R P S B
Relative Performance
Stock Betting

The point of achieving maximum benefit, by taking an action relating to stock valuation, is when there is a surprise. Surprise can be an event such as a proposed or denied capitalization change or a change in earnings per share (EPS) level or trend. Surprises are mostly negative, as investors in publicly traded company stock’s usually expect good results, and this expectation is usually reflected in the price of the stock. It is a disappointing result which is the loss-causing surprise.

Current Price/Earning (P/E) ratios are the aggregate investor prediction of future EPS or events, such as buyouts. P/E’s are also the number of years of static EPS required to cumulatively equal the current price. A P/E of 20 is a prediction that it will take 20 years of the same amount of EPS, as the last 12-months, for the cumulative value to be the same as the present price. Clearly, a P/E of 20 indicates a market prediction that the EPS of the stock will be significantly higher than the EPS of a stock selling at a P/E of 12.

Charting the historical record of annual EPS, P/E and price of the stock, indicates when there are changes in the market’s level of expectation for future EPS. Were the chart to be one which reflected the EPS, P/E and price of a market index or another stock, the change in relative expectation of EPS and therefore stock price valuation change would be indicated. This is what our Perspective service did relative to the DJIA for institutional clients of my NYSE member firm, Arthur Lipper Corporation. I expect to offer those wishing to compare stocks and indices in stock price betting a similar ability.

A risk/reward comparison of opportunity is the essence of investment management. One stock is almost always going to outperform another stock in a specific period. The investor can reflect their opinion of which stock will do better, by the relative size of investment position, by being short one stock and taking a long position in the other stock or by just betting a set amount, on which stock will outperform the other, having nothing to do with the magnitude of the difference.

Relative Performance Stock Betting is suggested as being an additional means of profiting from an investor being able to predict which stock will be better than another stock, not as an alternative to the investor’s normal practice. Of course, the investor taking the wrong side of the relative performance bet will lose the entire amount which has been bet.

There are many tools for achieving profit from correct investment decision-making. Relative Performance Stock Betting is the newest and will likely grow in acceptance and use.

 

Arthur Lipper, Chairman                          arthurlipper@gmail.com
British Far East Holdings Ltd.                 858 793 7100 PST

 

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