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:
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.
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.