Why do people care about the Dow?

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Why do people care about the Dow?

Postby protagonist » Tue Mar 12, 2013 9:43 am

It's only 30 stocks. I don't get it.
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Re: Why do people care about the Dow?

Postby Cut-Throat » Tue Mar 12, 2013 9:50 am

protagonist wrote:It's only 30 stocks. I don't get it.


I don't either, but it's probably a lot like the U.S. not adopting the Metric System completely.

Even though an Inch and a Foot and a yard makes no sense, we are used to it.
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Re: Why do people care about the Dow?

Postby Call_Me_Op » Tue Mar 12, 2013 9:51 am

Habit - it has existed for a long time.
Best regards, -Op

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Re: Why do people care about the Dow?

Postby Jordana » Tue Mar 12, 2013 9:54 am

I think the range of numbers is the range that people inherently understand. It is a range around the number $10,000, not too high and not too low, so people are comfortable with it. The Nasdaq's range appears low and the US debt's range is too high to be comprehended by many people. The range for the DJIA is just right.
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Re: Why do people care about the Dow?

Postby Gauntlet » Tue Mar 12, 2013 9:55 am

Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.
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Re: Why do people care about the Dow?

Postby Toons » Tue Mar 12, 2013 9:59 am

It acts like a barometer for the market ,people like to watch the numbers :happy
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Re: Why do people care about the Dow?

Postby Grt2bOutdoors » Tue Mar 12, 2013 10:16 am

The Dow is meant to be representative of all facets of American industry. As the Dow goes, so goes the economy or vice versa. Or so they say........ If you looked at the companies in the index, they represent the bluest of the blue chips, until they falter like Eastman Kodak.
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Re: Why do people care about the Dow?

Postby nisiprius » Tue Mar 12, 2013 10:29 am

I think sniping at the Dow is pedantic. There are two reasons to care about the Dow:

1) It has longer continuity than any other index. The S&P 500 only goes back to 1957. (The original S&P index only goes back to 1923). The Dow goes back to 1896.

Why doesn't the Blue Hills Weather Observatory use the metric system? It's not ignorance, nostalgia, or home bias. They do it for the same reason as they use antique-design weather instruments: total comparability and continuity in their long-term weather records is more valuable to them than having the "best" measurements.

2) Despite all of the sniping at it and all of the theoretical objections to it, the fact is that a smallish number of companies do make up most of the stock market, and a somewhat-arbitrary choice of 30 stocks is enough to shake out the worst idiosyncratic behavior of individual companies. The Dow is really not that bad a proxy for "the market."

Blue, Vanguard Total Stock Market Index Fund (VTSMX); orange, SPDR Dow Jones Industrial Average (DIA).
Image
The "shape" of the market is perfectly recognizable in the Dow. It goes up and down at the same times, marks highs and lows at the same times, and by pretty much the same percentage amounts, as the total market. (The only real difference between the two is interesting, given the general consensus that large-caps are poop and that you must tilt away from them).

In looking at "the market," the facts that the Dow doesn't include reinvested dividends and isn't adjusted for inflation are much more serious (and much more misleading) than its lack of methodological purity.
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Re: Why do people care about the Dow?

Postby magician » Tue Mar 12, 2013 10:33 am

Gauntlet wrote:Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.

Each has its flaws and biases.

Why do you prefer the flaws and biases of a cap-weighted index to those of a price-weighted index?
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Re: Why do people care about the Dow?

Postby nisiprius » Tue Mar 12, 2013 10:43 am

Oh, if we're going to discuss weighting... let me switch sides and snipe at the Dow.

How about sniping at the fact that it is intentionally sector-tilted?

Why is its full name the "Dow Jones Industrial Average?" Why not just "The Dow Jones Average?" Because there was another Dow, the "Dow Jones Railroad Average." The DJIA was not intended to be a total market index. It was intended to be a market timing tool, as part of the cockamamie "Dow Theory" school of technical analysis, and what was important was not the movements of the Dow, but the relative movements of the Industrial Average against the Railroad Average.

Or something like that.

The Dow Jones Transportation Average still exists, of course. It seems to me that when I was a kid (the 1950s) they actually did mention it in the business segment of the nightly newscasts.

(I assume, but I do not know, that the reason why the S&P and S&P 500 indices are beauty-contest committee picks is that in 1923, and probably even in 1957, there weren't good enough statistics on the whole universe of traded stocks for there to be an easy, objective, mechanical way of picking the largest. Indeed, if you knew enough about the total market to construct a "large-cap index," you would have known enough to construct a "total market index.")
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Re: Why do people care about the Dow?

