At the November 2020 auction at Fasig-Tipton in Lexington, Kentucky, three exceptional female racehorses were actively sought by buyers. When the hammer fell, Monomoy Girl, Rushing Fall, and Midnight Bisou sold for $9.5 million, $5.5 million, and $5 million, respectively. When one thinks about such lofty prices for terrific racehorses, but unproven broodmare prospects, what comes to mind is how buyers justified paying the prices.
Another November 2020 auction was even more eye-opening. A two-week racing-pigeon sale culminated with a Chinese buyer using the pseudonym Super-Duper paying a record price of $1.9 million for a Belgian-bred hen named New Kim. Super-Duper engaged in a heated bidding contest with a buyer going by the name of Hitman and the final sale price of $1.9 million eclipsed last year’s record price by $406,000, for a pigeon called Armando. The life span of a pigeon is in the very wide range of 3 to 15 years.
A value on assets like corporate stocks can be estimated using, for example, a discounted cash flow formula. While the assumptions employed in the model may prove to be incorrect, there is at least an underlying rationale. By contrast, gold is a commodity that many investors and speculators buy even though it generates no cash flows and therefore the discounted cash flow method cannot be applied. Gold is worth basically what buyers perceive it to be as a scarce asset and gold buyers must predict that sentiment at a future time.
A discounted cash flow can be calculated on a racehorse or stallion or broodmare. For instance, Monomoy Girl can still be raced and afterwards her foals can be sold at auction. Yet this is an extremely speculative exercise at best in that it requires heroic assumptions about how many times she will get in foal and what the quality of said foals will be. Modeling the discounted cash flow value of a racing pigeon is even more of an exercise in futility. Gold, by comparison, is a much safer asset to own than racehorses or racing pigeons because gold won’t fail to reproduce, or reproduce quality offspring, or die prematurely.
A few wealthy players with a penchant for high-stakes risk taking—whether it is buying racehorses or racing pigeons—are attracted by the thrill of the chase. Las Vegas might call them “whales.” For whales, discounted cash flow is a foreign concept.
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