The book shows that one key to successful investment strategy is scenario analysis. GaveKal is an independent research firm which studies monetary policy, fiscal policies, secular trends, technical analysis and asset class valuations to derive conclusions about likely asset class returns in different scenarios.

GaveKal’s philosophy is based on historical analysis which suggests that investment value is determined by two main variables, economic activity and prices. Economic equilibrium does not exist in the real world and activity follows trends and cycles, as does the movement of prices (inflation and deflation). If this is so then the environment moves through four principal scenarios with very different investment implications for each one.

Analysis can determine the scenarios with a higher rather than a lower probability of occurring allowing focus on those which have the highest probability of outcome. And this analysis eliminates low probability scenarios which allows portfolios to exclude assets which protect against a risk which does not exist.