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The best strategies we have tested

The table below shows the most profitable strategies we found in the 50 page research paper called Quantitative Value Investing in Europe: What Works for Achieving Alpha as well as all our research since then.

Easy to implement

Even though the strategies may look complicated at first don’t let that worry you, they are all easy to implement with the screener. And if you struggle remember help is just an email away.

Don’t choose the highest returns, rather find the right strategy for you

These are all strategies with very good returns and your goal here is not to choose the highest return strategy.

Your goal is to choose the strategy that matches your investment style. This will also be the strategy you feel most comfortable with and the one that will allow you to sleep comfortably at night.

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Price Index 6m & Price to Book

The Price Index (PI) ratio (Current share price / Share price 6 or 12 months ago) is another good ratio you can use to find investment ideas.

Strategies involving PI are generally known as momentum strategies as they allow you to profit from the momentum of a company’s share price.

Momentum has been tested in numerous research papers, over long periods of time, and is an investment strategy that outperforms the market.

Can be improved
But, as you have seen with other one ratio investment strategies, it can be substantially improved.

But before we get to that here are the back tested returns you could have earned if you used a high Price Index strategy to invest in Europe over the 12 year period 13 June 1999 to 13 June 2011.

Price Index 6 months
PI_6m_stand_alone

Source: Quantitative Value Investing in Europe: What works for achieving alpha

Price Index 12 months
PI_12m_stand_alone

 Source: Quantitative Value Investing in Europe: What works for achieving alpha

Q1 (Quintile 1) represents the 20% of companies with the highest Price Index (share price has gone up the most) and Q5 (Quintile 5) companies with the lowest Price Index (share price has gone up the least or fallen the most).

For both strategies the highest PI companies (Q1) substantially outperformed the market, which over the same 12 year period returned 30.54%.

As you can see the strategies worked best for small companies.

You can do even better
As mentioned you can improve your returns substantially if you combine the PI with another ratio or indicator as the table below shows:

Price Index 6 months (highest 6 month Price Index companies combined with)

PI_6m_multifactor

Source: Quantitative Value Investing in Europe: What works for achieving alpha

Best combination – Price to Book (PB)
The best way to increase your returns was to combine 6 month PI with low Price to Book value companies.

Price Index 12 months (highest 12 month Price Index companies combined with)

PI_12m_multifactor

Source: Quantitative Value Investing in Europe: What works for achieving alpha

Best combination – 12 month PI
The best way to increase your returns was to combine 12 month PI again with the top 20% of companies with the best 12 month Price index. This would have given you a list of companies whose share price has gone up the most over the past year.

Your second best strategy would have been to combine 12 month Price index with low Price to Book value companies.

PI 6 month the better strategy
You can however see that the 6 month Price Index would have given you much higher returns.

Exact definition – in glossary
You can find the exact definition of all the ratios and indicators in the Glossary.

 

Be careful! – Long periods of under-performance

Although the Price to Book ratio is a good valuation ratio it also has long periods of under-performance, please refer to the following article: Be careful of this time tested value ratio

 

Period
May 1999 - Jun 2011

Index
+2.25% pa

Return
+23.5% pa +1157.5% 12yr