Picking winners is a losing game

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Noah Bradley
5 years ago
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1 Pickig wiers is a losig game Ivestig the Trasparet Value Way Applyig a disciplied ivestmet process to help stack the odds of equity ivestig success i your favor.

2 At Trasparet Value, we believe successful equity ivestig is ot about tryig to pick wiig stocks but to rather actively avoid losers. It is ot RBP Probability is very similar to the success measure detailed i the book Moeyball, which recouts the story of Billy Beae, who led Stock ivestig should ot be a guessig game about idetifyig macro treds or the Oaklad A s, oe of the poorest ivestmet themes. It is ot about Major League Baseball clubs, to searchig for price mometum or out-of-favor buyig opportuities. Ad it certaily is ot about tryig to fid good stock stories. These approaches are all based o tryig to predict what might traspire i the future. By defiitio, however, the future is completely ukowable ad forecastig the ukowable future may oly icrease the likelihood of beig more regular seaso wis tha ay other team. Beae aalyzed the overlooked statistic of o-base percetage (OBP) ad foud that evaluatig cosistecy i gettig o base proved more effective i determiig whether or ot a player could help wi games tha other more popular measures. High OBP players help keep you i the game by Trasparet Value s uique RBP process was developed to address some fudametal problems associated with may equity portfolios. Ofte ivestmet maagers attempt to outperform a bechmark by makig educated guesses about a compay s future success. Eve for the most experieced professioals, however, forecastig the ukow future to make active stock selectios ca make ivestmet predictios very ureliable. Coversely, traditioal idex-based ivestig avoids this subjectivity, but it fails to offer ay type of outperformace potetial ad is completely exposed to broader equity declies. wrog ad ivestig i a loser. Trasparet Value recogizes that a elemet of luck is preset i the world of ivestig, ad whe luck is ivolved we believe that a systematic, disciplied process over time will lead to better outcomes. Applyig isurace compay risk maagemet lessos, Trasparet Value has built a ivestmet maagemet platform avoidig outs, ad more players o base aturally lead to more rus, which of course lead to more wis. Trasparet Value applies this same thikig to equity ivestig with its RBP Probability measure determiig the o-base percetage for stocks. Trasparet Value believes that a systematic, disciplied process over time will have a better outcome. Focusig o what is rather tha what might be The RBP process elimiates the emotio biases from ivestmet decisios that ofte lead ivestors astray. Our i-depth fudametal aalysis mathematically quatifies maagemet s ability to deliver the performace to support the curret stock price, istead of relyig o persoal judgmet ad ituitio, both of which ca be otoriously iaccurate i forecastig ivestmet results with ay log-term cosistecy. that uses the actuarial risk maagemet techiques to build portfolios that we believe are able to deliver more sustaiable log-term ivestmet results. At the heart of this process is a success measure called Required Busiess Performace (RBP ) Probability, ad it evaluates oe simple questio: Ca maagemet deliver the performace ecessary to support the stock price? About Trasparet Value Established i 2003 Deep dedicatio to a cosistet strategic ad ivestmet visio Cotiued executive ad portfolio leadership uder cofouders Julia Koski ad Arme Arus Strict adherece to the pateted RBP ivestmet process Costat RBP aalysis of more tha 2,200 stocks, 2,500 mutual fuds, 400 exchage-traded fuds, 100 closed-ed mutual fuds ad 150 variable auities Maagig equity risk more realistically Attemptig to pick wiers by tryig to predict the ukowable may icrease the likelihood of beig wrog ad ivestig i losers. We try to avoid losers from the start with a repeatable disciplied process that seeks to establish a clear lik betwee a compay s stock price ad what its maagemet must do o a daily basis to justify that valuatio. This helps idetify which compaies ca support their stock prices ad which firms caot. Combiig active research with idex trasparecy Trasparet Value s portfolios are maaged to track specific RBP idexes. We believe this offers the most attractive aspects of both active ad passive ivestmet maagemet by providig the deeper research isights of fudametal aalysis applied through the strict rules-based methodology of a idex-based portfolio. This avoids the icosistecy ad emotio that ca occur i purely qualitative strategies, as well as the black box metality usually associated with a purely quatitative approach. 1

Backed by a proprietary ivestmet methodology Basig decisios o fact, ot assumptios Determiig if price ad performace are aliged Systematically implemetig the RBP model Trasparet Value s RBP process

