Evidence, Anomalies, and What Investors Should Actually Do
In the first two articles (1st, 2nd), we explored the foundations of the Efficient Market Hypothesis (EMH) and its three forms: weak, semi-strong, and strong. But theory is one thing — reality is another.
So today, we ask the big question:
👉 Do markets behave the way EMH says they should?
Let’s look at what the data says, the anomalies that challenge the theory, and what all this means for how you should invest.
🔬 Testing Market Efficiency: What Does the Evidence Say?
Researchers have spent decades running tests to verify whether markets really are efficient — and the results are... nuanced.
1. Price Patterns and Historical Data
If weak-form efficiency holds, past price data shouldn’t help predict future returns.
Numerous studies show that short-term anomalies do exist, like momentum and mean-reversion.
But once discovered, these patterns often disappear quickly — likely because traders exploit them until they vanish.
After transaction costs and slippage, most strategies based on past price trends are not profitable.
✅ Verdict: Some patterns exist, but they’re hard to monetize reliably.
2. Public News and Market Reactions
Semi-strong efficiency says markets instantly incorporate public information.
Studies on earnings announcements, mergers, dividend changes, and other news events show:
Prices adjust very rapidly, often within minutes of the announcement.
The window to profit from public news is so short that by the time you act, it’s too late.
✅ Verdict: Markets are impressively quick at absorbing public info.
3. Active Fund Managers vs. the Market
This is where EMH gets personal.
If markets were inefficient, we’d expect skilled fund managers to consistently beat their benchmarks.
But...
Most active managers underperform their benchmarks, especially after fees.
The few who do outperform one year rarely repeat the performance the next.
Even hedge funds and institutional players struggle to generate persistent alpha.
✅ Verdict: Beating the market is hard. Really hard.
🚨 The Anomalies: When Markets Get Weird
Despite the strong evidence for efficiency, markets are not always rational. Researchers have identified several pricing anomalies that should not exist under EMH.
Here are some of the most famous:
📅 Calendar Effects
January Effect: Stocks tend to perform unusually well in January.
Day-of-the-Week Effect: Mondays often have lower returns than other weekdays.
Holiday Effect: Stocks tend to rise before public holidays.
These patterns suggest that investor behavior, not just information, affects prices.
🔁 Momentum Effect
Stocks that have performed well in the short term tend to keep performing well — and vice versa for losers.
This violates both weak and semi-strong efficiency.
Momentum is one of the few anomalies that has persisted across time and markets.
It’s even used in quantitative strategies today (e.g. factor investing).
🧱 Size and Value Effects
Small-cap stocks tend to outperform large-cap stocks over long horizons (Size Effect).
Value stocks (low P/E, high dividend yield) often beat growth stocks (Value Effect).
These patterns challenge the CAPM and suggest that risk-adjusted returns aren’t always equalized.
❓ But Are These Real Opportunities?
Here’s where it gets tricky.
Many anomalies disappear after being published — a phenomenon known as data-snooping or backtest overfitting.
If thousands of researchers mine the same dataset, some patterns will appear just by chance.
Once investors start trading on a known anomaly, it tends to get arbitraged away.
Add transaction costs, taxes, and slippage, and many “edges” vanish in the real world.
✅ Bottom line: Some anomalies are real, but fragile. Most don’t survive contact with reality.
🧠 So... What Should You Actually Do?
Here are some practical takeaways for investors navigating a world that’s mostly efficient, but occasionally irrational:
1. Don’t Count on Beating the Market
Unless you have:
Insider information (illegal)
A genuine structural edge (rare)
Or a time machine (cool, but unlikely),
You’re better off investing passively and focusing on long-term strategy.
2. Control What You Can
You can’t predict the market. But you can:
Minimize fees
Diversify globally
Stick to your plan
Avoid emotional decisions
These boring things matter more than stock picks or market timing.
3. Use Anomalies Carefully
If you use momentum, value, or size factors:
Do so via systematic, rules-based strategies
Be aware of volatility and drawdowns
Don’t expect them to work all the time
Factor investing can work — but it’s not magic.
🎯 Final Thoughts: Beyond the Theory
The Efficient Market Hypothesis isn’t perfect.
Markets aren’t robots — they’re made of humans, and humans are messy.
But EMH gives us a powerful baseline:
Prices are hard to beat, and most information is already priced in.
That’s not a limitation — it’s a framework for making smarter, simpler decisions.
Because in the end, successful investing isn’t about outsmarting the market.
It’s about understanding how it works — and using that knowledge to your advantage.