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.

Why Stocks & Houses Don’t Compare As Investments is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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There are 30 companies which comprise the DJIA, but not the same companies all the time. New companies are added to the list from time to time, which means old companies are removed and DJIA movements up or down continue to be reported as if nothing has happened.

But that’s not the case. Each and every time Dow membership changes it makes sense to wonder if we are still comparing apples with apples.

Started in 1896 with 12 stocks, the DJIA has risen from a first-year close of 40.45 to 12,650.36 as of December 31, 2007. Over a period of 111 years, that’s an average annual increase of 5.31 and a fabulous argument for the joys of compound interest.

But within that general average are a series of ups and downs. The DJIA hit 41.22 in 1932, essentially back where it began in 1896. The benchmark 300 recorded at the end of 1928 was not seen again until 26 years later when the Dow closed for the year at 404 in 1954. The yearly close didn’t top 500 until 1958 and it wasn’t until 1972 that the year-end average finally reached 1000.

Between 1896 and 1981 the Dow grew by an annual average of 3.68%, but between 1982 and 1999 the measure increased at year-end from 1046 to 11497, an average growth of 15.14%.

The catch, of course, is that while the percentages and numbers above are accurate, what they measure has shifted over time.

As it happens, the modern Olympics also began in 1896. Thomas Burke of the U.S. won the 100-meter race in 12 seconds flat. In the 2008 Olympic races held in China, Usain Bolt of Jamaica covered the same distance in 9.69 seconds.

It’s possible to compare the efforts of Burke and Bolt because there’s a common measure: 100 meters is 100 meters. We know with total assurance that Bolt is astonishingly faster than Burke.

Alas, the Dow averages from 100 years ago, 20 years ago, and even five years ago track stocks that differ from the ones we watch today, thus comparing results with one period or another requires a whole bunch of asterisks and caveats.

To faithfully track stock movements from 1896 or within any period we need a consistent measure. The catch is that the only stock from 1896 found on today’s DJIA is General Electric. One can only guess how the average would look at this time if the DJIA still accounted for American Cotton Oil, Distilling & Cattle Feeding, and U.S. Leather.

And that, of course, is the core point. Companies come and go, investing preferences evolve, and if we are to track marketplace trends then we should not ignore either the great successes or those firms which have become less favored.

For instance, whatever happened to such DJIA stalwarts as U.S. Cordage (added in 1896), Standard Rope & Twine (1896), Federal Steel (1899), Central Leather (1912), Studebaker (1916), Corn Products (1920), Woolworth (1924), Paramount Famous Lasky (1925), Remington Typewriter (1925), Nash Motors (1928), Postum (1928), Victor Talking Machine (1928), and Hudson Motors (1930)? If we are to fully reflect the path of American commerce, then surely we must account for the direction, destiny, and descendants of these firms. (For a look at the companies which have composed the DJIA over the years, see the Dow Jones Industrial Average History.)

In recent years such new-economy giants as Intel, Microsoft, and Home Depot were added to the list, while Sears, Goodyear, and Union Carbide were dropped. The new firms are surely significant, but how many people no longer shop at Sears or reject tires from Goodyear? Did these firms suddenly disappear from the pantheon of corporate America?

On September 22, 2008, Kraft Foods Inc. (KFT) replaced American International Group Inc. (AIG). Where would the DJIA be if AIG had remained on the list? AIG shares were at $2.33 on October 10, 2008 — down from 52-week high of $69.91.

To have a consistent set of benchmarks we need a consistent DJIA so why not evolve a series of DJIAs? In the same way that Super Bowl XXXI inevitably follows Super Bowl XXX, why not acknowledge that the DJIA of the moment is not measuring the same body of information or companies as the DJIA from 2007, 1995, 1930, or 1900? All good years — but all different.

And so a modest proposal. Let us anoint today’s DJIA as “DJIA-1.0″ When next we add or subtract company members because they merge, fail or somehow become less interesting, we can move on to “DJIA-2.0″ Older DJIAs with different corporate members can be named DJIA-X1 or X2 — with X1 being the most recent before the advent of the DJIA-1.0. To have a clear and consistent accounting of what it is that we’re measuring, we can then post the averages for each index each day and easily compare one period with another.

Unless, of course, we are against clarity and consistent measures.

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Published originally by Realty Times on 2001 and posted with permission.

Do We Need A Dow 2.0? is a post from: OurBroker.com -- Refinance, Home Mortgage Loans & Rates, Home Equity Loan

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