland September sales. Analyzing the prospects based on RNA classification shows that 712 pinhook prospects entered the sale with a RNA on WPPi and 515 pinhook prospects were RNA’d on YSPi. There were 184 sale prospects with RNA’s on both WPPi and YSPi. There were 1,011 prospects were reported as sold on both WPPi and YSPi. The RNA designation is a critical factor because it dictates the data set of horses entered into the profitability model. Some studies do not include horses that RNA, because they consider those horses not to represent an actual sale. Other studies include RNA horses in the sale data, because they consider the RNA price as representing the last competitive bid. ANOVA Analysis of Profitability Table 3 presents ANOVA results testing mean profitability and ROI by year controlling for RNA. The null hypothesis for the ANOVA tests are one-tailed tests of profit and ROI being less than 0. The test of mean profitability of all 2,504 horses combined of $-1,661 against the 9 null hypothesis of, π < 0 cannot be rejected. Yearling pinhook profits for the combined group are not statistically greater than 0. However, by continually increasing the restriction on RNA, the profitability of pinhooking investments increase. Excluding yearlings with a RNA on both WPPi and YSPi, leaves 1,870 yearlings with an average profitability of $495 for all three years combined. Although average profitability is positive it remains not statistically greater than 0. Excluding yearlings with a RNA on YSPi, results in 1,539 yearlings with an average profitability of $3,990 and a ROI of 5.2 percent. Profitability is significantly greater than zero at a ten percent level of significance. The case of excluding all yearlings with a RNA on WPPi, results in 1,342 yearlings with an average profitability of $3,039 and a ROI of 9.0 percent and both are significantly greater than zero at the ten percent level of significance. The most restrictive case where all RNA yearlings are excluded results in 1,011 yearlings with average profitability of $9,913 and a ROI of 21.1 percent which are both strongly significant at a one percent level of significance. By individual year, 2003 had profitability significantly greater than zero for all classifications of yearling sales. The largest weanling to yearling price margin occurred in 2003, as previously presented in Figure 1, and partly explains the high profitability of this year. For 2001 and 2002 profitability was significantly greater than zero for only the most restrictive case excluding all RNA sales. Table 4 illustrates positive expected returns for pinhooking investment exists for horses that do not RNA. Figure 2 presents a histogram of pinhooking profitability combining the three years of data after controlling for all forms of RNA’s, and Table 4 presents the corresponding profitability results comparing profitable versus unprofitable pinhooking investments. Both the figure and the table reveal that by number, there is a higher probability of loss. Of the total 1,011 pinhooks evaluated, 42.1 percent were profitable and 57.9 percent had a negative profit. For 10 profitable investments the average gain was $56,431 and the average ROI was 165.6 percent. The average loss for unprofitable investments was -$25,207 and the average ROI was -84.1 percent. There is a higher probability of an unprofitable investment, but the variability of positive returns is greater than losses. Table 5 analyzes profitability by day of sale to evaluate pinhooking investment return by quality. The sale is organized so higher quality horses sell at the beginning of sale. Horse quality declines as the sale progresses. The day sale average shows a generally decreasing trend by day of sale having a sale average of $321,153 on day 1 which decreases to $6,683 by day 13. Average profitability and ROI is tested against the null hypothesis that π < 0, by day of the sale, for those horses without