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Djia Components Change


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#1

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Posted 02 April 2004 - 07:04 AM

I just saw on CNN that the Dow Jones Industrials will have its components changed - T, EK and IP will be removed and will be replaced with AIG, VZ and PFE. This is not an April Fool's joke, is it? Article

If it is serious, any speculations about the real reasons behind this move and about its possible implications?

How many of the "Nifty Fifty" will then remain in the Dow? Just IBM?

Regards,
Vesselin

#2 DrStool

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Posted 02 April 2004 - 08:52 AM

I wrote about this in the Anals last night, and have written about it repeatedly in the past. Dow Jones's history of managing this index higher is truly disgusting, one of the great frauds of all time. It's even obvious when comparing the Dow with that other phony big cap index the S&P. Down 10% vs. 30% from the all time high. And even 30% grossly understates the losses most people have suffered.

The long time historical practice of removing dogs from the index should be exposed for the fraud that it is. Once these stocks go to zero the investor's loss is total and can never be recovered. Even if they don't go to zero, most dog stocks never recover. The impact is one of a dead weight on a portfolio. Zero is zero forever. You cannot reinvest the loss in a stock that will help your portfolio recover.

By managing the "averages" replacing dogs with thriving companies, they make it look as though most portfolios have gained 10% a year over the last 50 years, when, in fact, nothing could be further from the truth. Almost all companies go out of business sooner or later and most portfolios suffer the impact. If the indexes were simply expanded to add new companies, leave the dead weight in, and adjust the divisor accordingly, they would give a much clearer picture of the market's real performance. Of course the original Dow 12 would now be the Dow 119.

That's right, they have added and subtracted 107 stocks through the years. And although they love to lie their asses off about it, not even General Electric was among the 12 stocks in the original Dow average published in 1886. Old Charley Dow threw out the original 12, 10 of which were rails, and switched to 12 industrial companies in 1886.GE was in that group. Then they went to 20 stocks in 1916, and 30 in 1928.

That real truth is that stocks, on average, do not outperform the risk free rate of return and get absolutely destroyed on a real rate of return basis over the long haul. But Wall Street, by perpetuating this farce, this fraud, makes it appear that stocks always go up.

The most egregious period of flim flam was in the 1930's. No fewer than 24 of the 30 stocks were replaced during the depression. 17 of those changes were made between 1930 and 1933. Then they left it alone until 1956. One can only imagine where the Dow would be today if the 24 dog stocks that were pulled from the index in the thirties were left in there. The Dow would have barely recovered from the pits of the depression. Today it would be a fraction of its current level.

The next most active period of this wholesale fraud was, ta daaa, the 1990's when 1/3 of the index was replaced. The classic definition of putting lipstick on a pig. The Dow was falling behind the Nasdaq in terms of public perception and in actual performance. It had to be dressed up, or it would be left out of the party all together.

The public doesn't have a clue, nor does it want to. Because of that it gets taken to the cleaners every few years, just as it deserves to for its absolute devotion to the credo of ignorance.

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#3 The brown one

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Posted 02 April 2004 - 09:30 AM

Word,Doc.

#4 machinehead

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Posted 02 April 2004 - 11:42 AM

The Dow is called an "Industrial" average because it used to be composed of companies that produced "things" - tires, cars, oil, paper, steel, tobacco, food.

Companies such as AIG tilt the content ever farther toward the finance side. The pills produced by Pfizer are more knowledge-intensive than commodity-intensive. Verizon delivers most of its services electronically.

In a more inflationary environment, the Dow might actually underperform for a change.
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#5 threadbare

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Posted 02 April 2004 - 12:59 PM

A couple of years ago when I was visiting my stockbroker and he was going on about how if you'd put all of your money in the Dow in 1950 and just walked away, you'd be rich today. Fortunately, through this site or something I'd read elsewhere, I mentioned the managed nature of the Dow and how I thought you'd be flat broke if you just let your money sit in the nifty fifties for decades.

Poor man. He went pale, started shaking uncontrollably and then his head blew up. There's a lesson to be learned from this, as in all things. Wear protective clothing when dealing with brokers unaccustomed to hearing the truth.

