Return-to-risk ratio: the most important indicator of investment opportunities

The bloody storm in the global investment market in the past few days has disrupted the pace of all investors and crushed the confidence of many novice investors. The continuous decline in the market has produced a feeling of "bottomless", and the entire market is filled with extreme anxiety.

At this time, we should calm down, abandon the subjective emotions of the market, and objectively examine various phenomena in the market.

In many recent articles, I have repeatedly mentioned that oil, China's stock market, and digital currencies are all at very low levels, and the risk is actually not that great.

Why do I see it this way? The standard I judge is the return-to-risk ratio of the investment.

What is the benefit-to-risk ratio? Simply put, it is the ratio between the possible rise of an investment target and the possible fall of an investment target under the current market environment.

For example, if a target has a possible fall of 10% and a possible rise of 100%, then the return-to-risk ratio of this investment target is 10 (100% / 10%).

An investment product with a higher return-to-risk ratio has greater investment potential. In any investment market, if we want to obtain substantial investment returns, we must find such a product with a high return-to-risk ratio.

We all know that during the US financial crisis in 2008, very few hedge funds made huge profits by shorting derivatives CDS. On the one hand, this is related to the superb analytical ability and profound insight of the heads of these funds, and on the other hand, it is also related to the huge return-to-risk ratio of CDS.

Before that crisis, the heads of these funds analyzed that the US housing market would collapse, so they decided to short the housing market.

They have many choices: the first method is to directly short-sell stocks related to real estate in the US stock market; the second method is to short-sell the bonds issued by these real estate companies; the third method is to short-sell financial derivatives related to real estate .

After careful sorting, they found that the most suitable target was CDS, a financial derivative product related to real estate. Since almost no one in the market believed that the U.S. housing market would fall, the prices of these CDS derivatives were very low. Once the housing market collapsed, the room for these CDS to rise would be astonishingly large.

Therefore, the return-to-risk ratio of shorting CDS is much higher than that of shorting stocks and bonds, so CDS has become their target. In this big sniping, Paulson who became famous in the first battle was like this. It can be said that if these fund traders short not CDS but stocks or bonds, they will also have huge returns, but the returns must not be as good as shorting CDS.

Therefore, to be successful in the investment market, you must not only choose the right direction but also choose the right investment target.

Let's take a look at gold, oil, China's A-shares and digital currencies that have received much attention recently. The following prices of various investment products refer to the prices on March 17, 2020.

1) Gold

The current price of gold is $1529. So how big is its upside? Based on the highest value of US$1929 after 2008, it is about 26% (= (1929-1529) / 1529 ). How big is its downside? Based on the lowest point after 2008 of 1100 US dollars, it is about 28% (= (1529-1100) / 1529),So it has a reward-to-risk ratio of 0.93.

2) Petroleum

The current price of oil is $33. Its rising space is about 215% based on the highest value of $104 after 2008. Its downside is about 27% based on the lowest point of $24 after 2008.It has a benefit-to-risk ratio of 7.96.

3) China A shares

At present, the Shanghai Composite Index of A-shares is 2887, and its room for growth is about 112% based on the last peak of 6124 points before the financial crisis in 2008. Its downside is about 38% based on the lowest price of 1782 after 2008.

It has a benefit-to-risk ratio of 2.95. As the global stock market continues to fall, A-shares still have room to fall, so the benefit-risk ratio will be even higher in the future.

4) Digital currency

I take Bitcoin as an example, the current price of Bitcoin is $5481. Its upside is about 265% based on the peak value of $20,000 in 2017. Its downside is about 42% based on the lowest point of the post-2017 bear market of $3,200.It has a benefit-to-risk ratio of 6.31.

If you take Ethereum as an example, its risk-reward ratio is even higher at 24.

Obviously, the return on investing in gold now is too low, and the other targets are still very suitable, which is why I say that oil, A-shares and digital currencies are now treasures everywhere.

Although it seems that digital currency has the highest return-to-risk ratio, in order to avoid risks, I suggest that you diversify your investments.In addition, I would like to remind readers again, no matter how low the price is, don't take a stud, and always stick to the fixed investment, because no one knows where it is.(The author is old-fashioned, talking about blockchain)