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EVSM Investing

|Includes: Diedrich Coffee, Inc. (DDRX), KIRK

As far as I'm aware, there are only four documented factors that produce above average performance in the stock market that have survived robustness tests since they were first reported:

1. Earnings (or PEAD): the tendency for stocks to drift in the direction of their most recent earnings surprise.
Ball, R.J. and P. Brown, "An empirical evaluation of accounting income numbers," Journal of Accounting Research 6 (1968): 159-178.

2. Value: value stocks tend to outperform growth stocks.
Basu, Sanjoy, "Investment Performance of Common Stocks in Relation to Their Price-Earnings Ratios: A Test of the Efficient Market Hypothesis," Journal of Finance 32 (1977): 663-682.

3. Size: small-cap stocks tend to outperform large-caps.
Banz, Rolf W., "The Relationship Between Return and Market Value of Common Stocks," Journal of Financial Economics 9 (1981): 3-18.

4. Momentum: the tendency for recent outperformance to continue.
Jegadeesh, Narasimhan, "Evidence of Predictable Behavior of Security Returns," Journal of Finance 45 (1990): 881-898.

To take advantage of all of these factors, I buy small value stocks on earnings breakouts. This strategy seems to successfully identify huge winners, for example this year my best performers are DDRX (+786.79%) and KIRK (+330.04%).

Disclosure: Long DDRX, KIRK