In 2004, I wrote a piece called “Dow’s Up…Dow’s Down…Who Cares?” The reason I did it was I was doing a lot of seminars back then and I always asked the question “How many stocks make up the Dow Jones Industrial Average (DJIA)?
The responses were in the hundreds to the thousands. Now let’s think about this for a minute. You’re driving home from work and the person on the radio says “The Dow was up 50 points on trading of blah, blah, blah.” If it’s up are you happy? If it’s down are you sad? Of course, you are…this information affects you…but only emotionally.
The DJIA is a history of the US Economy. It was created in 1896 to measure the industrial productivity of specific industries in the US. THERE ARE ONLY 30 STOCKS IN THE DJIA…PERIOD!
If you Google “The History of the Dow 30” it tells you some interesting facts. For example, in 1997 Walmart was placed into the DJIA. They were a booming example of growth in the Retail segment of the index. Guess who they replaced in 1997? Most people think Kmart, Sears, JC Penney…all wrong. They replaced Woolworth. You millennials & Gen X people…go ask your parents about Woolworth. Today, they are pretty much non-existent.
If I take a slowly dying company like Woolworth out of the Index, and place a high growth company like Walmart into the index, what do you think will happen? General Motors was in the Dow once…from 1928 to 2009…when their financial woes and a government bailout caused their exit.
Here’s another one for you. Remember 2008? Of course, you do. Markets fell 40% in a week that September. Wall Street totally mucked up Main Street, and American International Group (AIG) became of the companies “Too Big to Fail”.
They were guaranteeing all the mortgage backed securities issued by Merrill Lynch, Bear Stearns, and Goldman Sachs. The consequence was that AIG was removed from the DJIA. Guess who replaced them?
Hmmm…let’s see…a global insurance and pension company goes down hard…who to put in their place…How about Kraft Foods? The stock market “plummets” (this time for real!) and everyone knows what Americans do in times of financial crisis: EAT. Cheez Whiz and Velveeta for everyone. Moving forward as the stock markets “soared” after the crash; the passing of Obamacare seems eminent so in September 2012, Kraft Foods leaves the index…only to be replaced by? UnitedHealth Group, Inc. a.k.a United Healthcare. Maybe it’s just me, but is there any economic sense to what I just wrote…or is it just mind games played on the US consumers?
If you’re reading an electronic version of this book, click on this link http://www.cnbc.com/2014/07/02/history-of-dow-30.html If you have a paper copy, do your best…but go educate yourself on how your emotions are being affected.
By the way, in my opinion, nothing “Surges, Soars, Plummets” like the DJIA.
The Standard & Poors 500 Index (S&P) was introduced in 1923. It started tracking a small number of stocks…primarily to compete with the DJIA, but it in 1926 it grew to 90 stocks, and expanded to 500 in 1957. The operative word in this title is INDEX. It’s just a benchmark & comparison tool.
The problem is that you, the individual investor, probably think that all 500 stocks are equally weighted inside the index. It’s a common thought. However, here’s how it plays out. As of March 2015, the total market capitalization of the companies in the index was $18.5 Trillion. The largest member was Apple at $720 Billion. The smallest was Diamond Offshore Drilling at $3.65 Billion.
Apple makes up 4% of the index, Diamond Drilling .02%. If Diamond Drilling goes up in value 1000% in a day, does it really affect the index? Do the math…no it doesn’t. What happens if Apple goes up 10% in a day? See how the index is affected, and how your emotions towards the markets are affected? (Source: Investpedia.com)