a RNA. Days two through five and day seven show that on average pinhooking investments had profitability significantly greater than zero. Day one had a positive average profit of $50,016, but due to variance in individual investments, it was not found to be significantly greater than zero, although for day 1 the ROI of 25.1 percent was significantly positive. For days 1 through 5 and 7, the average ROI ranged from 25.1 to 144.2 percent over the holding period and in each case was significantly greater than 0. The holding period for the majority of pinhook investments from purchase at the Keeneland November sale to the Keeneland September sale is approximately, 310 days so reported ROI’s would have to be adjusted upward to compare to an alternative investment annual rate of return. The early days of sale produce strong returns for investors that can bear the investment risk and have the financial capacity to invest in this market segment. Days 8 through 13 of the sales show unprofitable investments on average but have profitable individual pinhook investments throughout this quality range. 11 The quality of the weanling purchased is directly related to the likelihood of pinhooking profitability. Table 6 reports average profitability and ROI of pinhooking investments grouped by quality as measured by weanling purchase price WPPi. The greatest likelihood of a profitable pinhooking investment occurred in the $20,000 to $100,000 purchase price range. The quality range is divided into two groups, $20,000 up to $50,000 and from $50,000 up to $100,000. Both groups had profitability and ROI significantly greater than zero. The ROI for these groups were 29.6 and 24.8 percent respectively. This quality range had high average weanling purchase price to yearling sale price appreciation which is profitability’s only revenue determinant. Higher quality weanling purchases, with WPPi above $100,000 had positive average profitability, but were not found to be significantly greater than zero. Limited value appreciation and the potential for substantial devaluation negatively affected the profitability of this quality group. The largest investment losses found in the data set were in this quality group due to devaluation. Weanlings purchased for below $20,000 had the lowest profitability levels and were also not found to be significantly greater than zero. An ANOVA analysis tested for differences in profitability between colts and fillies. Results presented in Table 7 show that colts were substantially more profitable than fillies. Colts had an average profit of $14,501 versus $1,934 for fillies, and an ROI of 44.1 versus -10.4 respectively. Tests of the null hypothesis that profit and ROI were less than 0, were rejected for colts at a one percent significance level, but could not be rejected for the fillies. The null hypothesis that mean profitability and ROI between colts and fillies are equal is strongly rejected, indicating that colts have significantly greater profitability than fillies. This may in part be due to colts have greater race earning potential than fillies so investors are willing to pay more for colts than fillies. There is also a substantial return for colts that are successful race horses that end up as stallion prospects. 12 Although very few colts end up as stallions, almost all fillies have breeding value potential as broodmare prospects. Owners of fillies may be more willing to overvalue and set a high RNA on fillies to capture the fillies expected breeding value. Fillies that RNA’d, had a higher average weanling purchase price, WPPi of $47,980 versus the average filly WPPi for those that sold was $42,108. Conversely the average yearling selling price, YSPi was lower for RNA fillies, $46,876 versus $59,058 for those that sold. This combination of high purchase price and low selling price can be explained in part through owner overvaluation and contributes to the lower