Postby Gauntlet » Tue Mar 12, 2013 10:53 am

magician wrote:
Gauntlet wrote:Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.

Each has its flaws and biases.

Why do you prefer the flaws and biases of a cap-weighted index to those of a price-weighted index?


Because, for example, if a company like Google joined the Dow, it would dominate the index because of its share price. It just seems silly to me. Or could you imagine BRK! Want to dominate the Dow...just don't split your stock...IBM. So yes, I guess it is fair to say that I prefer the cap-weighted flaws. Although, all the major indexes move in about the same direction so I guess it doesn't matter that much.

P.S. I know that I am not saying anything that you don't already know.
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Re: Why do people care about the Dow?

Postby magician » Tue Mar 12, 2013 11:08 am

Gauntlet wrote:
magician wrote:
Gauntlet wrote:Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.

Each has its flaws and biases.

Why do you prefer the flaws and biases of a cap-weighted index to those of a price-weighted index?


Because, for example, if a company like Google joined the Dow, it would dominate the index because of its share price. It just seems silly to me. Or could you imagine BRK! Want to dominate the Dow...just don't split your stock...IBM. So yes, I guess it is fair to say that I prefer the cap-weighted flaws. Although, all the major indexes move in about the same direction so I guess it doesn't matter that much.

P.S. I know that I am not saying anything that you don't already know.

And if Apple joined a cap-weighted index (of 30 stocks) it would dominate that index.

I don't see that that's intrinsically better.
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Re: Why do people care about the Dow?

Postby nisiprius » Tue Mar 12, 2013 11:16 am

Magician, I personally prefer a cap-weighted index for two reasons. First, I know that it incurs lower transaction costs for the fund manager. Second--I only partially understand what I'm about to say and am saying this actually because I think you can clarify it for me--John C. Bogle, Jeremy Siegel, and Eugena Fama have all sorta-kinda endorsed it in a way. Maybe you can explain what Siegel meant about "mean-variance efficiency" and what Fama meant by "an efficient portfolio."

Bogle says that cap-weighting is the allocation that cancels out the speculative component of stock market returns and leaves you with the investment component.

Siegel has said that "certain assumptions" which he of course rejects,[/i]
Capitalization-weighted indexes... under certain assumptions give investors the "best" tradeoff between risk and return. That means that for any given risk level, these capitalization-weighted portfolios give the highest returns, and for any given return, these portfolios give the lowest risk. This property is called mean-variance efficiency.
And Eugene Fama, in a video interview that has been rather closely parsed in this forum, said, direct quote:
The way I like to talk about it when I give presentations for DFA or other people is, in every asset pricing model, the market portfolio is always an efficient portfolio. It's always a relevant portfolio for an investor to hold. And investors can decide to tilt away from that based on their personal tastes. But that's what it amounts to. You can decide to tilt toward more value or smaller size based on your tastes for these dimensions of risk. But you needn't do it. You could also decide to go the other way. You could look at the premiums and say, no, I think I like the growth stocks better. Then, as long as you get a diversified portfolio of them, I can't argue with that either. So there's a whole multi-dimensional continuum here of efficient portfolios that anybody can decide to buy that I can't quarrel with. And I have no recommendations about because I think it's totally a matter of taste. If you eat oranges and I eat apples I can't really quarrel very much with that.
Is Fama saying that there is some sort of multidimensional efficient frontier in 3 or 4 or 5-dimensional space, and that the cap-weighted portfolio is one of an infinite number of portfolios on that frontier? That is, all optimal, but different?
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Re: Why do people care about the Dow?

Postby protagonist » Tue Mar 12, 2013 11:19 am

nisiprius wrote:I think sniping at the Dow is pedantic. There are two reasons to care about the Dow:

1) It has longer continuity than any other index. The S&P 500 only goes back to 1957. (The original S&P index only goes back to 1923). The Dow goes back to 1896.


IMHO, this reason given by nisiprius seems to make the most sense. It explains why the Dow may be most useful as a statistical, analytical tool given the volume of historical data. It doesn't, however, explain to me why, in the "information age", it still appears to be widely used as the main barometer of recent market performance when such better ones exist and are just as easily accessible. I imagine very few people actually invest in a DJIA index fund or ETF.


nisiprius wrote: 2) Despite all of the sniping at it and all of the theoretical objections to it, the fact is that a smallish number of companies do make up most of the stock market, and a somewhat-arbitrary choice of 30 stocks is enough to shake out the worst idiosyncratic behavior of individual companies. The Dow is really not that bad a proxy for "the market."


