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My full interview with Jason Mann of EdgeHill Partners originally appeared in my national bestselling book, Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca.

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Jason Mann is all about momentum. At EdgeHill Partners, Jason runs the flagship EHP Advantage Fund. That fund has delivered a 23% compound annual return since its inception. How does Jason deliver such high returns? He employs a quant-based, rules-driven system for stock selection. Additionally, he follows a strictly balanced long/short policy, and maintains 400 to 500 highly liquid positions in the fund at any given time. Through the EHP Advantage Fund, Jason buys undervalued, rising, stable stocks and shorts overvalued, declining, volatile stocks. He actively gears down risk in declining markets and rotates toward more defensive stocks and strategies to preserve capital. Impressively, Jason geared down before the oil crash impacted Canadian markets. In the EHP Advantage
Fund’s fact sheet, there’s a chart that shows a clear divergence starting in August 2014 between the fund and the TSX, whereby the former rose while the latter plunged.

Jason’s idea of “gearing down” means taking very specific steps: reducing net exposure, rotating to more defensive strategies, and reducing beta to zero. This gear-down concept demonstrates that while Jason is full speed ahead in rising and stable markets, he knows when, how, and where to take a detour when there’s a crash up ahead. Jason says, “We aim to participate in bull markets and sit out of bear markets.” All investors should understand and implement risk management in their trading or investing practice, since protecting capital is just as important, or some might argue more important, than growing capital in the market.

In addition to the core long/short investment strategy employed at EdgeHill Partners, Jason also shared with me the other strategies he used while he was a managing director, co-head of the Absolute Return/ Arbitrage Group at Scotia Capital. The Absolute Return Group is responsible for developing and delivering cross-platform alpha-generating ideas for the hedge fund community.

Jason Mann’s 21 Investing Lessons:

1) “The way we run money here is quantitative, or systematic, or rules driven.”

2) “We want to buy the best combination of cheap, rising, and stable stocks.”

3) “Most important though is to determine the price of a company relative to its historical ability to generate cash. That’s what we care about when we measure value.”

4) “Forward estimates are just that — an estimate, just a collection of guesses — whereas backwards looking is a factual representation of what a company has been able to do.”

5) “Value works because the market becomes overly pessimistic about a formerly good company’s ability to ever regain its footing and generate cash flows.”

6) “‘What do you call a stock that’s down 90%? A stock that was down 80% and then got cut in half.’ You can buy something at an 80% discount and still take a lot of pain waiting for that value to play out.”

7) “Because we are both long and short, we can benefit from both sides of that trade.”

8) “Momentum feeds on itself. Think about the manager who manages $100 million, but then receives another $100 million. What do they typically do? They go buy the same stocks they already own.”

9) “The classic definition of momentum is 12-month rolling returns. I ask, ‘What has this stock done over the last 12 months, relative to all the other stocks in the index?’”

10) “[We’ll] score a stock relative to how well it’s done on that measure, relative to all the other stocks, and we want to buy the stocks that have the best price momentum and the cheapest valuation.”

11) “Who would ever buy overvalued, declining, volatile stocks? However, there’s a huge behavioural bias to buy those stocks. They have lottery ticket–like payoffs.”

12) “There is a behavioural bias to trade relatively liquid, small-cap, volatile stocks that can go up or down 10% a day. Holding those stocks in a buy-and-hold-type environment is ruinous to returns on a long-term basis. You can get periodic great returns, and long-term terrible returns.”

13) “We take an amount of risk where the expected volatility and drawdown is going to be in the 10% range.”

14) “Because we’re operating with repeatable human behavioural biases in terms of the market participants, you have a market that rhymes.”

15) “Virtually all investors who are successful over the long run are either very good at instinctively understanding what their own behavioural biases are and what the behavioural biases are out there to take advantage of, or they’ve built a set of rules and processes to constrain their actions, their risks, and their own behavioural biases.”

16) “A bought deal is when a company issues stock to the secondary market at a discount to its trading price. Bought deals are done at a discount. And if that bought deal is liquid, oversubscribed, and borrowable — meaning that we can borrow to hedge our risk — then it’s of interest to us.”

17) “We play volatile stocks where there’s a high probability of a small gain in a short period of time.”

18) “A market that is moving below its 50-, 100-, and 200-day moving average is a warning sign for us.”

19) “The VIX going from a stable state to a rising state indicates an increase in volatility.”

20) “The existence of probability is part of the reason why we run money systematically. It’s to avoid breaking a rule, letting our emotions get to us, buying too much of something, not selling when we should have, failing to take a capital gains loss, doubling down, and so on.”

21) “Stocks that are highly valued have a long way to fall before they get into a category where value investors step in and apply a floor.”

Robin Speziale is the national bestselling author of Market Masters, which is available at Chapters, Indigo, and Coles as well as Costco and Amazon.ca. He lives in Toronto, Ontario. Learn more about Market Masters.