Which anomalies are more popular and why

The Dogs of the Dow are included as an example of the dangers of trading anomalies. The idea behind this theory was basically that investors could beat the market by selecting stocks in the Dow Jones Industrial Average that had certain value attributes.

Investors practiced different versions of the approach, but there were two common approaches. The first is to select the 10 highest-yielding Dow stocks.

The second method is to go a step further and take the five stocks from that list with the lowest absolute stock price and hold them for a year. It is unclear whether there was ever any basis in fact for this approach, as some have suggested that it was a product of data mining.

Even if it had once worked, the effect would have been arbitraged away—for instance, by those picking a day or week ahead of the first of the year. To some extent, this is simply a modified version of the reversal anomaly; the Dow stocks with the highest yields probably were relative underperformers and would be expected to outperform.

Attempting to trade anomalies is a risky way to invest. Many anomalies are not even real in the first place, but they are also unpredictable. What's more, they are often a product of large-scale data analysis that looks at portfolios consisting of hundreds of stocks that deliver just a fractional performance advantage.

Likewise, it would seem to make sense to try to sell losing investments before tax-loss selling really picks up and to hold off buying underperformers until at least well into December. Internal Revenue Service. Trading Basic Education. Mutual Fund Essentials. Mutual Funds. Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data.

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January Effect. Low Book Value. Neglected Stocks. The Days of the Week. Dogs of the Dow. The Bottom Line. Key Takeaways Market anomalies can be great opportunities for investors. Anomalies should influence but not dictate a trading decision. Proper research of a company's financials is more important for long-term growth.

Most market anomalies are psychologically driven. There is no way to prove these anomalies, since their proof would flood the market in their direction, therefore creating an anomaly in themselves. Article Sources. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

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Related Terms Anomaly An anomaly is when the actual result under a given set of assumptions is different from the expected result. January Effect Definition The January Effect is the tendency for stock prices to rise in the first month of the year following a year-end sell-off for tax purposes.

Reading Into the Small Firm Effect The small firm effect is a theory that holds that smaller firms, or those companies with a small market capitalization, outperform larger companies.

Neglected Firm Effect The neglected firm effect is a market anomaly that predicts lesser-known stocks outperform the market due to information deficiencies.

People have offered several different opinions, but many of the anomalies have no conclusive explanations. There seems to be a chicken-or-the-egg scenario with them too - which came first is highly debatable. Profiting From Anomalies It is highly unlikely that anyone could consistently profit from exploiting anomalies. The first problem lies in the need for history to repeat itself. Second, even if the anomalies recurred like clockwork, once trading costs and taxes are taken into account, profits could dwindle or disappear.

Finally, any returns will have to be risk-adjusted to determine whether trading on the anomaly allowed an investor to beat the market. Conclusion Anomalies reflect inefficiency within markets. Some anomalies occur once and disappear, while others occur repeatedly. History is no predictor of future performance, so you should not expect every Monday to be disastrous and every January to be great, but there also will be days that will "prove" these anomalies true!

Financial Architects, LLC. Accessed May 27, William Schwert. Portfolio Management. Personal Finance. Technical Analysis Basic Education.

Your Privacy Rights. To change or withdraw your consent choices for Investopedia. At any time, you can update your settings through the "EU Privacy" link at the bottom of any page. These choices will be signaled globally to our partners and will not affect browsing data. We and our partners process data to: Actively scan device characteristics for identification. I Accept Show Purposes. Your Money. Your Practice. Popular Courses. Investing Markets. Article Sources. Investopedia requires writers to use primary sources to support their work.

These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy. Compare Accounts. The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear.

Investopedia does not include all offers available in the marketplace. Related Articles. Markets What Is Market Efficiency? Personal Finance Personal Finance Calendar. Partner Links. Related Terms Anomaly An anomaly is when the actual result under a given set of assumptions is different from the expected result. What Is Finance? Finance is the study and management of money, investments, and other financial instruments.

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