This also makes sense. According to the central limit theorem (CLT- a remarkable thing really), sample size can be quite small (30 would probably suffice) within a given sampled population, and yet its mean and variance will likely come fairly close to the mean and variance of the population at large. That is a simplistic explanation, and isn't exactly what the CLT states, but the implication is close enough, and the reason why scientific studies with widespread implications for, say, humanity at large, can be performed on as few as a few dozen subjects and still have validity (rather mind-boggling I think)....one might assume that any 30 randomly selected stocks might have a fairly similar mean and variance. It might be interesting to grab a bunch of populations of 30 stocks randomly selected from the S+P 500 and plot a sampling distribution of the means. I would bet that has been done before.

nisiprius wrote:In looking at "the market," the facts that the Dow doesn't include reinvested dividends and isn't adjusted for inflation are much more serious (and much more misleading) than its lack of methodological purity.


That makes a LOT of sense to me. It's easy to be deluded into believing that your investments in stocks in 1999 or 2000 that you bought and held have actually made money over the last 13 or so years.

Thanks, nisip.

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Re: Why do people care about the Dow?

Postby protagonist » Tue Mar 12, 2013 11:25 am

nisiprius wrote:Magician, I personally prefer a cap-weighted index for two reasons.


I don't know the difference between cap-weighting and price-weighting.

I also accept the answer: "don't be lazy, look it up". So if nobody cares to indulge my laziness, I will.
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Re: Why do people care about the Dow?

Postby protagonist » Tue Mar 12, 2013 11:33 am

nisiprius wrote:Is Fama saying that there is some sort of multidimensional efficient frontier in 3 or 4 or 5-dimensional space, and that the cap-weighted portfolio is one of an infinite number of portfolios on that frontier? That is, all optimal, but different?


Oh my god. 5-dimensional efficient frontier space? Does he use Yang-Mills equations and Kaluza-Klein spaces? Is this financial string theory?

Gag me with a spoon.
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Re: Why do people care about the Dow?

Postby nisiprius » Tue Mar 12, 2013 11:35 am

Toons wrote:It acts like a barometer for the market ,people like to watch the numbers :happy
protagonist wrote:it still appears to be widely used as the main barometer of recent market performance
That word "barometer..."

I promised myself a few minutes ago that I wouldn't post again in this thread today, but, gee, this is important.

These are some mercury barometers at the Blue Hills Weather Observatory, with, yes, a column of shiny toxic liquid mercury in them, a column that should be about 760 mm, oops, exqueeze me, 29.92 inches high in good weather. The oldest was put into service in 1888, and is thus older than the Dow. This is not a museum case; these barometers are read daily--in inches--and you can read the directions for reading them and maintaining them here. I visited the observatory once, of course... fascinating. The founder was a 20-year-old kid when he built it; he was flying kites off it, big kites, full of meteorological instruments, at heights of 15,000 feet. Wonder what the FAA would have to say about that today? He was actually considered to be an aviation pioneer.

I wonder if Dow Jones has a little room somewhere where they still calculate the Dow using the same procedure and tools as they did in 1896?
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Re: Why do people care about the Dow?

Postby Gauntlet » Tue Mar 12, 2013 11:36 am

magician wrote:
Gauntlet wrote:
magician wrote:
Gauntlet wrote:Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.

Each has its flaws and biases.

Why do you prefer the flaws and biases of a cap-weighted index to those of a price-weighted index?


Because, for example, if a company like Google joined the Dow, it would dominate the index because of its share price. It just seems silly to me. Or could you imagine BRK! Want to dominate the Dow...just don't split your stock...IBM. So yes, I guess it is fair to say that I prefer the cap-weighted flaws. Although, all the major indexes move in about the same direction so I guess it doesn't matter that much.

P.S. I know that I am not saying anything that you don't already know.

And if Apple joined a cap-weighted index (of 30 stocks) it would dominate that index.

I don't see that that's intrinsically better.


I understand that. And we can go around and around on this. In my opinion, Apple dominating a cap-weighted index of 30 companies makes more sense to me than a company dominating an index because of its share price. I can't get behind the idea that 1 share of company A stock trading at $100 with a market cap of $100 dollars is not the same as 100 shares of company B trading at $1 per share with a market cap of $100 dollars. I suppose that I have over simplified things, but there it is.
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Re: Why do people care about the Dow?

Postby protagonist » Tue Mar 12, 2013 11:39 am

nisiprius wrote:
Toons wrote:It acts like a barometer for the market ,people like to watch the numbers :happy
protagonist wrote:it still appears to be widely used as the main barometer of recent market performance
That word "barometer..."