3 Backed by a proprietary ivestmet methodology Basig decisios o fact, ot assumptios Determiig if price ad performace are aliged Systematically implemetig the RBP model Trasparet Value s RBP process does ot rely o the traditioal otio of value or what we thik a compay is worth. Covetioal deductive reasoig about potetial growth drivers to forecast a stock s itrisic value might be exposed to tremedous subjectivity. Because this type of predictive forecastig ca be drive by persoal biases, it risks subjectig selectio portfolio to a radom outcome. We thik it makes more sese to remove persoal judgmet ad emotio from the research process i a effort to deliver more pragmatic, effective ivestmet results. RBP Methodology* Our research focuses oly o what is kowable: a compay s stock price ad its fiacial statemets. Usig these iputs, our RBP Methodology measures the reveue required to support a curret stock valuatio. It the calculates, based o past reveue growth, the RBP Probability that the firm will achieve these results. Our process uses a reverse discouted cash flow valuatio model to determie what the stock price implies i terms of curret reveue eeds ad bechmarks this agaist maagemet s past ability to perform. If maagemet is likely to achieve these goals, we feel the compay is worth the ivestmet. Trasparet Value s team of more tha 120 research aalysts cotiuously evaluates more tha 2,200 stocks usig the disciplied RBP ratig system. Iput: Curret stock price 1: Calculate compay s RBP 2: Calculate RBP Probability 3: Rak stocks by RBP The complemet to the RBP Probability is the Behavioral Risk Idicator (BRI), which provides a idicatio as to whether a stock price has dislocated from a compay s uderlyig fudametals. A low RBP /high BRI suggests that the stock price has rise to a level that makes it difficult for maagemet to deliver the reveue growth to support it. We feel that high behavioral risk stocks should be actively avoided. The fact is that losers are ofte the greatest determiat to overall performace, ad if a compay caot deliver the required reveue growth to support its stock value, it itroduces cosiderable risk that might erode portfolio returs. 4: Trasparet Value creates family of RBP Idexes The Trasparet Value Fuds are maaged out of our New York headquarters, utilizig graular RBP research o more tha 2,200 stocks coducted by our Idia-based research team. Our Mumbai ad Cheai, Idia offices were established i 2005 ad curretly cosist of more tha 120 research aalysts i additio to staff maagers ad team leaders. Each aalyst operates i a idustry-specific team ad covers approximately 20 compaies. This process applies tailored RBP templates structured for the idustryuaced fiacial reportig stadards of the eergy/oil & gas, real estate, bakig, home builders, broker dealers, isurace ad commercial sectors. To esure tight cotrols over team quality, cosistecy ad cotiuity, our recruitig ad traiig is similar to the ivestmet bakig model, with strict hirig criteria followed by itese classroom istructio ad hads-o immersio ito our philosophy ad process. Isolatig additive factors to potetially ehace returs The RBP aalysis is further ehaced by combiig the RBP sigal with other fudametal ad techical factors.these screes esure portfolio liquidity ad refie applicatio to specific ivestmet objectives. Refiemets draw from cotiuous academic research RBP Methodology is costatly tested ad subject to cotiuous improvemet ad ehacemets usig isights developed from academic research. This process focuses o idetifyig ew statistical distributios that ca lead to improved performace. Stock uiverse $ High RBP /Low BRI Ivest Apply rules-based portfolio costructio Stock price Low RBP /High BRI Disciplied portfolio costructio ad executio Calculate required free cash flow ad Required Busiess Performace (RBP ) over the ext 12 moths to support the curret stock price RBP Probability Behavioral Risk Idicator (BRI) Cout frequecy of achievig this RBP i the past 12 quarters Calculate probability that a compay ca deliver the RBP over the ext 12 moths Avoid Sort stock uiverse by RBP Probability ad BRI Filter by relevat idexspecific characteristic screes, such as ivestmet style, mometum, beta or market capitalizatio Weight stocks by RBP Probability Strict portfolio costructio rules allow portfolio maagers to focus o the efficiet tradig ad replicatio of the idex. This cocetrates portfolio expertise o core areas that are ideed cotrollable ad elimiates ay idividual stock selectio or sector weightig biases by a portfolio maager that could elevate ivestmet risk. Rebalace quarterly * The RBP Methodology is ot ecessarily the right or oly way oe should ivest, but a optio. RBP ad BRI are based o a proprietary ivestmet strategy (or model), ad there is o assurace that either the probability score or risk idicator will successfully idetify compaies based o these measures. The diagram is for illustrative purposes oly. Output: Trasparet Value ivestable portfolios 2 3

