Residents of the United States, please read this important information before proceeding
Please read this important information before proceeding.
Perhaps the most surprising thing about these anomalies is that they persist. One would think that, as more investors learned about them, more would try to take advantage of them and thereby reduce their effectiveness. Yet although entire books have been written about the January Effect, a 2006 report by professors Mark Haug and Mark Hirschey at the University of Kansas found that “abnormally high rates of return on small-capitalisation stocks continue to be observed during the month of January”.
UCLA’s Professor Subrahmanyam believes such anomalies will continue to throw up opportunities for investors, even as they become well known. “There is evidence that after discovery, anomalies do weaken,” he says, “but they do not completely disappear.”
The biggest obstacle to exploiting them is – for the individual investor especially – the costs involved. If you were going to play the January Effect, for example, you might reasonably target small companies because of their record of strong gains. However, shares in small companies are the most expensive to trade (they are typically less liquid than those of large-caps, meaning that brokers offer a much wider spread between the bid and offer prices). So any gains you made by playing the anomaly might be outweighed by transaction costs.
There are, of course, alternatives to buying small-cap shares directly. You could invest in an appropriate index tracker, exchange traded fund or leveraged fund. But then you’d have fees to consider too.
The bottom line is that, although these anomalies seem to offer the promise of short-term gains, they are not guaranteed to recur, and relying on history to repeat itself is a risky business. Shock events such as the collapse of Lehman Brothers will happen again, without warning, and when they do they will disrupt even the most dependable trends. That is why it is vital to formulate and stick to an investment strategy measured in years, not days.
A large number of regular market anomalies have been identified over the years. We have rounded up the ones that we think are the most significant. But please bear in mind that the value of investments can fall as well as rise and you may get back less than you originally invested.