profitability of fillies versus colts. There was also a larger increase in the average yearling sale price over the average weanling purchase price multiple for colts versus fillies, 1.62 versus 1.40 respectively for sales without any RNA. Maximum Likelihood Estimates of Profitability and ROI Distributions Analysis of stochastic investment outcomes frequently requires modeling investment risk with estimated probability distribution functions. Maximum likelihood estimates of the distribution function parameters best describing the mean and variance of profit and ROI are presented in Table 8. The results indicate that both profit and ROI are best modeled using a loglogistic distribution function based on χ2, Kolmogorov-Smirnov, and Anderson-Darling goodness of fit statistics ranking twenty-six alternative distribution specifications. The loglogistic distribution has larger tails and a higher kurtosis than a normal distribution, which means that more of the variance is due to infrequent extreme variations from the mean. Figure 3 presents the estimated distribution functions for π and ROI respectively. For both profit and ROI, all three goodness of fit statistics are statistically significant at a one percent level or greater. The distribution’s estimated mean and standard deviation for both π and ROI are less than the calculated input data indicating that the estimated distribution parameters are less sensitive to the maximum values in the data. 13 The estimated value at risk, VaR, is reported in Figure 3. VaR, is a financial analysis tool that estimates an investment’s expected gain or loss at a specified level of confidence, commonly the five percent lower tail of the distribution. It is used to measure the downside risk of a potential investment or portfolio. Examples of VaR models include Pritchett et al analyzing risk management strategies for corn and soybean producers, Schnitkey, Sherrick and Irwin analyzing multiple peril crop insurance and Manredo and Leuthold analyzing cattle feeding margins. The five percent VaR for pinhooking profit is a loss of -$72,340. Conclusions This paper constructs a data set from Thoroughbred bloodstock auctions to examine the profitability of weanling to yearling pinhooking investments. It complements the existing empirical literature examining Thoroughbred bloodstock markets, and identifies the importance of RNA classification on expected pinhooking profitability returns. The results find positive expected profitability and return on investment for pinhooking investments without an RNA and empirically quantifies important market characteristics for the sex of the horse, the quality classification of weanlings by purchase price and the day of the sale. Probability distribution functions were estimated and present an effective method of communicating the investment risk profile of the pinhooking investments analyzed. The results provide evidence of positive economic return of Thoroughbred pinhooking investments and provide an empirical counter argument to the stereotypic characterization of horse investments as unprofitable and not economically rational. Segmenting just profitable pinhooks found average profitability to be $56,431 with an ROI of 165.1 percent over a ten month holding period. The highest quality horses were not found to be the best investment 14 group due to limited appreciation and substantial devaluation risk. The greatest likelihood of profitability is found with weanlings purchased from $20,000 up to $100,000. The strongest value appreciation was found in this quality group. For investors with financial capacity and who can withstand the investment risk, pinhooking may provide a diversification role in an investment portfolio in addition to a utility return from owning a Thoroughbred horse. Additional work is needed to develop a hedonic model of individual horse characteristics that contribute to profitable pinhooking investments. References