TradingMarkets’ Big Saturday Interview: The Legendary Andy Beyer
A few years ago, Brice Wightman and I had the good fortune of interviewing
Andy Beyer of The Washington Post. With this weekends big summer race (The
Travers Stakes) running at Saratoga on Saturday, we thought it would be a good
time to reprint this interview.
For those of you who do not recognize the name, Andy is one of the greatest
minds in the thoroughbred racing industry. While attending Harvard in the 1960s,
he decided to pursue his passion — beating the horse races. Over the past four
decades, his research and insights have revolutionized and legitimized the
industry. Using his math skills, he created a new way to rate the speed of a
horse in a race. The formula he created, known as the "Beyer Figures," has
allowed horse enthusiasts around the world to better gauge how well a horse ran
in previous races and from this information, deduce the potential speed of the
horse in future races (in a sense, they are like momentum ratings in our
industry).
We hope you enjoy the following interview with Andy Beyer this Travers Stakes
Weekend.
Larry Connors: I
see a lot of parallels between horse racing and trading. Let’s start from the
beginning, let’s start with you attending
Harvard and Suffolk Downs at the same time.
Andrew Beyer:
I was exposed to the racetrack for the first time when I was 12 years old. I
loved numbers. I loved action. At that age, I was also fascinated by the stock
market but as soon as I got my first look at the Daily Racing Form, I was
hooked. I had a sense that this was going to be my passion for life and when I
got to Harvard and found that there were four racetracks within reasonable
commuting distance from Harvard Square, I guess I was lost forever.
Connors:
That was back in the 60s, right?
Beyer:
Right.
Connors:
Tell us the evolution from there.
Beyer: Although I was on a
respectable track as a journalist, my main goal or obsession in life was to
try to find a way to make money at the racetrack. Like everybody in your
business as well, I went down a lot of blind alleys and tried a lot of different
things until in the early 70s I started experimenting with speed figures which
is basically a numerical system for turning a horse’s time into a number that
took into account the inherent speed of the race track as well as the distance
of the race, so that if you had one horse who ran 6 furlongs in 1:11 at Belmont
and another who ran 7 furlongs in 1:24 3/5 at Aqueduct, you could turn each of
those performances into a number and at a glance tell who ran faster than whom.
At the
time, the idea of using times of races as a principal handicapping tool was
generally regarded as a crackpot notion by the majority of racing people who
thought that class rather than speed (think fundamentals
vs. technicals) was the most important thing in the game,
but time is crucial and is probably the major determinant of a horse’s future
performance. When I started using speed figures I was making a profit at the
track and my life’s course was fixed.
Connors:
The figures themselves — I’ve seen articles on this — would your edge be
substantially greater today if your figures were never published?
Beyer: It was a tremendous edge to have
the figures at a time when most people didn’t use them or even believe in them.
I can only draw an analogy to the stock market — if the concept of the P/E ratio
were unknown to, or its importance was disbelieved by the majority of people
buying stocks, and you were about the only guy who knew what the P/E of
different stocks was, it would be a tremendous advantage and I had that
advantage for many years.
By the time the Daily Racing Form came to me and asked me to provide my
figures for every horse in North America, thanks to my books and other people
who were disseminating figures, the majority of racing people had begun to
believe in speed figures. If I hadn’t made my deal with the Racing Form, someone
else would have. But the answer to your question is yes, it’s become
much, much more difficult to make a profit, certainly by using speed
figures — because they are now common currency.
Connors: Within our industry, there
are stories of some of the guys
who used to use mathematical formulas to trade options who have taken these
skills and moved to take advantage of the inefficiencies in parimutuel betting.
Can you talk about that?
Beyer:
I know there are people doing this. I had always thought that the idea of using
a mathematical model for the racetrack was an idea that wouldn’t work because
the model ought to be ever changing. I mean conditions that apply this week or
this month at a given track may not apply next month. So I had always thought
that this kind of approach would probably be doomed to failure in horse racing.
Then, in the mid-90s I made a trip to Hong Kong and I met the guy who is the
biggest and most successful gambler in the world who did everything with a
computer model and he had made tens of millions of dollars and didn’t even go to
the track. I mean it was just all numbers. And so I was made a believer and I
know now that there are people doing things along those lines. I don’t know how
extensively or how sophisticated they are compared to the guy in Hong Kong but
yes, they’re in action and I presume that’s one of the factors that has made the
game ever tougher.
Connors:
The guy in Hong Kong has a math background?
Beyer:
He actually had a blackjack background but he and his partner were very
computer-oriented. When I was talking to him in his office, a fax was coming in
that was a communication from a professor that he had on retainer for three
years to just analyze one of the 40 factors that went into his model. So he was
awfully sophisticated.
Connors:
Amazing. And you’re familiar with the New York Times magazine article a
couple of years back about the gentleman who was a professor and basically left to do the same thing. He is using his math
and computer skills and the New York Times magazine journalist saw
the IRS statements. This gentleman was earning approximately $700,000 a year on
average over the previous three or four years on a pretty consistent basis and
his computers were just spilling out which tracks had the inefficiencies.
Beyer:
That’s obviously a pretty impressive performance. I certainly salute the people who are
able to do this because I am stunned that with all the variables that exist in
racing, that mathematical models can nail them down. They can.
Connors:
For yourself, you’re using a number, an algorithm to get you to some sort of
opinion. From there, where do you go?