I promised myself a few minutes ago that I wouldn't post again in this thread today, but, gee, this is important.

These are some mercury barometers at the Blue Hills Weather Observatory, with, yes, a column of shiny toxic liquid mercury in them, a column that should be about 760 mm, oops, exqueeze me, 29.92 inches high in good weather. The oldest was put into service in 1888, and is thus older than the Dow. This is not a museum case; these barometers are read daily--in inches--and you can read the directions for reading them and maintaining them



hahaha.....right. Good observation. So when the Dow was invented, barometers were still all the rage. I get it now. Thanks again, nisi.
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Re: Why do people care about the Dow?

Postby jeffyscott » Tue Mar 12, 2013 6:22 pm

protagonist wrote:
nisiprius wrote:I think sniping at the Dow is pedantic. There are two reasons to care about the Dow:

1) It has longer continuity than any other index. The S&P 500 only goes back to 1957. (The original S&P index only goes back to 1923). The Dow goes back to 1896.


IMHO, this reason given by nisiprius seems to make the most sense. It explains why the Dow may be most useful as a statistical, analytical tool given the volume of historical data. It doesn't, however, explain to me why, in the "information age", it still appears to be widely used as the main barometer of recent market performance when such better ones exist and are just as easily accessible.


I think it is simply because it results in bigger numbers. "The Dow plummeted, falling 300 points today..." is just so much more exciting than hearing a report the the S&P 500 dropped by a mere 30 points. I highly doubt that the fact that the Dow goes back to 1896 has anything to do with why it is given more attention than the S&P 500 or other indexes.

Another factor may be just the name, the simplicity of saying "the Dow" vs. "the es and pee five hundred". Luckily for the Dow nobody wonders, when they hear "dow", if instead of DJIA, it might mean the even older Transportation index or any other DJ index.

Back in the tech bubble days the NASDAQ was getting a lot of attention, despite all the flaws with considering that a market barometer. I think this was simply because it was going up a lot (and then down a lot) and because the acronym is short and pronounceable...if they'd had to say "National Association of Securities Dealers Automated Quotations Index", it might not have happened.

Might be more likely for the Wilshire 5000 to catch on someday, rather than S&P. This could be simply referred to as "The Wilshire" and the numbers are even slightly bigger than Dow's.
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Re: Why do people care about the Dow?

Postby z3r0c00l » Tue Mar 12, 2013 6:58 pm

I would prefer to follow a T index. As in the US market closed up .3% today at 16.531T, the world market is down 2% at 54.765T.
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Re: Why do people care about the Dow?

Postby staythecourse » Tue Mar 12, 2013 7:18 pm

I'll take this thread and go one step further... why does anyone care about ANY of the indexes?? That includes SP500, wilshire 5000, russell 3000, etc...

Unless you have ALL of your money in that one index how it does means NOTHING to you. These indexes are great for financial porn and making you sound smart talking at the watercooler, "did you see the Dow hit an all time high", but is no help to any diversified investor.

I will go as far as saying quoting these broad market indexes HURTS more then helps. I am sure there is a direct correlation to how much an investor looks at a broad market index and how prone they are to frame of reference risk. The fact one follows indexes makes one susceptible to seeing their assets in isolation and NOT as a whole. They take the act of thoughtful investing, i.e. diversification to sports betting, i.e. "what did better today the dow or the russell 2000".

All indexes are abritrary and rules of consituition made up of Wall Street folks to make them sound like the 10 Commandments. They aren't.

Good luck.
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Re: Why do people care about the Dow?

Postby mickeyd » Tue Mar 12, 2013 7:23 pm

In the daily WS quotes I only look/listen to what the S&P 500 is. It has always seemed more a reflection than the Dow. I guess it's a self-filter...
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Re: Why do people care about the Dow?

Postby SSSS » Tue Mar 12, 2013 7:51 pm

I don't care about the Dow. I can't speak for "people" but I would assume they're just not particularly smart.
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Re: Why do people care about the Dow?

