www.variantperception.

com

THEMATIC

An insanely simple
guide to investment
December 2014
Contents
Simplicity and Occams razor .......... 3
The business cycle and the stock
market ............................................. 3
Avoiding
fear
and
greed:
understanding stock market cycles .. 4
Best buying opportunities: Buying
when others are fearful .................. 10
Sector rotation: stocks to beat the
business cycle ............................... 12
Style rotation ................................. 18

Some investors only look at markets from a top-down perspective, while

others focus intensely on individual stocks and are blindsided by major
market downturns. Macro investors and bottom-up value investors are
separate tribes that rarely, if ever, speak. It doesnt need to be that way.
In this report, we bring together our top-down tools and integrate them with
bottom-up stock selection to create portfolios that provide very attractive riskreturn profiles. We provide a roadmap for investors to navigate the ups and
downs of the market and choose stocks that will beat the major indices. We
tie together our macroeconomic signals to sector and stock selection, and we
show what kinds of stocks do best at different points of the economic cycle.

Sector-style rotation ...................... 20

Combining portfolio rotation with our
tactical signals ............................... 21
Viability of sector rotation and the
reality of portfolio management ..... 24

We have created tools that are robust, repeatable and as simple as possible,
but not simpler. We demonstrate how to use our leading economic indicators
and signals to invest, avoid large drawdowns and benefit from potent rallies
off market bottoms.

VP quality portfolio ........................ 25

Final thoughts................................ 26

At Variant Perception, we try not to over-complicate. We have presented

here what we believe are the best tools to help one invest in the most
profitable, stable and consistent way. Steve Jobs abhorred complexity and
instead demanded that Apple products, no matter how technologically
advanced, should be insanely simple to use. We hope this guide to
investment will be no different.
HIGHLIGHTS
> The stock market tends to rise and fall over time in line with the
economy. Generally, whenever the real economy has been doing poorly,
markets have declined, and when the economy has been improving, the
market has done well.
VP MACRO THEMATIC DEC 2014 P.01

www.variantperception.com

> Variant Perceptions leading indicators allow us to understand where

we are in the business cycle. This can be used to improve equity
returns. Investors can avoid market downturns and choose the right
stocks for each phase of the cycle. Generally, cyclical stocks tend to do
better when the economy is growing or recovering from recession. During
economic slowdowns and crashes, non-cyclicals are preferred, or having
no exposure to stocks at all.
> Depending on where we are in the business cycle, certain factors
have a tendency to outperform.
Our intuition was that certain
quantitative or qualitative screens should do better in different phases of
the economic cycle. We identified five distinct factors for equities (value,
forecast momentum, price momentum, small caps and financial strength)
and rotate between them to generate attractive risk reward portfolios.
> The biggest hit to long term performance comes from being invested
in stocks at the starts of recessions. The best way to avoid large
declines in your portfolio is to avoid being invested in the market during
economic recessions. This is much easier said than done, as the vast
majority of economists are incapable of identifying a recession in real
time. At Variant Perception we have created a wide variety of tools to
identify recessions in real time. In fact, we correctly identified the start
and end of the 2008-09 recession in real time.
> The very best time to buy the stock market is near the end of a
recession. When things are very bad, almost all the bad news is priced
into the market. Investors are generally paralyzed by fear as markets
decline and they often dump stocks irrationally. Even buying close to the
bottom might mean accepting very large drawdowns. Fortunately, at
Variant Perception we have developed a series of objective tools and
signals to tell us if were near a market bottom.

VP MACRO THEMATIC DEC 2014 P.02