Beyer:
The major factors in my handicapping are obviously that I remain very
figure-oriented, but I can’t rely on them principally the way I used to just
because the value has been drained from speed figure play. So a lot of my
emphasis now is on watching races and taking notes on all the horses and you’re
trying to see things and spot subtleties that other horseplayers may not
see — to try to get an edge that way. Then obviously the figures go into the
equation and in this day and age, the horse’s trainer has become supremely
important, in part because I think a lot of them are using illegal drugs and
you’ve got to take into account the person. Those are the main elements that go
into my analysis.
Connors:
I’m going to keep drawing comparisons to the two industries. From what you’re
saying,
it’s
almost in a sense like money managers and traders who use technical analysis and
fundamental analysis combined. They have some math behind them but they are also
working on the fundamentals of a company.
Beyer:
For sure. I think that is a good parallel because you can have a situation that
looks good on paper but if you don’t have the right trainer or management
team that you can really have confidence in — that can undermine your best-laid
plans.
Connors:
Absolutely.
Money management plays a role in your…?
Beyer:
Absolutely! The majority of horseplayers who don’t win will tell you, “I’m a
great handicapper but I’m a poor money manager.†To some extent, that’s a
rationalization, but knowing how to manage your money and manage your emotions
as well is the key that makes or breaks a lot of players.
My own philosophy of approaching betting at the racetrack is that although there
are an awful lot of disadvantages in playing the horses as a potential
money-making game, particularly the high take out. You’re bucking such horrible
percentages that are built into the game, but the great thing about racing is
that you can leverage your money. You can take relatively small risks for the
chance of making relatively large scores.
I think
that most horseplayers will tell you they’ve had a successful year, it’s not
because they have been brilliant at grinding day-in and day-out profits, but
because during the course of that year, they have made a certain number of big
scores that more than compensate for all the inevitable losses along the way.
The racing game has so many exotic wagers now, you know, Pick 6’s, superfectas,
trifectas, that if you’ve got a good opinion, you have the potential to hit a
home run. That’s what I’m always looking to do. If I have what I think is a good
idea about a horse or about a race, I rarely think, “Gee this is a good
opportunity to get 2:1 on my money.†I will always look at exactas and trifectas
and all the exotics and say, “Is there a way to turn this opinion into a crusher
score?â€
And
sometimes it works and sometimes it doesn’t but the good thing about the
risk/reward ratio in horse racing is that you can hit big and at the same time
you can keep your risks under control. I mean if I were to have by far the worst
year of my handicapping, it’s not going to ruin me or change my lifestyle because
the risks I’m taking are relatively restrained compared to the potential gains.
Connors:
There’s a book called “Fooled By Randomness†by Nassim Talib, a former floor trader
on the CBOE who trades a fairly substantial hedge fund and has some phenomenal
years. His whole philosophy — and this ties in exactly to what you’re saying
here — is that he takes lots of very small bets and loses most of them, but the
ones that he hits are so tremendous — because he’s using leverage within the
options markets — that it more than offsets the times that he’s wrong. He’s
written a brilliant book on the entire subject, that that is the proper way to
manage money, that this is the way you go about doing things.
Do you know who
John Henry is? He owns the Red Sox.
Beyer:
Yes.
Connors:
As you
know, he’s a
commodities trading advisor. He runs over $2 billion worth of money, and the way
they do it is almost the same. They’re wrong two out of every three times they
take a position but the one out of three times that they’re right, a percentage
of those one out of three’s tend to be outsized gains. They tend to be, as in
your world, like hitting a Pick 6 or hitting a large trifecta and it more than
offsets the small bets they’re making along the way.
Beyer:
I’m sure that in both of our disciplines, one of the keys is to understand the
consequences of your chosen strategy, that you are going to have a lot of dry
periods between the big scores. You have to take it in stride — the risky
nature of the game and when things are going bad as they inevitably will for a
period, it can’t affect your mental attitude so much that it affects your
judgment. I have always thought that one of my strengths as a player is if I
lose a photo finish today for $25,000 or something like that, I’ll curse and
scream and be pissed off, but the next day when I open the Racing Form,
in most cases I will have purged that from my mind and started the new day
without anything hanging over my head, because if you let yourself get unhinged
by the losses or the near-misses, then you’re wrecked as a gambler or a trader
or anything else.
Connors:
Andy, two
questions to that: Were you always this disciplined? Were you wired that way or
did you have to teach yourself?
Beyer:
Nobody is. But it just comes from experience. You miss a score for X thousands
of dollars and then because you’re unhinged, you lose thousands more that you
shouldn’t have because you’re rattled and after going through that experience a
few times, you have to learn the lesson that the most counter-productive
thing you can do is get upset by bad events. You just have to put them out of
your mind.
Conversely, if things are going well, obviously you maybe want to press a little
bit and take advantage of a good run but you don’t want to get what a gambler
friend of mine used to call “The Messiah Complex†and think, “Gosh, anything I
do is going to turn to gold,†and you start getting a little sloppy and
overconfident. So just keeping a mental even keel — it sounds like a cliché —
but it’s the attribute that every gambler needs to have.
Connors:
The parallels and tie-ins here are just amazing.
Last question: Any more books coming from you?
Beyer:
No.
Between my Washington Post duties and my Racing Form speed figure
activities, I have enough on my plate.
Connors:
Hopefully
“no†doesn’t mean never in this case. Andy, it’s been a pleasure.
Beyer:
Yes, thanks Larry, this has been fun.
Andy Beyer’s passion for what he does is contagious. He is an Ivy League
educated gentleman who has taken his passion and become the best in the world
at what he does. The parallels between what he does and the financial markets
are great. He uses past history, combined with statistical evidence, combined
with money management and psychology to show consistent profits in his
endeavors. Successful traders compete daily within and against the financial
markets. Andy Beyer has a different battlefield to achieve these goals, but
for four decades his goals have been no different than ours.