Postby jbk » Tue Mar 12, 2013 8:12 pm

Well-timed question. James Glassman answers it in the current issue of Kiplinger's in an article titled "Why I Love the Dow".

http://www.kiplinger.com/article/invest ... rials.html

Over time, the Dow, with its 30 stocks, has consistently produced about the same return as Standard & Poor's 500-stock index, which holds 500 large U.S.-based companies. For the ten-year period that ended January 31, for example, the Dow delivered an average annual return of 8.3% (including reinvested dividends) and the S&P 500 gained 7.9% annualized. And despite holding 470 fewer stocks, the Dow has given investors a smoother ride, exhibiting slightly less volatility than the S&P over both the short term and the long term. In 2008, the Dow sank 31.9% and the S&P plunged 37.0%; the next year, the Dow returned 22.7% and the S&P gained 26.5%. Overall, the two indexes delivered roughly the same results, but the Dow's path was less bumpy.
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Re: Why do people care about the Dow?

Postby jdilla1107 » Tue Mar 12, 2013 8:46 pm

magician wrote:
Gauntlet wrote:
magician wrote:
Gauntlet wrote:Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.

Each has its flaws and biases.

Why do you prefer the flaws and biases of a cap-weighted index to those of a price-weighted index?


Because, for example, if a company like Google joined the Dow, it would dominate the index because of its share price. It just seems silly to me. Or could you imagine BRK! Want to dominate the Dow...just don't split your stock...IBM. So yes, I guess it is fair to say that I prefer the cap-weighted flaws. Although, all the major indexes move in about the same direction so I guess it doesn't matter that much.

P.S. I know that I am not saying anything that you don't already know.

And if Apple joined a cap-weighted index (of 30 stocks) it would dominate that index.

I don't see that that's intrinsically better.


When you buy stocks you are buying present and future cash flows. The market cap of a stock says a heck of a lot more about a companies present and future cash flows than the price of a stock. The price of a stock means almost nothing.
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Re: Why do people care about the Dow?

Postby ofcmetz » Tue Mar 12, 2013 9:32 pm

And I used to think the Dow was a company that made plastic bags and what not. Didn't help because several of my dad's friends worked at the Dow Chemical plant in Plaquemine, LA when I was a kid.

As said in previous posts, I think the Dow average is fun to report because of tradition and because the numbers are so high. :D
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Re: Why do people care about the Dow?

Postby magician » Tue Mar 12, 2013 9:45 pm

jdilla1107 wrote:When you buy stocks you are buying present and future cash flows. The market cap of a stock says a heck of a lot more about a companies present and future cash flows than the price of a stock. The price of a stock means almost nothing.

Yes.

Well, you're buying your share of future cash flows.

jdilla1107 wrote:The market cap of a stock says a heck of a lot more about a companies present and future cash flows than the price of a stock.

I'm not sure that it does. Big companies don't necessarily produce higher returns than smaller companies, mainly because those future cash flows are typically divided amongst a much larger number of shares.

jdilla1107 wrote:The price of a stock means almost nothing.

The fact that the correlation of returns of the Dow and the S&P 500 is nearly +1 and that their overall return is quite close suggests that the price of a stock means about as much as the total market cap. If the former means almost nothing, so does the latter.
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Re: Why do people care about the Dow?

Postby RenoJay » Tue Mar 12, 2013 11:00 pm

James Glassman (of "Dow 36,000" fame) wrote an article in last month's Kiplinger Magazine about why the Dow is his favorite index, how wonderful it is, how quirky but forgiving, etc. The fact that he likes it is reason enough to completely disregard it.
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Re: Why do people care about the Dow?

Postby Valuethinker » Wed Mar 13, 2013 7:08 am

magician wrote:
jdilla1107 wrote:The price of a stock means almost nothing.

The fact that the correlation of returns of the Dow and the S&P 500 is nearly +1 and that their overall return is quite close suggests that the price of a stock means about as much as the total market cap. If the former means almost nothing, so does the latter.


Don't ignore the behavourial impact.

The Dow is *managed*. And companies in the Dow manage their share prices via eg stock splits.

The Dow is a classic of 'path dependence'. We wouldn't invent it now but we have it, and it gives us historical track record. Think QWERTY keyboards or driving on the left (the right to you ;-)).

We still use a 'barrel of oil' although latecomers to the metric system (like Canadian government) keep trying 'tonnes of oil equivalent*' and such measures. But barrel is likely to be the unit of measure as long as we pump liquid oil out of the ground.

* not as nice as we might think. There are tons, and tonnes -- oh dear...
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Re: Why do people care about the Dow?

