7 ms·

The Dow Jones index being a poor index (as well as being a price index) does not mean the idea of a stock market index is a poor one; the title of the article e

The Dow Jones index being a poor index (as well as being a price index) does not mean the idea of a stock market index is a poor one; the title of the article especially was poorly chosen by the editor. The S&P500 Index is another stock market index and is far from meaningless -- its level reflects expectations about the future profits of the largest 80% of American companies. The S&P500 has its own weaknesses because it does not fully capture the stock market (use something like the CRSP Total Stock Market Index or the Dow Jones U.S. Total Market Index) and because it is a price index (compare to the German DAX which is total return-based). The article overreaches in its conclusions.

adim86 8y ago
I think what the author is trying to point out here is that in the world we live in today the stock market indexes are less valuable. Stocks used to be able to be bought using technicals like the P/E ratio and other financial tools. As companies like facebook and snapchat and the likes. Companies whose values cannot really be calculated by the assets they hold (land, machines and factories etc). Their value is in their Brand, their IP and other subjective articles. But they are listed in the stock market and they dominate the stock market today. It generally makes these tools weaker in calculating the value of the market using stocks which was created for an industrial age
- JumpCrisscross 8y ago
  > Companies whose values cannot really be calculated by the assets they hold Assets have value for the cash flows they promise. Facebook is a dead simple valuation exercise on a PEG basis.
- frockington 8y ago
  Stock in Facebook is the same principle as stock in Ford. You are simply buying a share of the company. I don't see how indexing them is any less the beneficial now then it was twenty years ago
- kgwgk 8y ago
  In March 2000, tech companies represented 35% of the S&P 500 by market cap. Cisco was briefly the largest company in the world, with a market cap similar to Facebook today (taking inflation into account its market cap was similar to Amazon today). https://www.bizjournals.com/sanjose/stories/2000/03/20/story2.html https://www.bizjournals.com/sanjose/stories/2000/03/20/story... These were the ten largest companies in the S&P 500 in January 2000: Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP.
actsasbuffoon 8y ago
Agreed. These indices are extremely useful for trading. For just under $275, just about anyone can buy a share of SPY and make/lose money based on trends across a diverse array of the largest companies in the world. Without indices, you'd have to spend tens or hundreds of thousands of dollars for this kind of diversification. It's also useful for tracking trends within specific sectors. Think tech is undervalued? Invest in a NASDAQ ETF like QQQ or NDX. Maybe you read that OPEC is planning to increase oil production and you think that's going to devalue existing oil supplies, so you take a short position on XLE (an energy index ETF). The relative simplicity of indices means there's a lot of volume and liquidity. It's not easy to find a buyer for shares in an obscure oil company, but lots of investors would be happy to buy your energy index ETF shares. I love indices. I'd be hesitant to invest in sectors I don't know much about, like construction materials. They're heavily affected by the price of raw materials, and lately all this tariff talk has caused a lot of volatility in those prices. Which individual companies should I get involved with? It's hard to say without a fair bit of research because it's a specialized field. With an index ETF, I can quickly take a long or short position to get a little exposure to the sector without having to dig too deep.
- abakker 8y ago
  Just a quick point of correction - be careful not to confuse an Index with an Index fund. You are talking about ETFs, which come in Index fund varieties, but the Index exists as a market indicator, not for the purpose of creating a fund. ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes.
  - actsasbuffoon 8y ago
    Yes, you're correct. I didn't do a good job explaining the difference. I considered editing to add a note, but I think your comment explains it clearly enough to make that unnecessary.
  - tanderson92 8y ago
    > ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes. It's rumored that Vanguard 'bribed' CRSP to create its Total Market index (and etc for other funds) so that its licensing fees to MSCI / Dow Jones would be lower. So while it is true they do not maintain the indices, it is possible they have a heavy role in creating the indices.

adim86 8y ago

I think what the author is trying to point out here is that in the world we live in today the stock market indexes are less valuable. Stocks used to be able to be bought using technicals like the P/E ratio and other financial tools. As companies like facebook and snapchat and the likes. Companies whose values cannot really be calculated by the assets they hold (land, machines and factories etc). Their value is in their Brand, their IP and other subjective articles. But they are listed in the stock market and they dominate the stock market today. It generally makes these tools weaker in calculating the value of the market using stocks which was created for an industrial age

JumpCrisscross 8y ago
> Companies whose values cannot really be calculated by the assets they hold Assets have value for the cash flows they promise. Facebook is a dead simple valuation exercise on a PEG basis.
frockington 8y ago
Stock in Facebook is the same principle as stock in Ford. You are simply buying a share of the company. I don't see how indexing them is any less the beneficial now then it was twenty years ago
kgwgk 8y ago
In March 2000, tech companies represented 35% of the S&P 500 by market cap. Cisco was briefly the largest company in the world, with a market cap similar to Facebook today (taking inflation into account its market cap was similar to Amazon today). https://www.bizjournals.com/sanjose/stories/2000/03/20/story2.html https://www.bizjournals.com/sanjose/stories/2000/03/20/story... These were the ten largest companies in the S&P 500 in January 2000: Microsoft, Cisco, Intel, IBM, AOL, Oracle, Dell, Sun, Qualcomm, and HP.

actsasbuffoon 8y ago

Agreed. These indices are extremely useful for trading. For just under $275, just about anyone can buy a share of SPY and make/lose money based on trends across a diverse array of the largest companies in the world. Without indices, you'd have to spend tens or hundreds of thousands of dollars for this kind of diversification. It's also useful for tracking trends within specific sectors. Think tech is undervalued? Invest in a NASDAQ ETF like QQQ or NDX. Maybe you read that OPEC is planning to increase oil production and you think that's going to devalue existing oil supplies, so you take a short position on XLE (an energy index ETF). The relative simplicity of indices means there's a lot of volume and liquidity. It's not easy to find a buyer for shares in an obscure oil company, but lots of investors would be happy to buy your energy index ETF shares. I love indices. I'd be hesitant to invest in sectors I don't know much about, like construction materials. They're heavily affected by the price of raw materials, and lately all this tariff talk has caused a lot of volatility in those prices. Which individual companies should I get involved with? It's hard to say without a fair bit of research because it's a specialized field. With an index ETF, I can quickly take a long or short position to get a little exposure to the sector without having to dig too deep.

abakker 8y ago
Just a quick point of correction - be careful not to confuse an Index with an Index fund. You are talking about ETFs, which come in Index fund varieties, but the Index exists as a market indicator, not for the purpose of creating a fund. ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes.
- actsasbuffoon 8y ago
  Yes, you're correct. I didn't do a good job explaining the difference. I considered editing to add a note, but I think your comment explains it clearly enough to make that unnecessary.
- tanderson92 8y ago
  > ETF providers use indices to create a very simple to maintain trading strategy and investment vehicle for low management cost, but they do not create the indexes. It's rumored that Vanguard 'bribed' CRSP to create its Total Market index (and etc for other funds) so that its licensing fees to MSCI / Dow Jones would be lower. So while it is true they do not maintain the indices, it is possible they have a heavy role in creating the indices.