The method I use to maximize my risk to reward ratio
Hi all,
With the current economic uncertainty, I have found this strategy one of the best ways to 'retain' your wealth as well as maximizing your risk to reward significantly. I have chosen to put spare cash into SPACs (special purpose acquisition company), which are close to the NAV of $10. SPACs are 'blank check companies' , which bring many companies public to the markets. The reasons below are why I choose to employ this method.
1. Extremely favourable risk to reward ratio
The floor of $10 is something that works in the favour of retail investors. This minimises your downside risk tremendously if you get the share close to $10, while you have unlimited upside on the SPAC. Take note that this floor of $10 is only present on the SPAC pre-merger and once the merger happens, the floor is removed, so the stock can drop way below $10.
In the scenario that the SPAC(pre-merger) drops below $10, when the merger date is announced, you can choose to redeem for $10, and your brokerage will sell your SPACs for $10. Therefore, there really isn't any risk or very low risk if you manage to get the SPAC close to $10 (only before pre-merger).
2. SPACs appear to be getting more popular
In 2020, SPACs were extremely popular, with SPACs soaring once merger is announced (remember Quantum scape which went up to $132 upon the announcement of the merger? )
However, in 2021, the interest in SPACs died down, many retail investors were left holding the bag on these stocks.
With the resurgence in meme SPACs like Trump's DWAC, SPACs are starting to get more popular with retail investors nowadays, this can drive money inflow into SPACs.
Two of the SPACs that I have selected that are close to NAV of $10 are these:
1. BRPM- Merging with FaZe Clan which is a leading digital content platform created for, and by, the Gen Z and Millennial generations. This can be a potential short squeeze and the risk is 3.6% downside compared to unlimited upside. Faze Clan has a huge social media presence and has all the ingredients to be the next DWAC. In the case that stock price doesn't move until merger, you can choose to sell out any time to deploy your funds elsewhere.
2. SEAH - Another SPAC which I found which is close to NAV that has announced its merger with Super Group, a sports betting company. This company is well positioned to ride on the trends of the quick growing trend of Sports Betting and gaming. With more and more states in the US approving sports betting, this can take off in a big way. (Look at similar companies like Rush Street Interactive ($RSI) and Draftkings ($DKNG))
For the two SPACS above, I am only using them as a temporary storage for my funds, as I have not found any stocks that are promising yet. I will be selling them before the merger happens since the floor of $10 will be removed once the merger happens. These are not long term plays as of now.
To all the readers : Thank you for the support, and please let me know what is the financial content that you are interested in, I will share more. You can email me at jjfinancialblog@gmail.com.
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