Postby Valuethinker » Wed Mar 13, 2013 7:32 am

jbk wrote:Well-timed question. James Glassman answers it in the current issue of Kiplinger's in an article titled "Why I Love the Dow".

http://www.kiplinger.com/article/invest ... rials.html

Over time, the Dow, with its 30 stocks, has consistently produced about the same return as Standard & Poor's 500-stock index, which holds 500 large U.S.-based companies. For the ten-year period that ended January 31, for example, the Dow delivered an average annual return of 8.3% (including reinvested dividends) and the S&P 500 gained 7.9% annualized. And despite holding 470 fewer stocks, the Dow has given investors a smoother ride, exhibiting slightly less volatility than the S&P over both the short term and the long term. In 2008, the Dow sank 31.9% and the S&P plunged 37.0%; the next year, the Dow returned 22.7% and the S&P gained 26.5%. Overall, the two indexes delivered roughly the same results, but the Dow's path was less bumpy.


He's ignoring that the Dow is managed. When the price drops below a certain level, they chuck the stock out of the index-- think GM. It's managed for stability. And I think all Dow stocks pay a dividend? So again you'd get slightly more stable returns.

Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?
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Re: Why do people care about the Dow?

Postby Valuethinker » Wed Mar 13, 2013 7:34 am

Think of the Dow as temperature. Interesting but not sufficient to tell you what the weather is like.

70 degrees in Seattle is not 70 degrees in Raleigh is not 70 degrees in Santa Fe, is not 70 degrees in New York City.

You have humidity, wind, rain, cloud cover. London at 70 degrees is often slightly steamy.
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Re: Why do people care about the Dow?

Postby happymob » Wed Mar 13, 2013 8:03 am

magician wrote:
Gauntlet wrote:
magician wrote:
Gauntlet wrote:Even worse than only having 30 stocks is that the Dow is price-weighted, which in my opinion, is not as good as market-weighted.

Each has its flaws and biases.

Why do you prefer the flaws and biases of a cap-weighted index to those of a price-weighted index?


Because, for example, if a company like Google joined the Dow, it would dominate the index because of its share price. It just seems silly to me. Or could you imagine BRK! Want to dominate the Dow...just don't split your stock...IBM. So yes, I guess it is fair to say that I prefer the cap-weighted flaws. Although, all the major indexes move in about the same direction so I guess it doesn't matter that much.

P.S. I know that I am not saying anything that you don't already know.

And if Apple joined a cap-weighted index (of 30 stocks) it would dominate that index.

I don't see that that's intrinsically better.

Come on... APPL would clearly be weighted heavily. But if it were in the DJIA, it would still be less than half the index. Not 1/30th, but less than half. If BRK were in the DJIA, the index might as well simply be BRK. There are fine historical reasons for why the DJIA is share-price weighted (easy to calculate in an era before computers and calculators), but arguing that capitalization-weighted is equally as bad as share price-weighted? That is simply crazy, in my own personal opinion. Capitalization-weighted will skew things. Price weighting can simply make things absurd.
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Re: Why do people care about the Dow?

Postby magician » Wed Mar 13, 2013 10:26 am

happymob wrote:. . . but arguing that capitalization-weighted is equally as bad as share price-weighted?

I defy you to find anywhere I (or anyone else) said that cap-weighting is as bad as price-weighting.

I, for one, merely said that each has its biases.

However, now that you bring it up, cap-weighting can be equally bad if it's applied stupidly.

happymob wrote:That is simply crazy, in my own personal opinion.

Fair enough.

happymob wrote:Capitalization-weighted will skew things. Price weighting can simply make things absurd.

Both can make things absurd if applied stupidly. You've formulated an argument against stupidity, not against price-weighted indices.
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Re: Why do people care about the Dow?

Postby Aptenodytes » Wed Mar 13, 2013 10:32 am

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Re: Why do people care about the Dow?

Postby Quidnam » Wed Mar 13, 2013 10:48 am

Jordana wrote:I think the range of numbers is the range that people inherently understand. It is a range around the number $10,000, not too high and not too low, so people are comfortable with it. The Nasdaq's range appears low and the US debt's range is too high to be comprehended by many people. The range for the DJIA is just right.

The Dow has only really been in that range for the last 15 years or so. The popularity of the index was established long before then.

Separately, I would say that there have been a lot of good observations about path dependence, inertia, force of habit, etc. thus far in this thread But I haven't seen a lot of discussion about the role of the financial press. Which is, after all, how "the Dow" came to be known in the first place (i.e., through its publication in the Wall Street Journal), and is arguably how its popularity has been sustained over time even as more relevant indices have been introduced (i.e., through its constant and near-universal promulgation in all forms of news media today).
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Re: Why do people care about the Dow?

Postby jeffyscott » Wed Mar 13, 2013 5:52 pm

Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?


The combined market cap of the Dow 30 companies is about $4.25 trillion, while the combined value of the 500 companies in the S&P more than triples that figure to nearly $14 trillion.


http://www.cnbc.com/id/100549812
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Re: Why do people care about the Dow?

