Appendix A
All Hail the Mighty Dow
What follows is a reprint of Chapter 23 from my 2010 book, Debunkery.
I’m consistently surprised at how many investors—even professionals who should know better—obsess over the Dow as if it were indicative of anything. It’s all you hear on TV: “The Dow was up XX points. The Dow fell YY points.” Who cares? In my entire 38-year professional career, I’ve never paid attention to the level of the Dow—I learned as a kid it is a useless long-term indicator because it is far too narrow and, worse, it is “price-weighted.” Never pay attention to any price-weighted index.
In short, despite an army of proponents, the Dow is an inherently flawed index that doesn’t reflect the reality of US markets, let alone global ones. Why does everyone fixate on it so?
What’s So Wrong With the Dow?
The “Dow” is, of course, the sainted Dow Jones Industrial Average, which persists out of tradition, mostly. That its publisher owns The Wall Street Journal (among other publications) probably doesn’t hurt either.
Let’s start with some relatively minor problems. First, the index is 30 stocks. Just 30! Those 30 stocks are pretty big, but the index is just 29% of the total value of US stocks.1 And you get some weird concentrations in some sectors. And it’s US only! So is the S&P 500, but at least its 500 stocks are 89% of the total value of US stocks.2 And the stocks included in the Dow can be included or booted out of the index for fairly arbitrary reasons by those who select the ...
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