With this two-factor back test we took the cheapest 20% of companies in our universe with the lowest price-to-book value and then sorted these companies into five quintiles based on the second factor we tested.

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Of the nine two-factor strategies we tested, using the price-to-book as the first factor led to by far the highest average return of 620% (median 617.5%). The best two-factor strategy was combining cheap price-to-book companies with the companies that had the highest 6-month price index value. This led to a total return of nearly 1030% over the 12 year period we tested. The second best combination was also momentum, and was the combination of price-to-book value with the highest 12-months price index companies. This led to a total return of 987%.

The worst strategy was the combination of low price-to-book companies with companies that had the highest 5-year average earnings yield. This would have led to a total return of 354.3%. Not bad at all, but not close to the 1030% of the best performing two-factors.

It is of course very hard to make predictions about what investment strategy will work best in future, but looking at the dreadful market over the last 12 years the returns of buying low price-to-book companies with a high 6-months price index is truly astounding.