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HANDICAPPING INSIGHTS MAY 19, 2006 by Dick Powell Years ago, animals grouped themselves into herds to protect against predators. Then along came homo sapiens, who used this survival instinct against them. The most cost-effective way of slaughtering animals is to group them into a herd. Sheep follow the scapegoat right into the slaughterhouse and are none the wiser until it's too late. In investing, following the herd works in a market that is going up but often times the herd doesn't know when to get off the bandwagon and follows the market down way too long. We tend to make decisions based upon objective data that is supported by others. "I like stock A since it has a low profit/earnings ratio and strong earnings and will stick with it as long as the herd continues to like it." What should be purely an objective decision becomes subjective since we have a greater psychological comfort level when we are part of the herd. And, yet, we know what happens to herds. According to options guru Larry McMillian in his book, "Options: Essential Concepts and Trading Strategies," the investing public is trading on emotion: "It is often said that the public is right during a move, but wrong at the extremes." The investing public goes along with the herd during a bull market while it is rising, but then goes in head over heels right at the top. Bernie Schaeffer, author of "New Thinking in Technical Analysis," believes that the way to make money in the market is to go against the herd: "As contrarians, we believe that when too many speculators are bullish, the market is ready to fall or consolidate." Or, as Ricky Roma (played by Al Pacino), the slick salesman on a hot streak in the movie "Glengarry Glen Ross" said, "If everyone says one thing, I say bet the other way." Can you make money betting on horse racing by being part of the pari-mutuel herd? We recently saw a perfect example of why you should go against the herd and how correct McMillian was about the public being right during a move, but wrong at the extremes. SWEETNORTHERNSAINT (Sweetsouthernsaint) was one of many contenders two weeks ago in the 132nd running of the Kentucky Derby (G1). He was 10-1 on the morning line and was the top selection of a few public handicappers. As the betting got serious on Saturday, his odds were in the single digits and as the day went on, more and more money poured in on him. The unique thing about the Derby is the attention it receives and how the betting public is armed with information about it earlier than any other big race in America. Past performance information is available Wednesday evening and most media pundits make their selections for publication Friday or Saturday. The betting public has those opinions available to them early in the day on Saturday and, unless there is the possibility of a dramatic weather change, most bettors know who they like hours before post time. Yet, without anything changing, Sweetnorthernsaint's odds continued to drop during the day. There were no weather changes, the track did not develop a severe bias that would help his chances, nor were there any late scratches that would impact how the race would be run. Sweetnorthernsaint was 8-1 and many noticed that he was taking money. He dropped to 7-1 and even more bettors saw a trend toward him. In a race that was very hard to figure out how to handicap and bet, maybe others saw something that was overlooked. Maybe the connections of Sweetnorthernsaint were supremely confident in their horse's chances and the word was out that he had a big chance. Or, maybe it was just the deafening roar of the herd's thundering hooves as even more bettors got on board. Sweetnorthernsaint dropped to 6-1 and was co-favorite with BARBARO (Dynaformer) a half-hour before the race. Finally, as the betting closed, Sweetnorthernsaint was sent off as the 11-2 favorite. Even though he didn't win, the bettors that were bullish on Sweetnorthernsaint were probably correct. The problem was they went head over heels at the top and continued to bet him at reduced odds. The more the odds dropped, the more they bet on him. We watch the board and notice a trend. It makes us take a second glance and even if there is no rational reason to like a horse we didn't like before, we still can't resist getting on the bandwagon with the rest of the herd. And, the opposite is true with negative trends. A horse that should be bet is dead on the board. Even though we like him we start to second guess ourselves since the herd has turned bearish. Once again, with no rational reason, we change our mind. It's not just the odds; it's the herd. The herd is not always wrong, but when they are right the odds drop just like when they are right on Wall Street. The price goes up and it becomes less rewarding to be right. Many media types seem to be slaves to bashing the favorite. They throw out horses only because they think the horse will be heavily bet and try to promote horses with "value." But value is not the absolute odds of a horse, or the price of a stock, but the relative merit of its price or cost versus its chances of succeeding. Barbaro goes for the second leg of the Triple Crown on Saturday in the Preakness (G1). He's been installed as the even-money favorite and his odds could be even less. With his undefeated record, running style and smashing Derby win, what would be the cutoff point in odds that you would accept? Would 7-5 be worth a bet but anything less worth a pass? Will the herd be right or will they be so impressed by his Derby win that they will bet him at any price? I say that the Preakness will be a perfect spot for contrarians. Barbaro should be overbet down to odds-on and make the rest of the field overlays. The problem is which one? As much as I respect the herculean efforts of BROTHER DEREK (Benchmark) and Sweetnorthernsaint in the Derby, it's hard for me to play them here. They ran their hearts out at Churchill and nobody knows how much the effort took out of them. Brother Derek will break from inside Barbaro and it's very unlikely that Alex Solis will allow Edgar Prado to enjoy the pace advantage he had in the Derby. With the speedy LIKE NOW (Jules) almost a mortal lock to gun from the rail, Brother Derek could get a first-over stalking trip but will have heavy pressure from his outside. Sweetnorthernsaint will break to the outside of Barbaro but will have three speed horses to his inside and one to his outside. He probably ran the second-best race in the Derby after being clobbered at the start and making a strong middle move down on the rail. He's been able to handle any track he's raced on but has done his best racing when near the lead. Unless Kent Desormeaux decides that discretion is the better part of valor and drops in behind the early speed I can't see him getting a good trip. Like Now and DIABOLICAL (Artax) are both very fast and will have an effect on how the race is run but their only chance of winning is to clear the field and control things on the front end. I don't see that happening even with Garrett Gomez and Ramon Dominguez, respectively, riding. That leaves me with BERNARDINI (A.P. Indy). He broke his maiden second time out at Gulfstream going a mile in good time while drawing off nicely. Even though he was pressing the pace early, he was able to relax through a first quarter in :24 so he can rate. In his next start, only his third lifetime, he captured the Withers S. (G3) by nearly four lengths, winning for new rider Javier Castellano. Bernardini earned a BRIS Speed figure of 110 in the Withers, higher than Barbaro's 109 in the Derby. He's had two nice five-furlong breezes at Belmont in the interim, and if he settles early behind the expected pace scenario I think he's sitting on a big race. He's never been two turns but he's sired by A.P. Indy (Seattle Slew) out of Grade 1 winner CARA RAFAELA (Quiet American), so the pedigree is there. Normally, a horse coming off a career-best performance is a candidate for a "bounce" or poor effort next time out. However, with only three starts and a pedigree that suggests the longer the better, Bernardini should be a live longshot on Saturday. We'll take him on top and underneath is obviously Barbaro. Most of my betting will be on Bernardini to win with a big exacta with Barbaro on top to protect. With only six horses having a realistic chance, I won't spread out too much. Brother Derek will be the choice for third since I think he had an easy campaign and the Derby will take less out of him. I'll go with Like Now for fourth, as he hangs around a lot longer than expected. When you go with the herd and the herd is right, you win but you win less. When you go against the herd and the herd is wrong, you win and you win a lot more. Here's to the herd being wrong in the Preakness. 1. BERNARDINI
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