In the grand scheme of things, how big is Apple?

Apple, Inc., producer of the iPhone, announces quarterly earnings on Tuesday.

This WSJ article claims that the cash and cash equivalents on APPL’s balance sheet will exceed $250 billion dollars. I put this article together to give you some idea what that looks like.

Relative to the World:

$250 billion is about the same size as the nominal GDP of Venezuela, Pakistan, Chile, Bangladesh, or Finland. It’s about the same size as the combined GDP’s of the smallest 61 countries in the world. I repeat, Apple could afford to buy the smallest 61 countries in the world using ONLY CASH!!

Switching to revenue as a metric:

Apple, at $233.72b, would be the 47th largest country in the world, between Vietnam and Peru. For relativity, Toyota Motor produces $236.6 b in revenue each year. The largest company in the world is Walmart at $482.13 b in revenue. Walmart would sit between Poland and Belgium if you allow sales to be a metric compared with GDP. Walmart is bigger than Belgium, UAE, Norway, Hong Kong, South Africa, Denmark; the list goes on and on.

Of the top 15 largest corporations in the world (FORBES), six are commodity producers, two are automotive producers, two tech (Apple, Samsung), and two conglomerates, one is utilities, one pharma, and one financial. Apple makes up 6% of the revenue of the top 15 companies in the world.

top15

In terms of Geography:

Five are USA based, four Chinese, and one from each of the following: UK, Germany, Japan, S. Korea, Switzerland, and Netherlands.

bygeography

This is the world represented by the top 15 companies sorted by sales revenues. Note: Eight (8) countries represented.
percentsgeography

This is the world represented by the top 8 economies sorted by GDP. Strangely similar eh?

top8gdp

Grexit: Should we be worried?

Without another bailout, Greece is set to default in June on yet another debt payment of $7.0b.  If Apple agreed to pay instead of the Greek government, it would represent just 2.8% of the cash on Apple’s balance sheet.

The entirety of Greece’s nominal debt in dollars is $375.6 billion. Apple’s total debt is around $100 billion. Apple’s total cash is around $250 billion. Apple could afford to buy two-thirds of Greece’s debt using ONLY CASH. It would only need about $125 billion in nehw debt to completely refi te whole country.

Remind me, why are we worried about Greece again?

Food for thought. Thanks for reading.

– Tommander-in-Chief

Sauce:

1.) http://statisticstimes.com/economy/countries-by-projected-gdp.php

2.) http://fortune.com/global500/list

3.) https://www.wsj.com/articles/apples-250-billion-cash-pile-enlivens-hopes-fuels-expectations-1493566748

In the grand scheme of things, how big is Apple?

Relative Performance: Equal or Market Capitalization Weighted Index?

Using SCHA and SCHX as proxies for Small and Large cap equity markets, I attempt to measure cumulative relative performance over one (1), two (2), and three (3) year time periods.

The S&P 500 is a market capitalization weighted index, meaning the biggest companies have the biggest weights in the index. The Dow Jones Industrial Average (DJIA) is a price weighted index. So companies with large stock prices are weighted heavier. (Example: Goldman Sachs at $230 has much more weight than Intel at $34). There are also equal weight indexes (Ticker: RSP). These weight each stock in the index equally, regardless of price or market cap. (Ex: 60 stocks, each gets 1/60th weighting.)

Investing your money in a market cap weighted index leaves you relatively more exposed to larger companies, where equally weighted indexes leave you more exposed to smaller caps. Price weighted indexes have very little mathematical basis, other than they’re easy to understand. Price weighted indexes are not good representation of changes in value of the stock market, thus we ignore them in this exercise.

Small cap stocks tend to exhibit more price movement, i.e. more volatility. More risk, more reward. On average, small caps will outperform in a bull market, but under-perform in a bear market. The strategy goes, overweight small caps when times are good, overweight large cap value (Walmart, Walgreens) when times go sour.

Here’s the relative cumulative performance of Small/Large Cap equities. A number above one (1) means small cap is outperforming, while a number less than one (1) means Large Caps are outperforming.

rp_largesmall

 

The above graph shows relative cumulative performance starting in March of each year. Example, blue line shows 36 month relative cumulative returns, while the green line shows the 12 month relative cumulative returns.

Since Trump took office in November of last year, we’ve seen a bump in small caps, then a subsequent sell off, relative to large caps. Small caps popped first, then large caps followed. However, small caps have outperformed relatively since last year, while large caps have performed better since three (3) years ago.