Postby magician » Wed Mar 13, 2013 5:58 pm

jeffyscott wrote:
Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?


The combined market cap of the Dow 30 companies is about $4.25 trillion, while the combined value of the 500 companies in the S&P more than triples that figure to nearly $14 trillion.

http://www.cnbc.com/id/100549812

Are all of the former in the latter?
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Re: Why do people care about the Dow?

Postby Ice-9 » Wed Mar 13, 2013 7:02 pm

My big question isn't just why people care about the Dow, but rather why news radio stations in their financial updates seem to always give the point changes in the Dow, the S&P 500, and the Nasdaq. The Dow is the original "barometer" of the market using 30 stocks, the S&P 500 is a later "barometer" of the same market using 500 stocks, and the Nasdaq is an exchange that offers a rough but not perfect barometer of tech stocks. The first two seem redundant, and the latter seems to have appeal only to those investing in the tech sector.

And the fact that my news radio station lists all of these daily changes as point changes and usually without also listing the more relevant (at least it seems to me) percentage changes bugs me even more.

I suppose a radio station catering to Bogleheads like me would instead list something like, "Today, the Total Domestic Stock Market up 0.19%, Total International up 0.30%, and Total Bond down 0.12%." For some reason, I don't see that happening anytime soon.
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Re: Why do people care about the Dow?

Postby stemikger » Wed Mar 13, 2013 7:09 pm

Posted by nisprius
pedantic.


Thanks for the new word.
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Re: Why do people care about the Dow?

Postby nisiprius » Wed Mar 13, 2013 7:23 pm

magician wrote:
Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?...
...Are all of the former in the latter?
Made me look. I'm SURE the answer is yes, gotta be, gotta be. It is unthinkable that any of the Dow companies would not be included in a list of "leading companies in leading industries." But it would be such a great piece of trivia if it weren't. I'll trust Wikipedia on the lists. It says the DJIA companies are:

3M NYSE MMM Conglomerate 1976-08-09 as Minnesota Mining and Manufacturing
Alcoa NYSE AA Aluminum 1959-06-01 as Aluminum Company of America
American Express NYSE AXP Consumer finance 1982-08-30
AT&T NYSE T Telecommunication 1999-11-01 as SBC Communications
Bank of America NYSE BAC Banking 2008-02-19
Boeing NYSE BA Aerospace and defense 1987-03-12
Caterpillar NYSE CAT Construction and mining equipment 1991-05-06
Chevron Corporation NYSE CVX Oil & gas 2008-02-19
Cisco Systems NASDAQ CSCO Computer networking 2009-06-08
Coca-Cola NYSE KO Beverages 1987-03-12
DuPont NYSE DD Chemical industry 1935-11-20 also 1924-01-22 to 1925-08-31
ExxonMobil NYSE XOM Oil & gas 1928-10-01 as Standard Oil of New Jersey
General Electric NYSE GE Conglomerate 1907-11-07
Hewlett-Packard NYSE HPQ Computers and technology 1997-03-17
The Home Depot NYSE HD Home improvement retailer 1999-11-01
Intel NASDAQ INTC Semiconductors 1999-11-01
IBM NYSE IBM Computers and technology 1979-06-29
Johnson & Johnson NYSE JNJ Pharmaceuticals 1997-03-17
JPMorgan Chase NYSE JPM Banking 1991-05-06 as J.P. Morgan & Company
McDonald's NYSE MCD Fast food 1985-10-30
Merck NYSE MRK Pharmaceuticals 1979-06-29
Microsoft NASDAQ MSFT Software 1999-11-01
Pfizer NYSE PFE Pharmaceuticals 2004-04-08
Procter & Gamble NYSE PG Consumer goods 1932-05-26
Travelers NYSE TRV Insurance 2009-06-08 Property, casual and personal insurance.
UnitedHealth Group NYSE UNH Managed health care 2012-09-24
United Technologies Corporation NYSE UTX Conglomerate 1939-03-14 as United Aircraft
Verizon NYSE VZ Telecommunication 2004-04-08
Wal-Mart NYSE WMT Retail 1997-03-17
Walt Disney NYSE DIS Broadcasting and entertainment 1991-05-06

Wikipedia has a List of S&P 500 companies.

Ok. S&P 500 screen next to the Dow screen and ready to scroll. 3M, check; Alcoa, check... Wal-Mart, check, Walt Disney, check. Yes. All there. Can't believe I just wasted ten minutes on that.
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Re: Why do people care about the Dow?

