The CATS (capital tax sensitivity) approach to portfolio selection calls for switching between stocks in response to macroeconomic events that affect the relative rates of taxation on labor and capital. The Fat CATS approach combines the mechanical trading rules of the CATS approach with expert investment advice to signal switches between stocks and Treasury bills and, within stocks, between companies with high sensitivity to taxes on capital and those with low sensitivity.

Hypothetical results obtained with the Fat CATS strategy are encouraging. The Fat CATS approach outperformed the S&P 500 in 16 of 21 years between 1965 and 1985. The average annual rate of return on the Fat CATS portfolio over this period was 13.2 per cent. One dollar invested according to the Fat CATS strategy in January 1965 would have grown to $12.59 by December 1984. Over that period, the same investment in the S&P 500 would have grown to only $1.86.