I am guessing this is a topic that many of us wonder about every time when we look at the markets. After all, with so many assets and markets down with the possibility of a recession next year, most of us are actually putting the money back into our fixed deposit accounts and waiting out the bear market. However, in my opinion, this presents a lot of opportunities to take advantage of. I am an avid believer that no matter what kind of market it is currently in, there are always ways to make some extra money on the side.

Without further ado, let me share some things I see in the market right now that could benefit your investments.

Looking for cheap companies that are risky

I am sure this is mentioned many times in the media right now. Many markets are down and valuations are cheap. Hence, it is the best time to buy that company that you have been meaning to buy from last year. I do agree with this sentiment but I have a slightly different twist on it.

First, let me say that we should always buy companies that have solid fundamentals and very good prospects for the future. That is always the golden rule when it comes to investing. But unfortunately, that isn’t always the case. Most of these companies have probably been bought earlier on as they are on many investors’ radars for an opportunity to enter. Even when you found such a company, it is probably not cheap anymore to buy since many like have found them also.

I do in fact, keep to that philosophy when I find them. But alas, they are few and between. Hence, recently I have been looking at taking on more unconventional strategies. Many people have always advised not to invest in a company that has suffered a big decline in share price as it shows that investors have lost faith in the company. That could be true, but there are some conditions that I feel could be right to buy these types of companies.

Firstly, the company needs to be in the market for at least 10 to 15 years already and showed at least 70% of profits. What this means is that the company needs to make profits for at least 70% of how long it has been in the market. Secondly, the company is now trading at a price-to-earnings ratio of below 5 times and a price-to-book ratio of below 0.5 times. For the laymen out there, this means that the company’s share price is really down and it’s cheap to buy. Finally, the company needs to lose at least 70% of its value and share price.

What I am looking for in these conditions are companies that have received negative investor perception and have been beaten down to very low share prices. They have had an established track record in the past but perhaps due to some mishaps recently, they are seeing a lot of selling of their stock. However, they are so cheap that it’s worth taking a risk to bet on the company’s share price rising back again.

To illustrate this, take for instance company A which had lost 80% of its share price in the past few months. Investors are staying away from it due to the bad performance recently. For a normal investor, you should too but I see an opportunity to buy a company that has a 50–50 chance of recovering, and even if it doesn’t, I would not have lost much. For me, if I invest about RM2,000 in this stock, my total loss would be RM2,000 or 100%. However, there is a maximum potential upside of about 400% if it manages to recover back to its original share price. To me, this is a risk-reward ratio of about 4 to 1 which I am willing to take.

Of course, that is if the company’s share price recovers. That is a hard thing to predict even for the most experienced of investors. However, the beauty of this is that you are investing with small amounts of capital (not big, it won’t work if it’s big) for an investment that has a high payoff on paper. I need to be ok with losing that RM2,000 if it doesn’t pan out and I will set myself a stop-loss of probably 50% to actually decide that the investment would not come to fruition. That is a risk I am willing to take.

These kinds of opportunities are actually more common in the market, as investors are constantly looking for cheap and strong stocks and would tend to stay away from other companies that do not fit these criteria. I would argue that it’s good to be informed and do your research and that it is very important to do that for all investments. However, most times, share price performances are driven by uncertain events in the world economy we have no way of knowing them all. We will also lose money on the investments that we are dead sure are good. That’s where ego and luck come into play.

My belief is that the best way to make money in the market is actually not to be too smart. Intellect, emotions, and biases cloud our judgment sometimes on our analysis. I would say many of the profits we make from investments are 50–50 luck and research.

In such a down market in 2022 and possibly heading into 2023, I would say it’s more practical to search for these investments that are beaten down so much and make a bet on them recovering. They are so cheap now, that it is worth taking a shot for a big upside. If they don’t, just cut your loss and move on to another opportunity.