We need to compare this to an average ratio for each time period (far right column). Note: these are weekly returns (March thru March).

smalllargetable

Large Cap have outperformed Small Cap over the last three years, pretty significantly, and under-performed over the last twelve (12) months.Thus, equal weight has outperformed over the past year as we see below. However, Large caps have made a *Huge* rally relative to small caps since February. Here we used RSP and SPY as proxies for equal and market weighted indexes.

rp_eq_mkt

Strategy: Large Caps were over valued last March, but Small cap valuations are catching back up. Buy equal weight for the 6-9 month time period, then re-evaluate relative performance. Note: Tax reform will help Small cap over Large cap, so watch for tax reform in late summer,early fall (LINK, Fortune).

Disclaimer: this article is designed to help you choose between Equal or Market cap weighted indexes; I’m not advocating specific securities. This is only one measure of relative valuation, do more research on your own before purchasing securities. I do own SCHA.

Relative Performance: Equal or Market Capitalization Weighted Index?

Supersize Me’s Effect on MCD’s Stock Price

Image result for mcd

I’ll save you the suspense: MCD’s stock price returns were affected by the release of Morgan Spurlock’s Supersize Me on May 7, 2004. However, MCD’s stock price returns were also unaffected by the release of Morgan Spurlock’s Supersize Me when measured differently.

If you just change how you measure the reaction, you can get the data to tell you what you want. In the business it’s called confirmation bias or data mining. The desire to produce a positive result incentivizes researchers to get the numbers to tell them what they want to hear.

In the example of McDonald’s stock price, we use an event study to gauge the average change in stock price before and after the ‘event’. Morgan Spurlock’s Supersize Me didn’t portray McDonald’s fares in the most appealing light, so I expected to find a negative change in the returns and volume of McDonalds stock, all else held constant.

Quick stats refresher:  A big t-stat implies rejection of the null hypothesis, in favor of the tested hypothesis. A small p-value implies significance. A p-value ranges from [0,1] with zero being the most significant and one being the least.

Using a simple t-test to compare average daily returns here’s my results:

Screen Shot 2017-03-08 at 4.51.39 PM.png

A small p-value, as we see above, implies significance. This means the average return on MCD’s stock was significantly different before and after the release of Supersize me! But check this out…

Screen Shot 2017-03-08 at 4.51.32 PM.png

Over the same time period, but at a weekly tenor, we see a different result. This p-value is huge, the average weekly returns were not significantly different from one another before and after the release of Supersize me.

 

Screen Shot 2017-03-08 at 4.49.49 PM.pngScreen Shot 2017-03-08 at 4.50.19 PM.png

This exercise goes to show you should be wary and inquisitive if a statistic doesn’t make sense or makes too much sense. The financial world is not a laboratory where everything works out the way it “should” according to the models. Statistical findings are useful tools to model and describe our world, but always take them with a grain of sand. (I’m never sure if its sand or salt…)

Challenge ideas, be inquisitive, and don’t get all your news in one place.

Thanks for reading,

-tommander-in-chief

Note 1: If you want the data, I’ll be happy to provide it.

Note 2: Time Period (Jan. 1, 2004 – Sept. 20, 2004)

Side note: Risk is a human made concept. If you can associate a probability with an uncertainty, you’ve created risk. If you can’t calculate a probability that an event will occur it remains an uncertainty, and is either over or underestimated depending on your past experiences. For example: you hear about a recent shark attack on the news and are planning a day at the beach. Because of immediately available information, you overestimate the probability that you’ll be attacked by the shark and spend the day building sandcastles rather than shredding the surf. The risks don’t match up.Your perceived risk and the probability that you’ll be gobbled up by a Great White are different.

 

Supersize Me’s Effect on MCD’s Stock Price

Golf Options: An exersize in derivatives

In this article, I’ll try to explain derivatives using the price of a season pass to a golf course, the price of a gallon of milk, and from the perspective of a corn farmer.

Red Rocks Golf Club, in Rapid City, SD, sells season golf passes for $1,450 per adult, plus an additional charge of $525 for a single seat cart pass. An 18 hole round of golf at Red Rocks costs $59, excluding tax, with an additional $21 for a cart. Red Rocks is betting that patrons will golf 24.58 times over the course of the year, (1450/59). They’re also betting that you’ll use the cart 25 times over the year (525/21). By this measure, the cart pass is overvalued. The cart pass should be valued by the same metric as the golf pass; a club member should refuse to pay anything over $516.18 (plus tax) for the cart pass.

