Kraig Biocraft Laboratories Inc (KBLB)

[first mike]

A simple explanation of risk/reward ratio.

Mojo:
You also said the risk now is much lower...except that the pps is 3 times less than it was when the risk was supposedly much higher...

That is correct! Risk is the Inverse of PPS if no other factors override it!

To advance your education, and perhaps that of others, let me introduce you to the concept of risk/reward ratio in investing.

This ratio has four determinants:

1)The amount of money at risk = amount invested = PPS
2)The remnant worth - (amount remaining after failure).
3)The amount of monetary increase upon success. (the payout)
4)The odds of failure vs. success.

The easiest way to demonstrate these factors is via the example of a simple gambling game.

Let's use Roulette as an example.

The roulette wheel has 36 numbers,half red and half black, that are possible outcomes for the ball. (I will mention 0 and 00 later)
They are arranged such that one may "place a bet" on a single number, a group of two four or six numbers, or via side boxes on the layout, on groups of twelve or eighteen numbers.
You may also bet on Red or Black, or on all Odd or Even numbers.

In roulette as in most gambling games bets are either won or lost, there is no remnant on failure.
Also, the odds of success are set such that the Payoff for winning makes the risk/reward ratio always equal to one, minus the "house percentage" known as "vigorish".
In roulette this is accomplished by adding 2 special slots to the wheel, 0 and 00 which are neither black nor red, neither odd nor even.

If you bet on a single number of the 36, the payout for a win is 36 times the bet.
If you bet on black, or even, the payout is double your bet.

For the single number bet the risk is high. You have only one chance in 38 of winning, but if you win the payout is 36/1. (high risk / high reward)

For the bet on black the risk is much lower. You will win 18 out of 38 times, but the reward is also lower, you only get your money back plus an equal amount 2/1. (low risk / low reward).

In both cases the risk/reward ratio is 36/38 = 0.947.

In the world of equity ownership, (the stock market) there are [simplified for easier understanding] two kinds of investments, income and speculative.

Both sorts of investor seek a risk/reward ratio Greater than 1.

The goal of the income investor is to preserve capital while earning income.
This is accomplished by the accumulation of dividends while the capital investment remains stable.
He seeks out very low risk investments which provide high remnant values.

The goal of every speculative investor is to achieve a high risk/reward ratio by capital growth (PPS) and by the growth of remnant value. (~= book value).

Note that the concept of risk/reward ratio is historyless, or even sometimes inversely historical.

If you are considering a new investment, or whether to remain invested in a company, you don't care about past performance, only future performance!
(except in the case where you believe the PPS of a company to have been unfairly punished, in which case a rebound toward normalcy would increase your reward.)
This is why I invested heavily in two mortgage insurance based financials after the crash of 2008.
I bought HIG at about $5 and GNW at about $1.
I sold them after recovery and normalization at ~ $25 and $13.

In the case of KBLB in particular:

When the company first went public and first came to my attention in early 2009, the small amount of money I put into the company was totally at risk,
They had only an idea, no real IP, zero remnant value.

The odds of success were long.
They had perhaps one chance in forty or less of achieving their goal.

But the rewards for success would be great.
I made a partially educated guess at 30 to one.

So my estimate of the risk/reward ratio at that time was less than one, perhaps 0.75, but I liked the boldness and innovation of the idea, so I took an admitted gamble and invested a very small amount of money in KBLB.

After the announcement of success in September of 2009 the risk reward ratio changed dramatically.
The company now had some book value (the IP behind the transgenic silk worms and the worms themselves).

The odds on success also changed dramatically, from 1 in 40 to 100 I now estimated them to be about 1 in 10.
The payout remained roughly the same, but the buy-in price became quite high,reducing the odds, so the risk/reward ratio rose to about 1.5.
It was at this point that I became a serious investor in KBLB.

Since then, four things have occurred.

First, the odds on success have become better because of the acquisition of the exclusive rights to the use of ZFN and the world class recognition of the PNAS paper, trade magazine articles, and samples shown at trade shows.
(I would now think those odds to be about 1 in 3.)

Second, because of the greatly increased Intellectual Property owned by KBLB (patents and licenses and its own internally generated knowledge of silkworm genetic expression) its book value has increased, and therefore the remnant value on failure.
(my guesstimate of this remnant value is minimally 50 million dollars.)

Third, the potential payout has increased in the long term due to the many potential new products and applications enabled by the new ZFN tools.
(I would still expect short term gen 1 payout to be in the $0.50 range, but longer term prices could easily go to multiple dollars.)

Fourth, the PPS has gone back down from the vicinity of 0.20 to about 0.05!
YES, This is a positive thing for the risk/reward ratio for a new investor or for someone evaluating the decision to stay invested or not.
Even "igotthemojo" recognizes this, even if he is not willing to admit it logically and consciously.
He has bought in recently because he feels that the PPS is low enough that it is likely to rise in the near future.
Remember that I said that in September of 2009

"...the buy-in price became quite high,reducing the odds, so the risk/reward ratio rose to about 1.5."

Even neglecting all of the other improvements since then, this alone, the drop in PPS from .25 to .05, would raise my calculated risk reward ratio from 1.5 to 7.5!

Overall, I would put the current risk/reward ratio at about 20 in the short term (weeks or months) and about 100 in the long term (years).

All of the factors adding up to this are a matter of opinion, and the numbers that I arrive at are based upon my opinions of the four determinants that go into a risk/reward ratio.

Current PPS = buy-in price.
Book Value = Remnant price.
Odds of success.
Future PPS = Payout

Your opinions and therefore your numbers will vary.
But you should at least consider thinking about your opinions of the various factors in a logical rather than an emotional manner.
And thereby deriving an indicator of worth such as the risk/reward ratio in a logical and deterministic manner.

Mike L.