Agnello, Richard J. “Investment Returns and Risk for Art: Evidence from Auctions of American Paintings”, Eastern Economic Journal, 28-4(2002):443-463. Ashenfelter, Orley, “How Auctions Work for Wine and Art”, Journal of Economic Perspectives, 3-3(1989):23-36. Biles, Deirdre B., “Rally Cry: Final week of Keeneland September Sale Shows Middle Market has Remained Strong”, The Blood-Horse, 38(2002):5344-5349. Buzby, J.C. and Eric.L. Jessep, “The Relative Impact of Macroeconomic and Yearling-Specific variables in determining Thoroughbred Yearling Price”, Applied Economics, 26-1(1994):1-8. Chezum, Brian and Bradley Wimmer, “Roses or Lemons: Adverse Selection in the Market for Thoroughbred Yearlings”, Review of Economics and Statistics, 79(1997):521-526. Karungu, P., M. Reed and D. Tvedt, “Macroeconomic Factors and the Thoroughbred Market”, Journal of Agricultural and Applied Economics, 25(1993):165-173. Manfredo, M. and R. Leuthold, “Market Risk and the Cattle Feeding Margin: An Application of Value-at-Risk”, Agribusiness an International Journal, 17-3(2001):333-353. Mei, Jianping and Michael Moses, “Vested Interest and Biased Price Estimates: Evidence form an Auction Market”, Journal of Finance, 60-5(2005):2,409-2,434. Neibergs, J. Shannon, “A Hedonic Price Analysis of Thoroughbred Broodmare Characteristics”, Agribusiness: An International Journal, 17(2001):299-314. 15 Neibergs, J. Shannon and Richard Thalheimer, “An Economic Analysis of the Effectiveness of Thoroughbred Breeder/Owner Incentive Policies”, Journal of Agricultural and Applied Economics, 31(1999):581-592. Neibergs J. Shannon and Patrick L. Vinzant, “Maximum-Likelihood Estimates of Racehorse Earnings and Profitability”, Journal of Agribusiness, 17(1999):37-49. Pritchett, James G., George F. Patrick, Kurt J. Collins, and Ana Rios, “Risk Management Strategy Evaluation for Corn and Soybean Producers”, Agricultural Finance Review, 641(2004):45-60. Schnitkey, G. D., B. J. Sherrick, and S. H. Irwin, “Evaluation of Risk Reductions Associated with Multi-Peril Crop Insurance Products.” Agricultural Finance Review, 63-1(2003):1-21. The Blood-Horse Auction Edge, Keeneland September Yearling Sale, The Blood-Horse, 2002. Vickner, Stephen and S. Koch, “Hedonic Pricing, Information and the Market for Thoroughbred Yearlings”, Journal of Agribusiness, 19-2(2001):173-189. 16 Average Keeneland Sale Prices and Pinhooking Margin 120,000 100,000 80,000 60,000 42,828 40,000 34,565 34,067 28,614 20,003 21,051 20,000 10,626 9,214 7,948 9,546 9,987 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 71 -4,487 1993 1991 1990 0 1992 3,126 -20,000 Weanling Yearling Price Margin Source: www.keeneland.com/livesales Figure 1. Bloodstock Trend of Keeneland November Weanling and September Yearling Average Prices. 17 500 Frequency 400 300 200 100 Mean = 9192.552057368932 Std. Dev. = 81528.12599287946 N = 1,011 0 -400000 -200000 0 200000 400000 600000 800000 1000000 Profit Figure 2. Histogram of Pinhooking Profitability. 18 Estimated Probabilty Distribution Pinhooking Profitability X <= -72340 X <= 87675 5.0% 95.0% 0.01 Probability 0.0075 0.005 0.0025 0 -400,000 -200,000 0 200,000 400,000 600,000 800,000 1,000,000 Profitability $ Estimated Probability Distribution Pinhooking ROI Probability X <= - 2 0 7 5 .0 % X <= 2 4 6 9 5 .0 % 0.0021 0 -1,000 -500 0 500 1,000 1,500 2,000 ROI % Figure 3. Maximum Likelihood Estimate Probability Distributions. 