How is this a derivative?

The golf course is selling you the option to golf. Whether you use that option enough times, i.e. golf enough rounds, is completely up to you. I would venture to guess that the price of a golf pass at Red Rocks has outpaced inflation. Why? Perhaps people are golfing more. If the golf course sells the pass, and the golfer gets 40 rounds in throughout the year, Red Rocks loses money on the investment, but the golfer gains. The intrinsic value of the golf pass can be expressed as such:

IV(golf pass) = Price of Pass – (# of Rounds* Price Per Round)

Note: Price of Pass and Price per Round are both constant and known; the only variable is how many rounds of golf the golfer plays.

Black Friday:

The BF price implies the commercially saavy golfer will only play 19.66 rounds of golf. The BF price on a cart pass ($472.50) implies the golfer will use the pass 22.5 times. Personally, I don’t know many people who like to go to the golf course just for a drive. Why the discrepancy?

I would be curious to see how the rates have changed over time. I wonder if the number of rounds implied has changed over time or if the price is arbitrary. This is the type of problem for an actuary. Under a perfect price discriminatory environment and with perfect information, the club could sell to each patron at a price consistent with their past behavior. A retiree who lives near the golf course and golfs 80 rounds a year is exploiting the system, while someone who can only golf 15 times a year is getting hustled. Looking at a patron’s past should determine their rate, just like insurance.

“Golf is too hard,” some say. And rates of participation are showing it. Red Rock installed a defensive strategy into their rates. College students and millennials get a discount on their passes as a direct result. Supply and demand states that if demand drops so do prices. So instead of keeping a single sticker price on their passes and lowering it to compensate for the drop in participation rates, Red Rock split their pass into several age tenors after identifying who wasn’t buying passes. This is all guess work, but I’m sure this pricing scheme wasn’t conjured out of thin air. (Guardian)

Seniors also get a discount, as they are probably some of Red Rock’s most devout customers. They’re also less likely to tear up the course by duffing their tee shots and taking a ton of mulligans.

screen-shot-2016-11-28-at-7-31-41-am

Financial options are similar, but instead of number of rounds being variable, it is the underlying spot price’s volatility. Options written on an underlying asset derive their value from the volatility of that asset’s price, for example, the price of a barrel of oil. Oil is a commodity that is highly traded and the price of oil is hotly debated. Big moves in the price of oil are much more likely that a big move in the price of milk; therefore, options on oil are more expensive than options on milk. The price of an option is called premium.

A call option is the right to buy the underlying asset at a certain price. For example, my view is that milk is undervalued, at $2 bucks a gallon. One option would be to buy 10 gallons of milk and hold onto them until the price rises. However, I’d have to store the milk, keep it cold, and also make sure it doesn’t go bad before I sell it. All these things cost money, and diminish my profits. By buying a call option on milk, I can eliminate these costs. I’m betting that the price of milk will rise. I buy a call on milk at a strike price of $2. This means I’ve just bought the right to buy milk at $2, sometime in the future. To buy this right, I will pay the seller premium. If the price of milk goes to $2.50 like I planned, I’ll exercise the option, buy milk at $2 then sell it at $2.50. My profit is:

Π = $2.50-$2.00-Premium

If the option goes unexercised, meaning the price of milk moves in the opposite direction, say to $1.50, then my option expires worthless and I’m only out premium. I don’t have an obligation to buy the milk at $2.00, just the option. Profit in this example would be:

Π = -Premium

Similarly, a put option is the right to sell the underlying asset at a certain price. Buying a put option is a bearish view on the underlying asset. If you believe the price will fall, you want to lock in a sell price for your asset. As a farmer of corn, you notice everyone’s crops seem to be doing particularly well, and this harvest is set for a record year. A rise in supply causes the price of the asset to fall. You believe this will directly affect your profits for the year. In order to protect against this, you buy an option to sell your corn at a certain price, thus capping your downside. If the harvest is weak, and the price of corn rises the option expires and you’re only out the premium. If the harvest is strong, as you expected, you have the right to exercise the option and sell your crop at a higher price than the rest of the market.

I hope this helped expand you’re knowledge of derivatives. Thanks for reading.

– tommander-in-chief

Sauces:

Golf Options: An exersize in derivatives

Yahoo and Google: Democratic Responsibilities of Corporations

Overview:

China is renowned for keeping its citizens in the dark. They censor their television shows and ads. Now time travel, homosexuality, and luxurious lifestyle programs are banned from Chinese television (Time.com). They sensor Internet chat rooms to deter the conversations from issues like politics “towards [issues] such as which celebrities make the best role models.” The government even goes so far as to set up fake websites designed at luring in “would-be dissidents” for their “apprehension” (Dann and Haddow, p. 220).

