6 ideas
Across decades of Compustat data, buying the stocks with the lowest price-to-sales ratios beat the market more consistently than low P/E or low price-to-book. Sales are harder to manipulate through accounting choices than earnings, and they stay positive when earnings go negative, so the ratio still separates cheap from expensive in troubled companies.
Human forecasters overweight vivid stories, recent events, and their own confidence, so they apply their criteria inconsistently from one decision to the next. A mechanical model that applies the same screen every time captures the edge without those lapses, which is why base-rate rules outperform most discretionary managers.
First filter for cheapness, such as low price-to-sales. Then, among those cheap stocks, buy the ones with the strongest relative strength. The value screen keeps you from overpaying, and the momentum screen avoids 'value traps' that are cheap because they keep falling, giving better risk-adjusted returns than either factor alone.
Stocks with the highest P/E, price-to-book, or price-to-sales ratios have delivered returns well below the market over long periods. Investors extrapolate exciting growth stories into prices that later disappointments cannot sustain. Buying popular, expensive stocks is a systematically losing strategy, not a neutral bet.
Look at how often a strategy beat the market across every rolling period, such as the percentage of all 5- and 10-year windows. Don't judge it by its best stretch or a memorable winning stock. The base rate shows how reliable the strategy is and how long its dry spells last, which determines whether an investor can realistically stick with it.
Even strong factor strategies go through multi-year periods of trailing the market. Most investors abandon them during these stretches and so never collect the long-term premium. The advantage lies less in knowing the rules than in following them when they feel wrong.