19 Table 1. Weanling Pinhook Investments Point-of-Purchase. Sale Name Number Keeneland November 1,435 Keeneland January 291 Keeneland July1 52 Ocala Breeders Sale October 63 Fasig-Tipton November 43 Fasig-Tipton February 63 Ocala Breeder Sale Winter 43 EAS December 24 Arkansas February 8 Miscellaneous sales2 32 Total 1 2 2,054 The Keeneland July sale was discontinued in 2003 These sales represent 13 sales spread out over the 3 year study period. Table 2. Summary Number of Pinhook Prospects Description Total Pinhook Prospects Cataloged Number of Outs Number of Horses Going Through Yearling Sale Prospects with an RNA on WPPi Prospects with an RNA on YSPi Prospects with an RNA on both WPPi and YSPi Prospects reported as sold on both WPPi and YSPi 2001 926 84 842 2002 657 72 585 2003 688 61 627 Total 2,271 217 2054 336 230 96 232 147 58 144 138 30 712 515 184 372 264 375 1,011 20 Table 3. ANOVA Tests of Mean Profitability and ROI Controlling for RNA status Year1,2 RNA Group Description 2001 2002 2003 Total -1,661 -4,236 -7,072 6,845** 4.5 -5.3 -23.4 10.1 627 2,504 842 585 Exclude Yearlings with RNA on -1,973 -4,290 7,803** 495 both WPPi and YSPi -18.7 16.1 6.9 -0.7 746 527 597 1,870 *** 1,769 -2,134 12,254 3,990* Exclude all Yearlings with an -15.7 21.1 17.0** 5.2 RNA on YSPi 612 438 489 1,539 Exclude Yearlings with RNA on -531 482 8,649** 3,039* * * WPPi -10.0 31.0 12.8 9.0* 506 353 483 1,342 6,144* 5,669** 14,697*** 9,913*** Exclude all Yearlings with an ** *** -1.9 44.3 27.6 21.1*** RNA on either WPPi or YSPi 372 264 375 1,011 1 The top number is the mean profit ($), the middle number is the mean ROI (%) and the bottom number is the group’s n. 2 ANOVA Ho: π < 0 or Ho: ROI < 0 Reject Ho at significance level *** 0.01, **0.05, *0.10 All Horses Going Through Yearling Sale Table 4. Comparison of Profitable and Unprofitable Pinhooks Profit (π) n average std. deviation 426 56,431 102,278 Profitable (π > 0) 585 -25,206 32,704 Unprofitable (π < 0) ROI (%) average std. deviation 165.6 351.7 -84.1 75.0 21 Table 5. Average Profitability and ROI by Day of Sale for Pinhook Yearlings Without an RNA Mean Mean Day Sale Mean Profit1 ROI1 Day n WPPi ($) YSPi ($) Average ($) % π ($) 1 38 233,579 336,500 321,153 50,016 25.1** 2 36 139,417 245,056 363,901 67,233*** 94.1*** 3 84 97,387 173,798 129,722 47,114*** 144.2** 4 78 75,160 122,353 105,898 24,128** 69.5*** 5 113 48,549 68,951 66,971 4,158 60.9*** 6 87 35,701 43,345 53,088 -5,539 10.3 7 114 31,999 59,978 39,971 13,456** 79.2*** 8 105 21,494 32,340 27,955 -396 14.0 9 109 23,567 29,938 23,148 -4,741 -6.6 10 99 20,523 22,725 15,627 -8,079 -16.0 11 77 11,326 14,514 12,041 -5,550 -60.1 12 47 9,381 8,234 7,729 -9,349 -141.2 13 24 4,325 5,020 6,863 -6,826 -220.1 1 Hypothesis test Ho: π < 0 or Ho: ROI < 0. Reject Ho at significance level *** 0.01, **0.05, *0.10 22 Table 6. Average Profitability and ROI by Weanling Quality Classification. average Weanling Purchase Price Quality Range n $200,000 and up 34 333,824 423,971 22,906 2.5 $100,000 - $199,999 83 134,241 182,916 16,318 12.6 $50,000 - $99,999 173 67,220 105,610 17,473** 24.8** $20,000 - $49,999 354 30,706 54,900 10,224*** 29.6*** $10,000 - $19,999 161 14,348 25,475 1,021 5.7 Less than $10,000 206 5,589 15,930 1,719 21.9 1 Weanling Purchase Price WPPi ($) Yearling Sale Price YSPi ($) Profit1 π ($) ROI1 (%) Hypothesis test Ho: π < 0 or Ho: ROI < 0. Reject Ho at significance level *** 0.01, **0.05, *0.10 Table 7. Profitability Comparison of Colts versus Fillies. Description Ho: colts = fillies p value Colts Fillies Profit ($)1 14,501*** 1,934 0.015 ROI (%)1 44.1*** -10.4 0.001 For colts n = 584 and for fillies n = 427 1 Hypothesis test Ho: π < 0 or Ho: ROI < 0. Reject Ho at significance level *** 0.01, **0.05, *0.10 23 Table 8. Distribution Modeling Maximum-Likelihood Parameter Estimates and Goodness of Fit Statistics for Pinhooking Profitability and ROI. Pinhook Profit ($) Description ROI (%) π Sample Data: Mean 9,913 21.1 81,528 265.5 Minimum -294,946 -688.9 Maximum 910,904 1,529.5 LogLogistic LogLogistic Parameter 1 -367,441 -820.5 Parameter 2 366,476 808.7 Parameter 3 13.593 10.630 374.1*** 132.2*** 0.116 0.080 29.6 10.4 2,319 2.113 49,876 142.48 Standard Deviation Density Function Parameters: Type of distribution Goodness of Fit Statistics: χ2 Kolmogorov-Smirnov Anderson-Darling Estimated Distribution Moments: Mean Standard Deviation n=1,011 Denotes statistical significance at 0.01 or greater *** 24