Why Stocks & Houses Don’t Compare As Investments
There must be a million side stories to the bankruptcy of General Motors, a terrible event for the company, its workers and shareholders. One of those stories concerns the Dow Jones Industrial Average which at this momment seems to be free of any companies that are actually, well, industrial.
The Dow has just announced that the Travelers Companies, Inc. (TRV) and Cisco Systems, Inc. (CSCO) are replacing Citigroup, Inc. (C) and General Motors Corp. (GM) on the list of 30 bellweather companies as of June 8, 2009.
“The parlous state of GM has left us with no choice but to remove it from The Dow. A bankruptcy filing immediately disqualifies a stock regardless of a company’s history or its role as a cultural icon,” said Robert Thomson, managing editor of The Wall Street Journal and editor-in-chief for all of Dow Jones. “We were reluctant to remove Citigroup at the height of the financial frenzy, but it is clear that the bank is in the midst of a substantial restructuring which will see the government with a large and ongoing stake. We genuinely hope that once the bank has refashioned itself that we will again be able to consider it for inclusion — Citigroup is a renowned institution, not only in this country, but around the world.”
Misleading Indicator
In fact, changing the DJIA does very little for the country. People watch the Dow daily, it’s a fixture of the news, but it doesn’t make for a very good benchmark because we keep changing the 30 companies it tracks. In other words, it’s not an apples-to-apples comparison because the list of companies is constantly in flux.
For instance, if we continued to keep GM on the list then the Dow would fall. Why? The company is bankrupt. Citigroup is with us today only because the government has chipped in some $45 billion in direct federal funding as well as billions more in programs that buy assets of suspect value — if the value of such assets wasn’t suspect then there would be no need for the government to buy them.
Meanwhile, stockbrokers keep telling folks that stocks are a great investment, certainly better than real estate. The evidence? Well, have you seen how the DJIA has risen….
With houses the story is different. We know not only average values on a local, state and national basis, we can see what happened with a specific home over time. Such information is typically as close as your nearest real estate broker or local property tax office. When the value of a home goes down we don’t remove it from average.
Prices Don’t Always Go Up!
One of the financial theories which got so many people in trouble — and so many lenders — was the idea that real estate values always rise. They don’t. That’s plain today, but for some folks not obvious until the bottom fell out of the real estate market in most areas.
Real estate. It’s great for tax benefits and sleeping indoors. Sometimes, but not always, it’s also a great way to build equity — but not a sure way.
Stockbrokers should say as much about the stuff they sell.
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