When buying stocks trading below value, carefully calculate their downside and upside targets.
So says Suzann Pennington, head of Canadian Equities at CIBC Asset Management. She manages the Renaissance Canadian All-Cap Equity Fund and co-manages the Renaissance Canadian Balanced Fund.
"I [expect] a much larger upside than downside," she says. "I don't want to have a portfolio of stocks that all have their downside triggered by the same factors."
Combining this approach with broad diversification ensures your clients will receive more consistent returns over the long run, she adds. She doesn't diversify by matching sector weights to the index.
She says many people miss out on Canada's growing resource companies, which offer long-term opportunities. She suggests buying a basket of junior mining, junior gold, or junior oil companies trading at a discount.
It's beneficial to "buy a group of those companies with different production profiles, and different geographic and geopolitical exposures."
Before investing, she also identifies the risk factors for individual companies. If a mining company is in the palladium space, for example, it's exposed to the auto industry since palladium is used for catalytic converters.
As such, investors would need to consider how well the auto industry is currently performing, and how it might impact the stock over the long-term.
And remember: "Market timing is too difficult to get right on a consistent basis," says Pennington. "The key to consistency and solid returns is to keep it simple."
She's bullish on stocks that are economically sensitive and defensive, and doesn't try to time the market when it comes to her cash positions.
"Lots of people get [either] the buy or the sell side right, but get whipsawed on the other. I'm not going to introduce that risk into my portfolios."