The Dow is (Partially) an Advertisement

Did you know that the Dow Jones Industrial Average (DJIA), commonly quoted by the Wall Street Journal (owned by the same parent company), is largely irrelevant to your financial success?

Did you know the DJIA was created by a couple of newspaper writers who never really explained how or why or what they were thinking when they chose these 30 companies?

Only thirty companies get to be part of the DJIA. It's a badge of honor to be included. The DJIA could be influenced by advertising, marketing, or other random, irrational influencers. Imagine the wining and dining going on behind the scenes. But more importantly, ask yourself, who cares?

The DJIA companies have nothing to do with you, or me, or how investment decisions are made (or ought to be). One key reason is that the DJIA is "price weighted" whereas other stock market indices are "market weighted."

Initial stock price, believe it or not, is set by management, not by investors. The market (investors) move the price around, and over long periods of time, price reflects rational estimations of value.

The larger the price of each stock in the DJIA, the higher the DJIA. The share of a company's portion of the DJIA rises when it's stock price rises. If management does a share split, or a purchase, or a redemption, this affects whether the emotive news media can declare, "Dow breaks 20,000."

Not so with most stock market benchmark indices, like the SP500. The larger the company grows market share, the larger the portion of the index it becomes. Market share is the number of shares times the stock price. That seems to make a little more sense, doesn't it?

But even then, why do you care if Apple is the largest company? Why do you care if Amazon crossed $1,000? Don't you really just care about whether or not you can enjoy your lifestyle with independence and dignity?

For a little more about those interesting indices, or benchmarks, click here for some stats from a professor at the University of Denver.

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