The first question that needs answering is as follows: is the free flow of information a human right? Back before the Internet, how much access to information we had depended on both our monetary wealth and status in society. If we truly want a liquid society, where serfs can become kings, free flow of information should be of the utmost importance. Information is power.

By definition, markets cannot be efficient if information becomes scarce or censored. Those in power can use information to further sway those under their control; even in a democracy, controlling the information can make the electorate vote in a way that seems in their best interest but really they’re being influenced by the censored distribution of information. Without the freedom to distribute information, a democracy by name cannot be a democracy in practice.

The censorship in China is done by government entities to exert “paternalistic influence” over the population politically. Chinese economic freedom has evolved massively since the days of strict Communist rule (Dann and Haddow, p. 220). This economic freedom has allowed companies like Yahoo and Google to establish a presence in the formerly closed state. In order to do business within the Communist nation, however, foreign companies must comply with Chinese law. When law conflicts with a firm’s moral compass, which should have precedence?

Google:

Google complies with Chinese law and omits certain things from search results inquired within China. Before the establishment of Google.cn, every search inquiry had to pass through the “’the Great Firewall of China’” (Dann and Haddow, p. 221). This caused searches to take longer, thus less use of Google’s platform. Google set up a search database within China that already had politically undesirable items removed. This made the search engine faster and more accessible for many.

Hypothetically assume Google refuses service within China. Tech firms that are willing to swallow their moral obligation to society in favor of profit will step in and fill the void. A Chinese competitor, Baidu, soared from “2.5% market share in 2003 to 43% in 2005” (Dann and Haddow, p. 225). Google won’t solve anything by refusing service, except perhaps to exacerbate the problem. The search database will shrink, allowing less free flow of information.

Dann and Haddow argue Google produced a list of blocked items on its own, without “receiving direct orders from Beijing” (p. 226). By Dann and Haddow’s calculation, Google censored information without being directly ordered. Google was losing market share, and thus needed to revise their strategy. Dann and Haddow call this process an “outsource of censorship” by the Chinese government (p.226).

Yahoo!:

Yahoo!, an internet search engine and news site, allows its content to be censored in China as well. In Dann and Haddow’s research paper Yahoo is cited for aiding in the arrest of a citizen who “was sentenced to eight years in prison for posting comments that criticized government officials of corruption” (p. 229). Yahoo, like Google, asserted it had little to no choice in the matter, as it had to play by the rules in order to play the game.

Should Yahoo have sacrificed its Chinese branch in order to maintain its values? When does morality trump profitability in the business world? The answer can be easy when answering for the self, but harder when those affected have no skin in the game. American investors in Yahoo wish to see the company grow more profitable, period. Perhaps by sacrificing their Chinese branches, they can improve public image and gain market share… but perhaps not.

Yahoo can also assert that it was the responsibility of the individual involved to protect himself (or herself). If the individual hadn’t dissented against the government, there would be no wrongdoing and the individual would still be free today. Yahoo is merely providing the platform for conversation; they didn’t guide or start the discussion. Had Yahoo been actively endorsing the actions of the individual, they would be liable by Chinese law. Is it Yahoo’s responsibility to protect the users of its platform? If a controversial note was posted on a firm’s notice board, should the person who installed the corkboard be faulted or the individual who posted the note?

This turns the discussion to one of free speech rather than free flow of information. “It is the ability to exchange information that is valuable, not necessarily the worth of the information itself” (Dann and Haddow, p. 222). They argue it is the installer of the corkboard (from my example above) who is responsible for preserving the integrity of the information posted. Free flow of information is imperative to a democratic society. Uninhibited, unbiased news and information needs to be present in a truly free society.

Conclusion:

Google and Yahoo’s responsibly to Chinese citizens can be argued from both points of view. On one hand, Yahoo and Google must follow the rules to play the game. If they want to utilize and operate in one of the fastest growing economies in the world, they need to follow Chinese law.

On the other hand, they are actively participating in inhibiting the democratic process. The United States’ military has fought against the spread of Communism in several wars and hundreds of thousands had died to spread democratic ideals. Meanwhile, Google and Yahoo are assisting in the process of politically influencing entire generations of Chinese citizens.

Thanks for reading.

