This paper examines which historical value factors or financial ratios have the highest probability of consistently outperforming the market.

Considerable research has documented using individual ratios or combinations to create portfolios that outperform the market. One factor that received much attention in the past is the book-to-market investment strategy. Studies by Lakonishok, Shleifer and Vishny (1994) and Fama and French (1992) have demonstrated that buying a portfolio of high book-to-market (low price-to-book ratio) companies results in market outperformance. Joseph Piotroski (2000) extended this research by creating his own Piotroski F-score, an accounting-based 9-point scoring system that, when used in combination with high book-to-market (low price-to-book) companies, shows a consistent upward shift in the distribution of returns.

Other authors focused on different ratios. Joel Greenblatt focused on earnings yield and ROIC. He found that ranking US companies based on these measures and investing consistently in the top companies resulted in outperformance of 23% compared with the benchmark. In our previous papers, we concluded that these results could be reproduced when we tested them on European companies. James O’Shaughnessy focused on different factors, such as price-to-sales, and proved in his tests that these value factors help create portfolios that outperform the US market consistently.

The studies above were performed using different datasets and periods, so it’s not trivial to understand which factors or combination of factors leads to the most market outperformance. The goal of this paper is to provide more clarity in this area and to help investors understand which ratios lead to the biggest market outperformance and which have no effect. Finally, we combine the single factors generating the highest market outperformance with a second factor to determine if this increases market outperformance even more.