No-one rings a bell at the top of a bull market or at the bottom of a bear market.
In hindsight, any of us (like me), who were holding onto fast-growing yet loss-making growth stocks as inflation started spiking upwards, wished they could turn back the clock and sell at the (now) obviously inflated valuations.
Fast forward to now, where the S&P/ASX 200 Index (ASX: XJO) is down 10% year to date and the S&P/ASX Small Ordinaries Index (ASX: XSO) has lost 25% over the same period. In the US, it's worse, with the Nasdaq off 33% so far this year.
At the individual stock level, some of the falls have been absolutely brutal so far in 2022…
City Chic Collective Ltd (ASX: CCX) – down 79%
EML Payments Ltd (ASX:EML) – down 79%
Kogan.com Ltd (ASX:KGN) – down 64%
Megaport Ltd (ASX:MP1) – down 58%
If I were a betting man, I'd wager, over the next 12-24 months, small companies will out-perform the ASX 200 index.
And although the bell isn't ringing for the bottom of this bear market, I think now will prove a good time to steadily put money to work in stocks that I think have asymmetric upside potential.
An asymmetric bet, trade, or investment is when the potential upside of a position is much greater than its potential downside.
Rather than investing now in coal producers Whitehaven Coal Ltd (ASX: WHC) and New Hope Corporation Limited (ASX: NHC), up 314% and 208% respectively so far this year, I'd far rather be betting on some ASX micro-cap stocks who, from ultra-depressed levels, have the potential to rise three to five times in value in the coming years.
Image source: Getty Images
Putting my money where my mouth is
I'm putting my money where my mouth is, investing in a portfolio of companies that generally have little to no debt, are growing quickly, are either on the cusp of profitability or are indeed profitable, yet their share prices have fallen up to 70% in this brutal sell-off.
I'm not stupid enough or confident enough to say some won't fall in a screaming heap. These are often very small companies operating in very competitive markets. A diversified portfolio is essential – 15 to 30 stocks – as is lashings of patience and the ability to withstand short to medium term volatility.
It's worth reminding readers that a company that has already seen its share price fall 70% can easily see it halve again, especially in a market that's incredibly nervous, and one where liquidity for many micro-cap stocks has virtually disappeared.
But that's the stock picking game, right? Otherwise, we just stick with low-cost index-tracking Exchange Traded Funds (ETF), like the Vanguard Australian Shares Index ETF (ASX: VAS) and/or the Vanguard MSCI Index International Shares ETF (ASX: VGS).
In return for enduring the volatility and the uncertainty, you have the opportunity to earn out-sized returns by picking your own stocks.
Yet heed this warning from legendary investor Charlie Munger from 2009, also a period of high uncertainty and volatility…
"… if you're not willing to react with equanimity to a market decline of 50% two or three times a century you're not fit to be a common shareholder and you deserve the mediocre result you're going to get compared to the people who do have the temperament…"
Two ASX stocks with asymmetric upside potential
The Plenti Group Ltd (ASX: PLT) share price has slumped 64% so far this year as the online auto and personal lending business has been buffeted by a re-rating of tech stocks, higher interest rates and the threat of increasing bad debts in a slowing economy as those interest rates start to bite.
The risks are very real. Yet, the company is growing like gangbusters as it and other "challenger" lenders take market share from the less nimble big four banks. Its loan portfolio at 30th June 2022 was $1.44 billion, up 90% from the prior year, with ambitions to grow it to $5 billion in 2025.
The Bluebet Holdings Ltd (ASX: BBT) share price is down 70% so far this year as the online bookmaker has largely been a victim of the vicious sell-off in tech stocks.
Bluebet is growing quickly, has plenty of cash and no debt, and cash from operations is running around breakeven, despite its up-front investment in marketing and in the nascent yet lucrative US market.
With a market cap of just $86 million, and its cash balance providing downside protection. For me, Bluebet is an asymmetric bet on its 'Capital Lite' US strategy, starting in four states. Macquarie expects online sports betting to be available to 96% of the US population by 2025.
In a diversified portfolio, with plenty of large-cap ballast and a healthy cash balance, I hold modestly sized positions in both Plenti and Bluebet, amongst other small and microcap stocks I think offer asymmetric outcomes.