-tommander-in-chief

 

Sources:

  1. Dann, G.E. and Haddow, N., Journal of Business Ethics (2008). Retrieved: Sept. 2016
  2. http://time.com/4247432/china-tv-television-media-censorship/
Yahoo and Google: Democratic Responsibilities of Corporations

Who’s got the power?

 

When interest rates go up, and they will, the 50% increase across the board will topple markets, namely bond markets.

Today’s interest rates are unprecedented. The lowest possible bound for an interest rate USED to be 0%. In finance terms, we call it the ZLB or the zero lower bound. Today bond yields in Germany and Denmark (among others) are NEGATIVE! What does this mean for me, the common investor?

Examples of Interest Rates  in History, for relativity:

I’ll admit, I’m not finished with the 700+ page novel written by Sidney Homer first published in 1963. The preface is packed with insightful information such as:

1.) In ancient India, the going rate of interest on livestock was 100%. Then: You can borrow my cow for one year, if after the year is over you’ll pay be back with two cows. Today: I’ll let you use my house for a year, but after that, I’m gunna need that house back, plus a whole extra house.

2.) In early 20th century Indo-China, loans on rice were given at a rate of 50% annually commonly.

3.) In British Columbia, a phenomenon called “potlatch” was first documented. The Kwakiutl, an Candaian Indian tribe, used thin white blankets currency, roughly valued at $0.50 per item. The citizens of this tribe would give the blankets as ‘forced loans’ to one another, with the expectation of receiving what they gave plus interest. “Wealthy Indians vied with each other to see who could give away the most blankets, all with the understanding that even more would be given back—usually double.” – (p. 23, Homer) Kind of wonky huh? They gave because they were greedy.

4.) In Northern Siberia, domesticated reindeer, horses, and sheep were used to collateralize loans. They exchanged the animals like currency, usually charged at an annual rate of 100%.

All in all, lending is not new, but this new environment of negative interest rates is new. You have never  had to PAY someone so they can use your money, that just seems backwards. Remember quantitative easing (QE*)? The Europeans are doing the exact same thing. However, the European Central Bank (ECB) are buying up these negative interest charging bonds because the ECB is attempting to inject liquidity into markets. The ECB is allowing banks to use their cash and they’re paying the banks interest… hmm…

The goal of QE* is to inject liquidity into markets to avoid disastrous outcomes. The program is designed to allow debt to be more readily available for the average consumer. Lowering interest rates and loading up commercial banks with cash will help settle investors’ concerns surrounding a global financial meltdown without a doubt. This being said, if times are bad (economically), the average consumer will become risk averse, and will stay as far from debt as possible until things get better. When consumers get a pay raise or a new job, they might think about taking out a loan to build a new deck or get a new car. Demand drives supply and the policy makers who control interest rates and QE can only control supply. No matter how hard they try to get us to take out debt, we just won’t do it unless market conditions are appropriate. The final result of QE in the United States was a massive increase in the amount of cash that banks hold in reserves.

The graph below shows the level of reserves banks have on their balance sheet from 1984 to 2008. In 1999, banks jacked up their reserves because of Y2K scares; if the whole system imploded at the turn of the century, they wanted to have enough cash on hand to prevent a catastrophic collapse of our financial system. Notice how the level was just shy of $70 billion.

Screen Shot 2016-08-02 at 5.44.39 PM

This graph below shows what has happened to reserves since the beginning of quantitative easing. In 1999, (from above) the level of reserves his $70 billion, here $70 billion isn’t even on the scale. This is where all the bailout money went, onto the balance sheets of big banks.

Screen Shot 2016-08-02 at 5.45.07 PM

Holding reserves used to be an implicit tax for banks, because the more cash they held, the more return they were missing out on (opportunity cost, for you econ buffs). The banks could have put the currency to work in stocks or bonds to achieve a higher return. However, the less cash a bank has on hand, the more risky the institution is. The Fed instituted a return on cash of 50 basis points (0.5%) in order to incentivize holding cash reserves (both required* and excess). The banks can hold all of it in cash and make a half a percent annually or they can buy negative yielding bonds. It’s a positive, riskless yield. Why wouldn’t banks take advantage?

*Note: by law, the required reserve ratio in the US is 10% for big banks.

QE works as a mechanism to prevent economic collapse, but demand drives supply; thus, you cannot force people to buy things they don’t want (except maybe in Communist Russia where they don’t actually tell you what you’re taking until you’re disqualified for the Olympics) QE cannot create prosperity because no matter how available you make debt, it is the preferences of the consumers that ultimately drives demand for loanable funds.

