A few months ago, Brice Wightman and I had the good fortune of interviewing Andy Beyer of The Washington Post and we saved the interview for Breeder’s Cup Day, which is today. 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 Breeder’s Cup Day.
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?
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 yours?
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?”
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.
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 cliche – 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.