Tuesday, September 30, 2014

Coke Versus Pepsi -- one year returns with daily observations

Coke Versus Pepsi   -- one year returns with daily observations


Motivation:   Two issues motivated this post.     First, there is a lot of conventional wisdom and a lot of smart people saying that market timing is impossible and that returns to stocks historically dominate returns on assets.   Second, I read an article finding that Pepsi has outperformed Coke and is the better buy.

The numbers I crunched suggest strongly that the return on both Coke and Pepsi and the relative returns on the two stocks depend highly on the day you choose to sell or buy.    Market timing might be impossible for most of us but failure to be somewhat discriminate about when you buy or sell will almost certainly lead to subpar returns.

Data:    This post analyzes one-year changes of daily stock price closes for Coke and Pepsi over the period starting in July 2001 and ending in September 2014.      There are a total of 3331 observations in the sample for the entire period.

I also look at various subsamples.


Question:   What has been the likely one-year return on holding stock in Coke or Pepsi?  How much does the one-year return for Coke and Pepsi vary over time?

How have returns on Coke and Pepsi varied across years in this time period?

Analysis:   The first chart below has statistics on one-year returns for the entire sample.


One-year Returns Statistics Based On Daily Data
Coke
Pepsi
Coke-Pepsi
Average
0.043
0.059
-0.016
Median
0.061
0.080
-0.015
STD
0.157
0.135
0.134
Min
-0.360
-0.344
-0.442
MAX
0.440
0.419
0.361
Q1
-0.051
0.004
-0.110
Q3
0.151
0.142
0.083



The one year return for Pepsi varies from -34.4% to 41.9%  

The one year return for Coke varies from -36.0% to 44.0%

Returns near the median are probably most likely in an approximate sense so I expect 6.1 for Coke and 8.0 for Pepsi.   (Interestingly, the average is below the median.   I did not expect this.)



Below is data on median returns Coke Versus Pepsi by year ending in September


MEDIAN ANNUAL RETURN
End Month
Coke
Pepsi
Diff
Sep-14
0.027
0.104
-0.077
Sep-13
0.094
0.158
-0.065
Sep-12
0.097
-0.002
0.099
Sep-11
0.196
0.046
0.150
Sep-10
0.220
0.166
0.054
Sep-09
-0.252
-0.257
0.005
Sep-08
0.189
0.055
0.135
Sep-07
0.189
0.088
0.101
Sep-06
0.046
0.151
-0.105
Sep-05
-0.140
0.066
-0.206
Sep-04
0.108
0.140
-0.032
Sep-03
-0.131
-0.121
-0.011
Sep-02
0.085
0.063
0.022

Note:  The median annual return presented here is the middle of annual return on the 255 or so business days in the year.  



Things seem pretty even based on the median annual return for the year.   Coke beats Pepsi seven years.   Pepsi wins six years.


It might be useful to look at the worse possible return in the year for the two soft-drink companies.



Minimum Annual one-year Return During a Year
End Month
Coke
Pepsi
Diff
Sep-14
-0.086
0.012
-0.098
Sep-13
-0.030
0.028
-0.059
Sep-12
0.012
-0.112
0.124
Sep-11
0.082
-0.094
0.176
Sep-10
0.019
-0.014
0.033
Sep-09
-0.360
-0.344
-0.015
Sep-08
-0.243
-0.171
-0.072
Sep-07
0.049
0.028
0.021
Sep-06
-0.021
0.118
-0.139
Sep-05
-0.227
-0.035
-0.192
Sep-04
-0.139
-0.009
-0.130
Sep-03
-0.299
-0.253
-0.046
Sep-02
-0.263
-0.264
0.001
Based on 255 or so observations on one-year returns.   


In most years if one buys/sells on the wrong day the worse possible one-year return is negative.


Concluding Remarks:  Kids often claim that something is unfair.  They are correct.   The stock market is not fair.   There are some very smart people out there who have knowledge of specific companies, mutual funds industries and market conditions.   These people know when to hold and when to play. 

 One way to deal with this problem is to invest in lower-cost diversified funds.   Vanguard has a good reputation.   However, this strategy is only a partial fix because the overall market goes to extremes – both up and down and it is hard to figure out when to get out or when to get back in. 


The pros say market is timing.   But they do reallocate their own portfolios from time to time.   Isn’t reallocation a form of market timing?   The issue of timing and its impact on retirement savings was considered in one of my previous posts. 

Timing of market slumps and returns on lump sums and annuities



Critics of this piece will say that the one-year holding period is too small.   I agree that longer holder periods should be considered.   But let’s point out another factor.   Both Coke and Pepsi are or at least have been great companies.   We should also consider GM and Enron. 


Readers who found this post interesting may also want to read a recent “Pound Foolish” on financial advisors




No comments:

Post a Comment