| Every asset class at some time or other has its | | | | Then: Allied Chemical; Aluminum Company of |
| day in terms of being the investment that offers | | | | America; American Can; American Telephone |
| returns superior to all other types of assets. Real | | | | & Telegraphic; American Tobacco; Anaconda; |
| estate, gold, fine art, fixed income instruments | | | | Bethlehem Steel; Chrysler; DuPont; Eastman |
| such as bonds, even in recent times the so-called | | | | Kodak; Exxon; General Electric; General Foods; |
| alternative assets of private equity and hedge | | | | General Motors; Goodyear; International |
| fund investments can be kings of the hill. | | | | Harvester; International Nickel; International Paper; |
| However, over any very long period of time | | | | Johns-Manville; Owens-Illinois Glass; Procter & |
| measured in decades, all the evidence suggests | | | | Gamble; Sears, Roebuck & Co.; Standard Oil |
| that investing in stocks - equity stakes in publicly | | | | of California; Swift & Co.; Texas Corporation; |
| traded companies - is the best way to achieve | | | | Union Carbide; United Aircraft; U.S. Steel; |
| real inflation-beating returns. | | | | Westinghouse Electric; Woolworth. |
| It is typical of writers in the investing genre to | | | | Now: 3M Company; ALCOA; Altria Group; |
| use the statistical history of the Dow Jones | | | | American International Group; American Express; |
| Industrial Average (the Dow) to indicate the | | | | AT&T; Boeing; Caterpillar; Citigroup; |
| wisdom of investing in stocks. At first blush, the | | | | Coca-Cola; DuPont; Exxon Mobil; General Electric; |
| choice of this index may appear to be strange, | | | | General Motors; Hewlett-Packard; Home Depot; |
| given that it contains just thirty stocks (out of | | | | Honeywell International; Intel; IBM; Johnson & |
| many thousands of publicly traded companies) | | | | Johnson; JP Morgan Chase; McDonalds; Merck; |
| whereas broader indices such as the Standard | | | | Microsoft; Pfizer; Procter & Gamble; United |
| & Poor's (S&P) 500 and the Wilshire | | | | Technologies; Verizon; Wal-Mart Stores; Walt |
| 5000 Total Market Index cover much more | | | | Disney Co. |
| broadly-based groupings of stocks. However, the | | | | These different renderings of the Dow Jones |
| general usage of the Dow in this way reflects | | | | Industrial Average demonstrate that the use of |
| both its longevity, (it has been around for one | | | | the index as if it is unchanging and somehow |
| hundred and eleven years now and has been a | | | | carved in stone can be misleading. The use of the |
| thirty-stock index since 1928), as well as its | | | | index as a statistical proof of the history of "the |
| general acceptance by investors, the media and | | | | market" is in truth compromised by the regular |
| the general public. | | | | changes in its component parts. Yet it is |
| When someone remarks that "the market" is up | | | | convenient for those writing on long-term |
| 35 points today, they do not mean that the | | | | investing strategies to use the progress of the |
| S&P 500 is up by that amount, nor the | | | | Dow over many years to demonstrate not just |
| NASDAQ 100, nor certainly the Wilshire 5000. If | | | | the general upward trend in the market over |
| "the market" is up 35 points then you can be sure | | | | time, which is a fact, but much more tenuously |
| this refers to an increase that day in the Dow | | | | that of individual stocks comprising "the market." |
| Jones Industrial Average. It is precisely for this | | | | Should a writer voice the opinion that an |
| reason that the use of the Dow, whatever | | | | investment in "the market" in 1972 would be |
| weaknesses it may have in other ways, makes | | | | worth thirteen times that investment today, he |
| perfect sense as a day-to-day gauge of what the | | | | or she would be ignoring the fact that any return |
| market is doing. In effect, precisely owing to this | | | | would depend on which stocks had been selected |
| level of acceptance, the Dow is the most logical | | | | for investment back in 1972. Buying into the |
| index to use to act as an indicator on movements | | | | market at that time could involve purchase of |
| within "the market" overall because, to all intents | | | | Dow component stocks that later did well, Dow |
| and purposes, the Dow is the market. | | | | component stocks that later did badly and are no |
| This general acceptance and longevity have the | | | | longer part of the Dow - and of course for the |
| additional effect that the Dow is consistently used | | | | most part it would probably realistically mean |
| as a market proxy by investment writers wishing | | | | investment in stocks that were not part of the |
| to demonstrate how over very long periods of | | | | Dow index then or now. Indeed, exactly the |
| decades and more investing in stocks has been | | | | same issue would arise for a broader index such |
| the smartest investing practice. This is especially | | | | as the S&P 500 which is also constantly |
| well illustrated by showing the upward advance of | | | | refreshed by additions of fast-growing companies |
| the Dow in graph form. The message is clear - | | | | and demotions of slower-growing ones. Moreover, |
| there is an obvious ever onward and upward | | | | companies that are acquired by larger, more |
| progression of the index. This can be used to | | | | successful companies are deleted and always |
| bolster the argument, very typically used by | | | | replaced in the index by promising up-and-comers. |
| writers on investing, that if you had bought | | | | A straight comparison of an index at one point in |
| stocks say in November, 1972, when the Dow | | | | time with the same index decades later masks |
| closed above 1,000 for the first time, then your | | | | the significant rotations of sectors within the |
| investment would have been worth over thirteen | | | | overall market that are always taking place. |
| times that initial investment in 2007 with the Dow | | | | Developments in technology, lifestyle choices and |
| today at well above the 13,000 level. | | | | general business and consumer trends are subject |
| Leaving aside the fact that during the 35 years | | | | to changes that can be cyclical in nature, as |
| from 1972 to 2007 inflation would have eaten up | | | | certain industries or companies and their products |
| a large portion of the nominal gain, (but also on | | | | come in or out of prominence. Management |
| the flip side the fact that over the same period | | | | miscues, competitive developments or even legal |
| dividend payouts would have made up a good | | | | liabilities, (did we hear someone say Asbestos?) |
| part of any losses from inflation), our argument | | | | can also lay low a stock that looked promising at |
| that the use of the Dow by investment writers in | | | | the time of investment and can make its |
| this way is misleading hinges on the fact that the | | | | performance over time very different from that |
| Dow is itself in no way an immutable index. It is | | | | of what is being referred to as "the market." |
| subjected to a kind of regular housecleaning by | | | | The only way that comparisons of indices over |
| the editors of the Wall Street Journal who every | | | | many years as a measure of investment |
| few years bring into the Dow Jones Industrial | | | | performance can truly be considered accurate is |
| Average companies that are dominant in the | | | | for the investor who puts his/her money into a |
| economy of the day, and throw out those that | | | | market index fund which is managed to replicate |
| are not considered dominant enough, either | | | | the movements of the index on which it is based. |
| generally or in their own industry sector. | | | | Otherwise you really cannot directly extrapolate |
| Therefore, they ease out the old-economy, | | | | from the historical trend lines of any index, |
| smokestack, buggy-whip making has-beens of | | | | including the key Dow Jones Industrial Average, |
| yesteryear, and replace them with the zippy | | | | the likely success of any individual stock in which |
| bright new-economy stars in growth mode. This | | | | you may choose to invest over the very |
| process over time can clearly be demonstrated | | | | long-term. Put bluntly, individual stocks potentially |
| by comparing the make-up of the Dow at the | | | | have a shelf life and are perishable, even though |
| time that it first closed above 1,000 in 1972 and | | | | the overall market over time may go marching |
| the make-up of the index today. | | | | on. |