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Who Cares About The Dow Jones Industrial Index?

September 12, 2013 | About:
Intelligent Speculator

Intelligent Speculator

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I remember how I used to look at the daily movements of the Dow Jones Industrial Average (DJIA). That was before I started working in finance. Why? Because that is what they showed on tv. It’s the main index they would report on.

In a sense, I understand. It’s a very easy index to understand. It includes 30 of the biggest companies in the world. Companies such as Walmart (NYSE:WMT), Microsoft (NASDAQ:MSFT), Walt Disney (NYSE:DIS), JP Morgan Chase (NYSE:JPM) and Coca-Cola (NYSE:KO).

As I learn more about finance though, my opinion is changing.

The DJIA Is Irrelevant

It means very little. First off, having only the biggest blue chips doesn’t seem like a great way to build an index. That would be a matter of preference though and it’s certainly possible to argue that having an index of the biggest blue chip names has value.

What No One Can Argue

I personally think it makes no sense to have an index that is price-weighted. If you’re not aware. When the Dow Jones increases by the $8.24, that means that if you add up the daily gains and losses of the 30 stocks, you will get $8.24. What does that mean? The DJIA has not added companies such as Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) because of their high price. Why? If Google and its $800 price were added to the index, it would be worth around 6% of the index.

For example, imagine a day where 28 stocks in the index do not move. Google drops by 2% and Bank of America (BAC) increases by 100%..! The DJIA would actually be down for the day!!!!

That makes no sense to me.

I personally look at broader market cap weighted indexes such as the S&P500 which give a much more accurate picture?

Why does the DJIA still exist? It’s well known, it has a history, a tradition, etc.

Do you pay any attention to the Dow Jones Industrial Index? If so, why?


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