Two factor results

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 (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 10 best performing two-factor strategies all had one momentum factor as one of the factors.

This was hard for us to fully grasp as classical value investors. We always thought buying a cheap, good company would give you market beating results. And the cheaper the company gets, the higher your returns would 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!