Deep Inside the Dow
April 3, 2009
What About the Original Dow 30 Stocks?
Adding and Subtracting Value
The Original Dow 30 Components
A Few Thoughts from Richard Russell
How to Succeed at Writing
Conversations on Banks
Copenhagen, London and Orange County, etc.
Tonight (Saturday) some 450 people will come together in San Diego to honor Richard Russell, who has been writing the Dow Theory Letter for over 50 years. In that spirit, in today's letter we are going to look deep inside the Dow, back to its very roots. The Dow is a price-weighted index as opposed to a cap-weighted index. Does that make a difference in performance? Specifically, does it affect how the Dow has performed since it was expanded to 30 names in 1928? There are some real surprises we have found, and I think you will find this letter very interesting.
The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today, only nine names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or the committee felt that other companies better represented the industrial prowess of the US economy.
For instance, in November of 1999, Goodyear and Chevron were removed in order to allow Microsoft and Intel to join the Dow 30, where the two tech giants proceeded to rise handily the next few quarters. However, it has not been that pretty since the end of 2000, with both stocks down approximately 60% from their entry price, and much further from their peak price. Chevron proceeded to move up some 60% in price after it was removed, at which point Chevron was inserted back into the Dow 30 on February 19, 2008, where it is now down about 15%. Not a good run for the selection committee.
But it is not all bad. If you look at the deletions and additions, you find some interesting timing issues. Some additions were excellent in terms of performance. Some avoided later bankruptcies.
What About the Original Dow Jones 30 Stocks?
Thinking about the Dow, I wondered how much the committee had helped or hurt the Dow performance over the last 80 years. What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?
I asked that question to good friend Rob Arnott of Research Affiliates. It turns out that he…