The Federal Reserve of the United States holds way, way more power than Donald Trump and Hilary Clinton, yet when they make a statement in the press, it usually doesn’t even make the front page. The Fed has the power to control interest rates. They also have the power to create money, as in printing currency (yup, money growing on trees). They control what you pay on your mortgage and they control how much interest your money makes (in markets and in savings accounts). This affects how soon you will be able to retire, how much your house is worth, how much your pension has in cash (i.e. how much risk your pension can take), how much your kid’s college fund will make… you name it, the Fed controls it. The best part is, you didn’t get to elect these officials. The US government deemed it too risky to put big financial decisions in the hands of under-informed citizens (*cough* Brexit *cough*).

Thanks for reading.

– tommander-in-chief.

Note: For more on pensions taking on too much risk check out this economist article, http://tinyurl.com/hg4rbjl

Sources:

  1. http://www.forbes.com/sites/marcprosser/2013/04/07/beyond-the-10-year-treasury-yield-how-to-follow-the-bond-market-with-etfs/#7c753437523d
  2. http://www.wiley.com/WileyCDA/WileyTitle/productCd-0471732834.html
  3. https://fred.stlouisfed.org/series/WRESBAL/

 

Side note on bond prices –

Bond prices are inversely related to bond yields. That is, when the rate on a bond rises, it’s price will drop. Because today’s rates are so low, the effect that a rise in interest rates will have will be massive. For a little relativity, interest rates (the fed funds rate) in 1999 was around 5%. A 50% increase in this rate would raise the rate to 7.5%, which is a massive jump. Now, we are debating a 25 basis point* increase in rates, which brings them from 25-50 bps to 50-75 bps. This may seem trivial, but that represents the same 50% increase in the fed funds rate!

*Note: a basis point is a ten thousandth of a percent; 1 basis point = 0.01%

 

Who’s got the power?

Bud Light sucks…

Fun fact: This is what happens when you Google, “what is American beer?”

“Light beer, which was introduced on a large scale by Miller Brewing Company in the early 1970s, is a beer made with reduced alcohol and carbohydrate content, and has grown to eclipse many of the original pale lager brands in sales. Bud Light, brewed by Anheuser-Busch InBev, is the top-selling beer in the United States.” -wikipedia

Bud. Light. Sucks. There. I’ve had my say.
Before I get started, I want to clarify that this article is on the stocks of Boston Brewing Co. (SAM), Anheuser-Busch (BUD), and Molson Coors  (TAP) stocks, not an opinion article on Bud Light, but now we all know where I stand.
The idea is that similar stocks will follow similar patterns in the stock market. You wouldn’t think that a construction company and a biotech firm  would move together. That is, you wouldn’t expect the two to be positively correlated. But you would expect stocks like Pepsi and Coke to move together, as any new information affecting one would probably affect the other, right?
WRONG. The correlation coefficient between Coke (COKE) and Pepsi (PEP) is 0.2014, which means only one in 5 days do Coke and Pepsi stocks move together in step… hmm.. ok maybe it’s just Coke and Pepsi acting weird. Here are the correlation coefficients for BUD, SAM, and TAP:
Screen Shot 2016-07-26 at 3.04.43 PM.png
Only roughly one in three days do SAM and BUD move exactly together (the same with SAM and TAP). TAP and BUD only move exactly together every other day.  They move mostly as we expected (direction), but they certainly don’t always move exactly together (magnitude).
Diversification means don’t put all your eggs in one basket. It means you need to branch out, own stocks in many sectors. It implies that stocks in similar arenas move together.
“But wait, didn’t we just find out that stocks in similar areas of the market don’t move in step? Is my finance advisor feeding me bullshit?”
Home Depot and Lowe’s are practically interchangeable, unless you have a penchant for orange or blue. The correlation between their returns is 0.8486. What affects one, directly translates to the other on eight of ten days.
In this article, I indirectly tested diversification. All jokes aside, diversification states that stocks in similar industries will move together on average. This idea is not trash, as none of the example groups of stocks returned a negative correlation coefficient, which would imply that they moved oppositely more often than together. You can still correctly assume that, on average, stocks in similar industries will move in similar directions.
Rest assured, diversification still works. It just doesn’t work as well as you thought it might… or at least I did.
– tommander-in-chief
Further, I’ll test to see if there is a profitable strategy to put in place regarding the three stocks. I’ll see if there are any two stocks whose outcomes will predict the third’s return.
Bud Light sucks…