Thoughtful investors often have their ears tuned to non-traditional investment vehicles, looking out for singular insights – whether they come from a financial publication, a colleague with a novel idea for a startup or a fellow cyclist on a Saturday morning ride.
Our Impact clients routinely come to us for help analyzing these non-traditional opportunities through our sounding board services.
In acting as a sounding board, CWM advisors ask questions and dig into the numbers to help clients determine for themselves if it may be the right time and opportunity for them to do everything from purchasing a second home, to financing the kids’ college, to determining if their brother-in-law’s investment tip makes for reasonable diversification.
No matter the question or situation, we apply our methodology to support evidence-based decision-making in keeping with CWM’s focus on managing risk to achieve long-term gains.
When we say any question or situation, we mean it. Take this inquiry we recently fielded from a client interested in an investment vehicle that’s as non-traditional as they come: a champion cutting horse mare, or female horse, with the potential to produce highly valuable offspring.
For the uninitiated among us, cutting is a Western equestrian competition designed to demonstrate a horse’s athleticism and ability to manage cattle. Although it sounds simple – a horse and rider keep a cow away from a small herd of cattle for about two and half minutes – the thrilling, rigorous sport draws well-heeled competitors willing to pay hundreds of thousands of dollars for top-ranked horses.
If any of this is novel to you, we understand; when our client first proposed the cutting horse idea, the topic was totally foreign to us. But at CWM we are more than willing to learn new things. Once we understood the vocabulary and variables, we could seek to apply investment logic: determine initial investment and operational costs, calculate anticipated revenue, and help estimate potential profitability for the life of the investment. (For a quick primer, check out the vocab and variables section below.)
As part of our detail analysis, we learned that the sport of cutting supports a vibrant industry of trainers and breeders, and it’s customary to maximize the genes of a well-bred mare through artificial insemination and in vitro fertilization, allowing multiple other mares to carry several high-dollar progeny per year. In fact, innovations in high-tech husbandry have revolutionized mares as potential investments, enabling one horse to yield up to three foals annually by delegating the 11-month gestation and nursing period to surrogates, and lowering the medical risks inherent in pregnancy and delivery.
So how do we analyze a cutting horse as a financial vehicle? We apply the rigorous methodology we use for all potential investments.
In year one, there would be a capital investment of $650,000 to purchase the mare as well as approximately $70,000 in operational expenses that include boarding, artificially inseminating the mare three times, flushing the fertilized eggs out of the mate and placing them in three recipient mares, training the colts or fillies once weaned along with insurance and standard medical costs.
Our detailed analysis determined that normal operational costs would be slightly lower in subsequent years totaling approximately $58,000 annually. Additionally, sale of three foals each year could bring as much as $250,000-$300,000 annually.
We also considered the length of time mares typically can produce offspring. In this case, the assumption was twelve years. Assuming that the mare can produce three foals a year for twelve years and the cost maintains at $58,000 annually after year one, the client has the potential to achieve profitability in year five and yield a total profit of $1,891,500, before taxes.
The CWM sounding board prognosis: A potential 9.31 percent return. Just like any investment, non-traditional investments carries risk and results vary and are not guaranteed; however, it was satisfying to provide our client with information that helped him make a more informed decision – particularly in a project that fed his passion and carried intrinsic appeal for him.
Do we anticipate many of our clients to buy cutting horses? Of course not. But most of us, at some point, want to invest in a sector that fulfills us personally – and there are ample opportunities to prove that personal and financial fulfillment are not mutually exclusive.
While this is an extreme example of our sounding board service, we invite you to give us a call anytime you have an opportunity or decision to make where substantial dollars are involved. There are some small limits on what we can help with, but we’re glad to hear ideas and ask questions to help you make a more informed decision.
Brian Lockett, CFP®
Vice President, Certified Financial Planner
Cutting Horse Vocabulary
Mare = Female horse
Brood mare = Essentially, the mother horse. Specific to this case, a former competitive cutting horse at prime breeding age.
Recip mare = Short for recipient mare – the surrogate mother horse who carries the brood mare’s fertilized egg to term.
Foal = Baby horse; colt is a young male and filly is a young female.
Stud or sire = Father horse
We worked with our client and with a respected horse broker to ensure we had a solid collective understanding of the variables that contribute to a successful investment in a brood mare. We considered several variables and inputs, including:
Market value = The value of top brood stock is based on its production and produce. Production involves what it has won in the ring – the stature and purses, or financial earnings, of the cutting horse competitions at which it excelled. Produce relates to the dollar winnings and hardware that a horse’s offspring earn in the ring. The horse our client purchased had an attractive production of $200,000 and produce worth $300,000.
Stewardship of the market value = Recognizing that the sale price of each generation of foals helps dictate the value of future offspring, the brood mare owner can help sustain her value by only selecting top studs to breed with and selling foals at well-recognized horse sales known to attract top dollar.
Mare’s age = The age and health of the mare dictates how many years she can continue to produce viable eggs.
Mare vs. stud = Originally, our client was considering purchasing a stud, following conventional wisdom that the male side of the equation offered the greatest investment upside. However, modern genetic testing tells us that the mare’s genes are a better indicator of future success, and the numbers show that brood mares can hold a higher market value longer than standing studs.
This article has been prepared and distributed for informational purposes only and is not a solicitation or an offer to buy any security or investment or to participate in any trading strategy. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. This information is not intended to be a substitute for specific individualized tax, legal or investment planning advice as individual situations will vary. For specific advice about your situation, please consult with a financial professional. Past performance is no guarantee of future results.