What if we told you we found a simple two-factor method you can use to select investments that led to a 23.5% per year compound return (the market was 2.25%) over the 12 years we tested? That is a total return of 1157.5% compared with the 30.54% the market returned! That is what a combination of the 6-month price index with the lowest price-to-book value companies returned. Very interesting was that the ten best performing two-factor strategies all had one momentum factor as one of the factors.
This was hard for us to grasp as classical value investors fully. We always thought buying a cheap, good company would give you market-beating results. And the cheaper the company gets, the higher your returns will be. This strategy will give you market-beating results, but not nearly as good as buying companies where the share prices are already increasing.
For example, the 11th best performing two-factor strategy, 12-month free cash flow yield combined with price-to-book ratio, led to a total return of 713.7%. Not bad. But if you used the best-performing strategy, your return would have been 11.57 times your initial capital compared with only 7.13 times if you used the 11th best strategy!