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

Considerable research has documented the use of individual ratios or combinations to create portfolios that outperform the market. One factor that received a lot of 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 distribution of returns.

Other authors focused on different ratios. Joel Greenblatt focused on earnings yield and ROIC, and found that ranking US companies based on these measures and investing on a consistent basis in the top companies resulted in an outperformance of 23% compared with the benchmark. In our previous papers, we concluded that these results can be reproduced when we tested it 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 on a consistent basis.

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.