Mark Twain, or somebody, said that history never repeats itself but it rhymes. With favored Nyquist winning the Derby convincingly—and being very much the kind of horse that can win the Preakness and Belmont—the racing conversation has become about clustered Triple Crown. There were a lot in the 1930’s and 1940’s, followed by a 25-year gap between Citation in 1948 and Secretariat in 1973. Then there were two more in the 1970’s (Seattle Slew and Affirmed in 1977-78) and a very near miss in 1979 by Spectacular Bid, thought by more than a few to be the best horse to race in the 1970’s, including Secretariat.
Then we had the 37-year wait for American Pharoah, colored by a lot of near-misses. Seemed like there would never be another Derby winner. Part of the problem may have been that the point system for allowing horses into the Derby was weighted too heavily toward the horses’ accomplishments when they were much younger. As a result, the Derby often had a lot of horses ill-bred to handle its distance, setting crazy paces and stopping, leading to horses that may not have been particularly good picking up the pieces and winning at big odds.
It’s no accident that since the rules have changed, weighting more recent races more heavily, the Derby has become more formful. Four straight favorites have won. This augurs well for more Triple Crown winners. Why? Because to win the Derby, now, you’re more likely to be a top-quality horse that can win from close up, not a lucky closer who inherits a collapsing race. And the Preakness and Belmont—especially the Belmont—are hard to win from way behind. Why is the Belmont, the longest race, so hard to win from far behind? Because when horses are able to run steady fractions on the lead, they are very hard to catch, and that’s the kind of pace the Belmont usually gets.
Steady fractions are like investments that don’t have big drawdowns. Like maximizing the area a string envelops by forming it in a circle, with every point equidistant from the center. Not flashy—the knock on Nyquist is that, unlike American Pharoah, he doesn’t win big—but winning all the same.
Converts, converts, converts. What are we going to do about you? Every time we get more evidence of a steady, dull economy and lower-for-longer rates, we weep some more, not for our old Kentucky home but for the decay of an asset class that provides relatively steady returns that pay off over time. Yes, I said relatively. But we are moving along, staying anchored to converts but talking more about other ideas.
Today Dennis Dowden discusses the earnings results of some high-yielding energy names (is there any other kind), while I discuss an interesting biotech buy-write. Jeff Alton, meanwhile, comes through with a timely update on EZCORP. Do pawnshops do some of their best business during the Triple Crown? It would make sense, right?
(This is the cover letter for the subscription-based weekly Hillside's Hybrid Vigor newsletter. For a complete copy, please contact John Anderson at + 1 (646) 712-9289 x 107).