#6 Soros

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Posted 03 April 2004 - 02:01 AM

http://www.djindexes...eMenu=true.html

http://www.fool.com/...oryOfTheDow.htm
Early on, the Industrials were a dynamic Average, changing composition on an almost monthly basis.

http://www.djindexes...jsp?decade=1895
American Cotton Oil
Distant ancestor of Bestfoods

American Sugar
Evolved into Amstar Holdings

American Tobacco
Broken up in 1911 antitrust action

Chicago Gas
Absorbed by Peoples Gas, 1897

Distilling & Cattle Feeding
Whiskey trust evolved into Millennium Chemical

General Electric
Going strong and still in the DJIA

Laclede Gas
Active, removed from DJIA in 1899

National Lead
Today's NL Industries removed from DJIA in 1916

North American
Utility combine broken up in 1940s

Tennessee Coal & Iron
Absorbed by U.S. Steel in 1907

U.S. Leather (preferred)
Dissolved in 1952

U.S. Rubber
Became Uniroyal, now part of Michelin

#7

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Posted 05 April 2004 - 07:03 AM

Doc, I generally agree with what you said, but there are a some factors you aren't considering and which are complicating the issues.

You see, nowadays the average Joe Shmoe doesn't "buy the stocks of the Dow". Instead, he buys a mutual fund that mirrors the Dow, or buys DIA. As a consequence, the "managing" of the index results directly in a managing of his portfolio - so, his stocks don't "go to zero".

OK, to answer one of my questions, apparently many of the Nifty Fifty are still members of the DJIA: AXP, DIS, GE, IBM, JNJ, KO, MCD, MMM, MO, MRK, PG and not PFE.

Regarding my other question, I assume that you're implying that the three components (EK, IP, T) are being removed because of their underpeformance? But why now - they've been underperforming for years...

Regards,
Vesselin

#8 Soros

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Posted 06 April 2004 - 03:44 PM

Rogers say:
http://www.foxnews.c...05148,00.html#2
I'm not as bullish as everyone else but they just threw AT&T (T) out of the Dow Jones. And historically, when a company gets thrown out of the Dow Jones, you should buy it.

#9 DrStool

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Posted 06 April 2004 - 08:00 PM

I'd like to see the data on that. I think the majority have disappeared. I know Sears did well for awhile, but I don't think Bethlehem Stool did.

I think the real problem is that in theory the Dow was not meant to be a barometer of the market. It was and is meant to represent a cross section of the economy. The editors who make the changes do so with this in mind. But for all the issues mentioned above, the Dow is a lousy measure of market performance, and because of its small size, arithmetic weighting, and control by the three biggest NYSE specialist firms, it is mostly just a tool of manipulation, grossly understating the true damage the market has suffered.

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#10

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Posted 06 April 2004 - 08:20 PM

I'd like to see the data on that. I think the majority have disappeared. I know Sears did well for awhile, but I don't think Bethlehem Stool did.

I think the real problem is that in theory the Dow was not meant to be a barometer of the market. It was and is meant to represent a cross section of the economy. The editors who make the changes do so with this in mind. But for all the issues mentioned above, the Dow is a lousy measure of market performance, and because of its small size, arithmetic weighting, and control by the three biggest NYSE specialist firms, it is mostly just a tool of manipulation, grossly understating the true damage the market has suffered.

Concur 110% with your ANALysis Doc. Orwellian distortions entered the picture, year unknown.

I have never seen such a receptive nor gullible crowd except on carnival grounds at the games.

#11

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Posted 07 April 2004 - 11:45 AM

Doc, what data? I simply Googled for a list of the Nifty Fifty stocks and checked which ones of them are still among the DJIA components.

Regards,
Vesselin

#12 Bearbones

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Posted 10 April 2004 - 10:20 PM

Rogers say:
http://www.foxnews.c...05148,00.html#2
I'm not as bullish as everyone else but they just threw AT&T (T) out of the Dow Jones. And historically, when a company gets thrown out of the Dow Jones, you should buy it.

The Bloomberg keeps track of the performance of the old Dow from the prio r change. If you have one of these machines it can be accessed by typing OLDDOW and the index key.
That index is now about 10670 I believe.





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