January 4, 2011--How Now Dow Jones
By the measure of the Dow Jones Industrial Average, 2010 was a good year. If you owned a bushel of the 30 DJ component stocks and held onto them all year you would have experienced a sizable uptick in your net worth. Your portfolio would have grown by 11%. Not exactly chopped liver when T-Bill and CDs were earning the worried investor only about 1%. (See linked New York Times story.)
This is just part of the story, especially for investors who take the long view--the buy-and-hold crowd--because the DJ Average has a history of its own that subverts some of the conventional thinking that says investing for the long term in Blue Chips is the way to go.
The Dow was established 114 years ago with just 11 companies included among its components, only one of which, General Electric, is still included since through the years the list of member companies has been changed 48 times.
In effect, one could say that those that have been eliminated (most of those listed over time) have been "sold" off by the keepers of the DJ Average (currently the Wall Street Journal which is owned by Rupert Murdock) and that the growth of the average (it began in 1896 at 40.94 in and is currently over 11,700) has had more to do with the changing nature of the component stocks than the U.S. economy. The average, as a result of these manipulations, grew by a factor of 285 while the overall economy in GDP-terms did not do nearly as well.
If you bought the original bushel of the 11 Dow components, with the exception of GE, and never got rid of the clunkers you would have gone bust since that initial group included the American Sugar Company, the National Lead Co., Tennessee Coal, and U.S. Rubber. All goners.
By 1939, many of the original companies had been replaced and there were others added that wouldn't be considered to have done well over time--Allied Chemical, American Can, Bethlehem Steel, Eastman Kodak.
As late as 1976 the DJ Industrial Average still included Bethlehem, though most steel making was occurring overseas, Chrysler (now essentially bankrupt), Goodyear (no longer really an American company), Sears Roebuck (currently struggling to stay out of bankruptcy), and U.S. Steel (ditto).
By the mid 80s the Average was no longer strictly industrial, reflecting the changed nature of the American economy--less dependent on manufacturing, mining, or agriculture and by then more of a service economy. Thus, we find on the list Wal-Mart, Disney, and McDonald's.
We had become more consumers than producers.
I wonder, if we're around even 20 years from now, what will be on the list to take the place of current components Alcoa, J.P. Morgan Chase, and Caterpillar (all doomed long term). Probably Goldman Sachs, Google, and Facebook.
Minimally, fair warning to any of us who believe in the old buy-and-hold approach.
As for me, I have no idea what to do with my money. Maybe have some good wine at lunch.
This is just part of the story, especially for investors who take the long view--the buy-and-hold crowd--because the DJ Average has a history of its own that subverts some of the conventional thinking that says investing for the long term in Blue Chips is the way to go.
The Dow was established 114 years ago with just 11 companies included among its components, only one of which, General Electric, is still included since through the years the list of member companies has been changed 48 times.
In effect, one could say that those that have been eliminated (most of those listed over time) have been "sold" off by the keepers of the DJ Average (currently the Wall Street Journal which is owned by Rupert Murdock) and that the growth of the average (it began in 1896 at 40.94 in and is currently over 11,700) has had more to do with the changing nature of the component stocks than the U.S. economy. The average, as a result of these manipulations, grew by a factor of 285 while the overall economy in GDP-terms did not do nearly as well.
If you bought the original bushel of the 11 Dow components, with the exception of GE, and never got rid of the clunkers you would have gone bust since that initial group included the American Sugar Company, the National Lead Co., Tennessee Coal, and U.S. Rubber. All goners.
By 1939, many of the original companies had been replaced and there were others added that wouldn't be considered to have done well over time--Allied Chemical, American Can, Bethlehem Steel, Eastman Kodak.
As late as 1976 the DJ Industrial Average still included Bethlehem, though most steel making was occurring overseas, Chrysler (now essentially bankrupt), Goodyear (no longer really an American company), Sears Roebuck (currently struggling to stay out of bankruptcy), and U.S. Steel (ditto).
By the mid 80s the Average was no longer strictly industrial, reflecting the changed nature of the American economy--less dependent on manufacturing, mining, or agriculture and by then more of a service economy. Thus, we find on the list Wal-Mart, Disney, and McDonald's.
We had become more consumers than producers.
I wonder, if we're around even 20 years from now, what will be on the list to take the place of current components Alcoa, J.P. Morgan Chase, and Caterpillar (all doomed long term). Probably Goldman Sachs, Google, and Facebook.
Minimally, fair warning to any of us who believe in the old buy-and-hold approach.
As for me, I have no idea what to do with my money. Maybe have some good wine at lunch.
posted by Steven Zwerling at
5:02 AM
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