4 RBP portfolio applicatios Trasparet Value offers ivestors a rage of strategies ad services to apply the disciplied isights of RBP research. Trasparet Value RBP Idexes SM The Trasparet Value RBP process is applied to specific uderlyig S&P Dow Joes Idex bechmarks. Each idex also has bee further tailored to create portfolios with specific risk ad ivestmet style characteristics. Trasparet Value Fuds Trasparet Value offers a array of professioally maaged mutual fuds desiged to track certai RBP idexes. Usig differet market exposures, ivestmet styles ad the ability to dyamically cotrol equity exposure based o chagig market risk these idexes are desiged to be used as core portfolios. Istitutioal portfolios ad separate accouts Trasparet Value also offers customized RBP portfolio maagemet solutios to help istitutioal ivestors meet specific ivestmet goals ad/or parameters. The RBP Istitute ( This istitute offers a easy way to access RBP research, allowig users to evaluate RBP Probabilities for umerous stocks, popular idexes, mutual fuds, closed-ed fuds, exchage-traded fuds ad variable auities, as well as iput ad track idividual portfolio holdigs. See the market clearly Trasparet Value seeks to offer equity ivestors exposure to better risk-adjusted returs. Our highly itesive Required Busiess Performace (RBP ) process quatifies the probability of whether a stock ca perform accordig to market expectatios. How may iphoes must Apple* sell to support its curret share price? How may packages must FedEx* ship? The aswers to these types of basic questios ca provide a clearer view of which stocks offer the most compellig risk/reward potetial. Our process forms the basis for the family of Trasparet Value Idexes SM. Each Trasparet Value portfolio is desiged to track a specific RBP Idex, providig ivestors with the research isights of active maagemet combied with the trasparecy, cosistecy ad disciplied rules-based methodology of a idex-based portfolio. The RBP ivestmet philosophy Guessig if a stock price reflects a compay s true value ca be risky. Maagemet performace is oe of the key factors i supportig a stock s price ad hece more stable returs over the log term. Stock prices aloe are ureliable proxies for compay worth sice they are largely based o collective market biases about future expectatios, which sometimes prove true but sometimes do ot. Ivest i maagemet teams best positioed to meet or beat market expectatios; we believe these are the firms most likely to be rewarded with higher stock prices. Ask your Fiacial Advisor for more iformatio about Trasparet Value. You ca also lear more by cotactig or visitig Steadily avoidig losses ca play a much more critical role i ivestmet success tha chasig potetial gais. Ay portfolio losses ca have a egative compoudig effect, meaig ivestmet gais must be eve higher just to get back to a eve level; avoidig stocks with fudametals that caot support their stock prices i the first place may greatly help to reduce this dowside risk. Select ad weight stocks relative to all others. Cast a broad et; active market capitalizatio weightig ad maagig specific sector allocatios oly exacerbate ivestor biases that icrease risk. Die cuts for busiess card Kowig whe to sell is as importat as kowig whe to buy if ot more so. Be quick to sell whe a compay s stock price begi to dislocate from uderlyig fudametals. This white pael is a pocket that folds i from the right side ad pastes top ad bottom 4 *Apple ad FedEx are used as examples oly ad are ot recommedatios to buy.

5 Fud Risks A ivestmet i the Trasparet Value Fuds ivolves risk, icludig loss of pricipal. Sice the Fuds ivest i securities comprisig idexes created by a proprietary model, the Fuds may have a lower retur tha if the Fuds were maaged usig a fudametal or idex-based strategy that did ot icorporate quatitative aalysis. The Fuds are o diversified ad, as a result, may have greater exposure to volatility tha other fuds. Ivestors should cosider the ivestmet objectives, risks, charges ad expeses of the Trasparet Value Fuds carefully before ivestig. To obtai a prospectus cotaiig this ad other iformatio o Trasparet Value Fuds, please cotact or visit www. trasparetvalue.com. Read the prospectus carefully before ivestig. Defiitios: Discouted Cash Flow aalysis is a method of valuig a compay, or asset usig the cocepts of the time value of moey Free Cash Flow is a measure of fiacial performace calculated as operatig cash flow mius capital expeditures. Free cash flow (FCF) represets the cash that a compay is able to geerate after layig out the moey required to maitai or expad its asset base. ALPS Distributors, Ic. is ot affiliated with the Trasparet Value Istitutioal portfolios or separate accouts. Trasparet Value Fuds are distributed by ALPS Distributors, Ic., Guggeheim Distributors, LLC ad Guggeheim Fuds Distributors, LLC ad are marketig agets for Trasparet Value Mutual Fuds. Trasparet Value, LLC, Guggeheim Distributors, LLC ad Guggeheim Fuds Distributors, LLC are subsidiaries of Guggeheim Parters, LLC Trasparet Value, LLC. All rights reserved. No part of this documet may be circulated, quoted or reproduced for distributio without prior writte approval from Trasparet Value, LLC. Trasparet Value, LLC 135 East 57th Street, 15th Floor, New York, NY TVA /31/2013

Transparent Value Dow Jones RBP Directional Allocation Index Fund

Transparent Value Dow Jones RBP Directional Allocation Index Fund Trasparet Value Dow Joes RBP Directioal Allocatio Idex Fud Stock ivestig should ot be a guessig game At Trasparet Value, we believe successful equity ivestig is ot about choosig a growth or value ivestmet