Market efficiency hypothesis suggests that markets are rational and their prices fully reflect all available information. ... The functioning of these stock markets deviate from the rules of EMH. These deviations are called anomalies. Anomalies could occur once and disappear, or could occur repeatedly.

A market anomaly refers to the difference in a stock's performance from its assumed price trajectory, as set out by the efficient market hypothesis (EMH). ... In theory, this should make it impossible to purchase overvalued stocks, or sell a stock above its value, because it would always trade at a fair market price.

Market anomalies can be great opportunities for investors.Anomalies should influence but not dictate a trading decision.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.

1. Small Firms Tend to Outperform:

Smaller firms (that is, smaller capitalization) tend to outperform larger companies. As anomalies go, the small-firm effect makes sense. A company's economic growth is ultimately the driving force behind its stock performance, and smaller companies have much longer runways for growth than larger companies.

2. January Effect:

The January effect is a rather well-known anomaly. Here, the idea is that stocks that underperformed in the fourth quarter of the prior year tend to outperform the markets in January. The reason for the January effect is so logical that it is almost hard to call it an anomaly. Investors will often look to jettison underperforming stocks late in the year so that they can use their losses to offset capital gains taxes (or to take the small deduction that the IRS allows if there is a net capital loss for the year).1 Many people call this event "tax-loss harvesting."

3. Low Book Value:

Extensive academic research has shown that stocks with below-average price-to-book ratios tend to outperform the market. Numerous test portfolios have shown that buying a collection of stocks with low price/book ratios will deliver market-beating performance.

The Bottom Line:

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