Postby dyeusdi » Wed Mar 13, 2013 7:57 pm

Speaking of timely, NPR's Planet Money radio show takes a good dig at the Average, for many of the aforementioned reasons. No transcript yet, but the podcast is available for listen.
http://www.npr.org/blogs/money/2013/03/12/174139347/episode-443-dont-believe-the-hype
Planet Money wrote:And even if it does hit a real, inflation-adjusted high in the next few weeks, it won't mean much. The Dow is a seriously flawed stock index, and it's certainly not a good way to measure what's going on in the overall economy.

On today's show, we rain on the Dow's parade and explain why a lot of very smart people say we should ignore the Dow.
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Re: Why do people care about the Dow?

Postby Valuethinker » Thu Mar 14, 2013 9:43 am

jeffyscott wrote:
Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?


The combined market cap of the Dow 30 companies is about $4.25 trillion, while the combined value of the 500 companies in the S&P more than triples that figure to nearly $14 trillion.


http://www.cnbc.com/id/100549812


Thank you.

So about 1/3rd. I should have thought a bit more (the top 10 companies in the FTSE 100 are c. 40% of the value of the All-Share (1250 companies roughly)).

Small cap effect says you should underperform marginally.

HOWEVER they delete underperformers from the Dow, and promote outperformers (the effect is much more muted for a broader index like SP500). So that may account for the similarity of performance.
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Re: Why do people care about the Dow?

Postby Valuethinker » Thu Mar 14, 2013 9:45 am

nisiprius wrote:
magician wrote:
Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?...
...Are all of the former in the latter?
Made me look. I'm SURE the answer is yes, gotta be, gotta be. It is unthinkable that any of the Dow companies would not be included in a list of "leading companies in leading industries." But it would be such a great piece of trivia if it weren't. I'll trust Wikipedia on the lists. It says the DJIA companies are:.


Ok now the weirdness. AFAIK Apple is not in the S&P500? The world's largest company at one point? And Google?

I do need to check that and I don't have time right now. But it underlines the need to index to the broadest index you can find.
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Re: Why do people care about the Dow?

Postby The Wizard » Thu Mar 14, 2013 9:57 am

magician wrote:
jeffyscott wrote:
Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?


The combined market cap of the Dow 30 companies is about $4.25 trillion, while the combined value of the 500 companies in the S&P more than triples that figure to nearly $14 trillion.

http://www.cnbc.com/id/100549812

Are all of the former in the latter?

Yes, DEFINITELY!
It would be sheer perfidy for the DJIA to contain a mid-sized company...
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Re: Why do people care about the Dow?

Postby The Wizard » Thu Mar 14, 2013 10:03 am

Valuethinker wrote:Ok now the weirdness. AFAIK Apple is not in the S&P500? The world's largest company at one point? And Google?

I do need to check that and I don't have time right now. But it underlines the need to index to the broadest index you can find.

Yes, they're both in there, check the Wikipedia article.
There's even a TIMELINE for when replacements occurred, to keep it at exactly 500 companies...
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Re: Why do people care about the Dow?

Postby magician » Thu Mar 14, 2013 10:32 am

The Wizard wrote:
magician wrote:
jeffyscott wrote:
Valuethinker wrote:Off hand, does anyone know what percentage of the S&P500 market cap is Dow stocks? I suspect at least half?


The combined market cap of the Dow 30 companies is about $4.25 trillion, while the combined value of the 500 companies in the S&P more than triples that figure to nearly $14 trillion.

http://www.cnbc.com/id/100549812

Are all of the former in the latter?

Yes, DEFINITELY!
It would be sheer perfidy for the DJIA to contain a mid-sized company...

Or carelessness.
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Re: Why do people care about the Dow?

Postby VictoriaF » Thu Mar 14, 2013 11:11 am

I care about Dow because it hints at dough.

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Re: Why do people care about the Dow?

Postby jeffyscott » Thu Mar 14, 2013 4:57 pm

Valuethinker wrote:So about 1/3rd. I should have thought a bit more (the top 10 companies in the FTSE 100 are c. 40% of the value of the All-Share (1250 companies roughly)).


It appears the 50 largest would be about 40% of the US market.

http://www.russell.com/indexes/data/fac ... _index.asp
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Re: Why do people care about the Dow?

Postby magician » Sat Mar 16, 2013 1:55 am

Sumflow wrote:
protagonist wrote:It's only 30 stocks. I don't get it.

Slight of hand.

That's sleight of hand . . . and that's supposed to be my line.
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