'Keeper' of the Dow tells what he learned, and why Steve Jobs
rang his phone
By John A. Prestbo
The Dow Jones Industrial Average turns 120 years old this month,
on May 26.
For 20 of those years it was my privilege to be "keeper of the
Dow" -- the staff person who watched over the globally famous index
to make sure it kept on ticking. Not that I alone made the
decisions about putting companies in or taking them out, but I had
a vote. And sometimes I called the huddle to take such actions.
Along the way, I learned some interesting things that many
others don't know about this icon of the investment world. Here are
my top 10:
1. The DJIA isn't the longest-running index in the world. That
distinction belongs to the Dow Jones Transportation Average.
Charles Dow, founding editor of The Wall Street Journal who created
these indexes, began with a railroad index in 1884, 12 years before
the industrial average launched in 1896.
Railroads were the biggest U.S. companies in Mr. Dow's day, so a
railroad average was appropriate. But after World War II, the rails
began consolidating to a very few, while trucking and air transport
grew. The index was renamed the Dow Jones Transportation Average in
1970.
2. No stock has been in the Dow the whole time, not even General
Electric Co. The Dow started with just 12 stocks of early
industrial companies. Of that dozen, only GE is in today's 30-stock
index. But it missed some years along the way: It was taken out in
1898, restored in 1899, removed again in 1901 and reinstated in
1907, this time for good. We don't know why the early changes were
made because no explanations were published.
3. The Dow really isn't an average anymore. In the beginning, it
was. Mr. Dow totaled the stocks' prices and divided by the number
of stocks. Over time that arithmetic became complicated by stock
splits, which reduced the price of each share. By 1916, when the
Dow was expanded to 20 stocks from 12, GE's stock price, for
example, had to be multiplied by four to correct for prior splits
before being "averaged."
4. Averaging was abandoned in 1928, when the DJIA expanded to 30
stocks. The sum of prices thereafter was divided by a divisor that
was adjusted every time a component split its shares, to keep the
Dow at the same level as before the split.
Stock splits over the years steadily shrank the divisor. On May
27, 1986, the divisor slipped below 1, where it remains. When
dividing by a number less than 1, the divisor becomes a multiplier.
That's why the 30 stock prices today add up to nearly $2,600 while
the Dow's index value fluctuates just below 18000. And it is why a
$1 move by any Dow stock moves the average 6.85 points.
5. Tech-stock fans didn't always agree with us -- including
Steve Jobs. When selecting stocks for the Dow, we Journal editors
simply tried to reflect the market in just 30 stocks (minus
transportations and utilities). But we never moved fast enough for
the "hot stock" crowd. Boosters lobbied us to add Microsoft Corp.
and Intel Corp. for years before we did in 1999. We were roundly
chastised for waiting so long.
More recently, Apple Inc. was another stock people wanted in the
Dow. So did Apple. One Friday afternoon Steve Jobs telephoned to
ask why we didn't add his company. I explained that the price of
Apple's stock had risen so high (over $600 a share) that it would
dominate and distort the index. After his death, Apple split its
stock, and it was installed in 2015.
6. The DJIA has risen for 78 of its 120 years, but it bombed in
its first year. From 40.94, its first average price, the Dow sank
30% to 28.48 by August 1896 because the heated presidential race
(William McKinley vs. William Jennings Bryan) made investors
nervous. That was the Dow's lowest close.
7. The Depression was so bad, the Dow industrials almost started
over. On July 8, 1932, the index closed at 41.22, just 0.7% above
where it began 36 years earlier.
8. The DJIA is slightly less volatile than other broad market
indexes, but it has an advantage. So far in this century, the
standard deviation from the industrials' average daily move is
0.91% versus the S&P 500's 0.98%. One might think that a
30-stock index would be more volatile than a broader index. But it
is also true that smaller stocks -- which the S&P 500 has but
the Dow does not -- are more volatile.
9. Each point move of the Dow industrials means less than it
used to. As the index rises, each point is easier to attain on a
percentage basis. By points, the big yearly wins and losses are all
fairly recent because the Dow is at high levels: The best year was
2013 with a gain of 3,472.52 points, and the worst year was 2008
with a loss of 4,488.43.
By percentage, the leader and laggard happened decades ago, and
within two years of each other. (Talk about volatility!) A 66.7%
jump puts 1933 in first place, and a 52.7% drop leaves 1931 in
last. As for the 21st century, 2013 ranks 19th with 26.5% and 2008
is 117th (minus 33.8%).
Oct. 13, 2008, had the largest one-day point gain at 936.42,
while Sept. 29, 2008, was the biggest decline of 777.68. The daily
percentage champ is a jump of 15.3% on March 15, 1933, and the
greatest loss was 23.5% on Oct. 19, 1987 (followed by the two-day
crash of October 1929).
10. The Dow is no longer part of News Corp's Dow Jones &
Co., publisher of The Wall Street Journal. Since 2012 it has been
in the stable of S&P Dow Jones Indices, a unit of McGraw Hill
Financial Inc., and Dow Jones has no ownership stake. Journal
editors still participate in selecting companies for addition and
deletion, however.
Mr. Prestbo, a former Wall Street Journal and Dow Jones Indexes
editor, is an adviser to MarketGrader Capital, which chooses
components of the Barron's 400 Index. He can be reached at
reports@wsj.com.
(END) Dow Jones Newswires
May 09, 2016 02:48 ET (06:48 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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