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Why I Don’t Follow the Dow
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Why I Don’t Follow the Dow
I’m not really an irritable kind of guy, preferring to find things to appreciate and enjoy rather than seeking opportunities to get steamed about something.
But I have to say that I’m always a little peeved when I’m listening to a radio news program and the anchorman (or woman) just tacks on at the end of the broadcast, “On Wall Street today the Dow was up 15 points.”
When that happens, I get impatient on several levels. And I’d like to tell you why.
First, I’m disappointed that, if they only have time to report one major index, they’ve chosen the Dow. The Dow Jones Industrial Average is certainly a venerable yardstick, with a history that stretches all the way back to 1896.
But it’s also a questionable proxy for the health of the total U.S. stock market. The Dow is calculated using the 30 largest companies that trade on the New York Stock Exchange. The Dow’s capitalization is about $4.9 trillion dollars, which is less than a quarter of the total market cap of all U.S. stocks. And its total concentration on Blue Chips (very large, stable, mostly dividend-paying companies) makes it too conservative to be a true representation of the broad market.
If you wanted to use one index to better represent what’s happening with the market as a whole, you would be better off using either the S&P 500 Index, which tracks the 500 largest companies in the market by capitalization, or the Wilshire 5000 Index, which tracks every stock on every exchange as long as it’s not a Bulletin Board or a Pink Sheets stock.
My second objection is based on my bet that not one listener in 10 will have any idea of how big a move the point change in the Dow actually represents. That’s because the three major indexes that most people are familiar with trade at very different levels. For example, the Dow is now trading above 16,500, so to get a 1% move, it must trade up or down 165 points. By contrast, the S&P, which is trading near its all-time highs just under 1,900, can move a full percent in just 19 points.
To illustrate, on March 13, the Dow was down 233 points and the S&P was down 23 points, which might sound like a huge move in the Dow. But that represented a dip of 1.4% in the Dow, while the S&P’s correction was 1.2%.
If news organizations are going to continue to tack a five-second market report on the end of their programs, I wish they would at least say “The Dow was up a half a percent, while the S&P 500 rose six-tenths of a percent.”
Then again, I suspect that most people listen to stock news about the way dogs do in the classic Far Side cartoon, where the only thing Ginger (the dog) hears is “blah, blah, blah, Ginger.” If that’s the case, what people really hear is “Today the Dow was up blah, blah, blah.”
My ideal report would follow the formula, “Today the markets were up slightly on light volume, with tech stocks leading the way and blue chips slightly behind.” Then the people who want to know the numbers can go to Yahoo Finance or their online broker and get all the details they want.
Without some perspective, data is just dumb.
In this week’s Stock Market Video, I look at the evidence of a possible upturn in U.S. stocks, but spend more time with the emerging markets stocks that I deal with every day. The improvement in tone in emerging markets is much more definite, and many stocks are forming good bases. Despite this, I don’t see a new buy signal, so I’m keeping new buying to a minimum and working on my watch list, including tracking the spate of new IPOs from China that have recently arrived. And, of course, I’m waiting for Alibaba along with everyone else. Click below to watch the video!
Mike’s Comment: I'm all for diversification, up to a point; it's been proven to help portfolio performance and cut risk, too. The problem is that everyone's father, mother, aunt and uncle preaches diversification, to the point where many investors own dozens of stocks (and nearly as many mutual funds)! All that does is guarantee so-so results. Every market cycle features a handful of leading companies with revolutionary new products or services, and these are the stocks you want big positions in as institutional investors accumulate shares over many months and years.
Paul’s Comment: As a growth investor, I prefer to have a maximum of about 10 stocks in my personal portfolio. And, not surprisingly, that’s also the maximum number in the portfolio of Cabot China & Emerging Markets Report. Mike’s Cabot Market Letter uses a maximum of 12 positions. The 10–12 area is the sweet spot for balancing risk and reward in an aggressive growth portfolio. I can’t agree totally with Berkowitz, who seems to saying “the fewer stocks the better,” but he’s the guy running a hedge fund, not me.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
In this issue, Chloe Lutts Jensen, Chief Analyst of Cabot Dividend Investor, discusses Canadian stocks that pay dividends, pointing out the diversification benefits of the market to the north. Stock discussed: Tim Horton’s (THI).
I write in this issue about the difficulties of trying to grab a piece of a brand new stock on its opening day and why I prefer to wait until the new issue has seasoned a bit. Stock discussed: Alibaba (no symbol yet).
Value guru Roy Ward, Chief Analyst for Cabot Benjamin Graham Value Investor, looks at the current market correction and how to get through it with minimum damage, including lowering the volatility of your portfolio. Stock discussed: Actavis (ACT).
Have a great weekend,
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory
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