R P S B
Relative Performance
Stock Betting
Loss Limitation
The primary risk of stock market speculation is the possible magnitude of unexpected loss due to adverse price change. Stock prices can change unexpectedly due to a supply/demand imbalance, news events and, in some cases, manipulation.
It is also the ego of the individual investor which prevents loss limitation policies to be applied. The intent to limit a loss to X percent of the amount invested is overwhelmed by the strength of the investor’s belief reflected in the original judgement.
It is the incidence of larger than expected investor losses which has prompted regulators to impose restrictions on leveraged securities trading.
In the Relative Performance Stock Betting (RPSB) approach the investor loss is limited to the amount of the standard betting unit.
Having a Reason to Study More Companies
It is natural for those interested in investing in stocks to have opinions as to the direction of the stock market, as well as to the performance of specific company stocks, reflecting the results achieved by the companies.
The more involved the investors, the greater will be their experience-based judgement and presumably their overall investing results. Of course, it is likely that their success in investing will also be improved by having a reason to study an increasing number of companies.
The modest size of the RPSB betting unit encourages investors to consider taking positions in an increased number of company stocks.
RPSB and Single Stock Price Change
The intent of all investors is to pay less for a position than will be the case at some time in the future. The degree of success is measured by the magnitude of the difference between the cost and price of possible sale, as occurring over the period of investment. The shorter the period for achieving the same amount of profit, the greater the Internal Rate of Return (IRR). The difference between speculation and investment is the intended period of holding the position.
The decision to invest in the stock of a company is based on an investor’s belief that the company will be successful, and that the success will be reflected in a positive change in the price of the stock. It is possible that the company can be successful, and the stock will decline due to an overall stock market decline. It is also possible the results of the company will be successful, but disappointing to investors expecting even better results.
The RPSB approach of betting which of two stocks will do better in a period enables the winner of the bet to win if the favored stock declines less than the other stock, as well as possibly going up more.
Profitability of Winning Versus Disappointment of Losing
The winner of a bet as to which of two stocks will do better in a period earns a very high return of the end of the period. Winning a net of 90% of the amount bet, in less than six months, is an extraordinary return. The shorter the period the higher the IRR. The periods we recommend are 30, 90, and 180 days. The loser of the bet will always lose 100% of the amount bet.
The broker arranging for the bet between the two parties is proposed to be paid 10% of the winner’s winnings. No securities transactions are made, and the broker will never be acting as a principal. The bet is which of two anythings will be better in a period.
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Arthur Lipper, Chairman arthurlipper@gmail.com
British Far East Holdings Ltd.
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