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> If one bought and held the Dow from 1921 to present, the total return would be 500,000% (5,000x)! If we can use hindsight in our trades, I'd recommend using
by riazrizvi 5y ago
> If one bought and held the Dow from 1921 to present, the total return would be 500,000% (5,000x)!
If we can use hindsight in our trades, I'd recommend using the numbers 60, 54, 36, 24 and 7, on last week's Powerball lottery that paid out $211mm. That's a 100,000,000x return!!
- yreg 5y agoSidenote: Dow Jones Industrial average is an incredibly archaic and dumb metric. It weights companies by price per share, not by market cap. So when Apple does a 1 to 4 stock split its influence on DJI nonsensically falls by 75%.
- dheera 5y agoDon't they adjust for that when splits happen?
- dmurray 5y agoNo. Lots of other measures do, but not the DJIA.
- christophilus 5y agoNope. It’s price weighted. Hence the comment on how dumb it is.
- dheera 5y agoSounds like a simple thing to solve if they just let me make a pull request for the function getDJIAValue() or wherever the hell it lives. Based on price is fine -- when splits happen just adjust the weight by the split factor. Are they really that incompetent at coding?
- yreg 5y ago>Based on price is fine -- when splits happen just adjust the weight by the split factor It's not fine since companies have varying counts of shares, nevermind the stock splits. The proper solution is getSharePrice() * getShareCount(). Which is what most other indeces do.
- bosie 5y ago> Are they really that incompetent at coding? Wait, you think this is a _coding_ issue?
- quickthrowman 5y agoIt’s not an error in the implementation, the problem lies within the index specification: https://www.spglobal.com/spdji/en/documents/methodologies/methodology-dj-averages.pdf https://www.spglobal.com/spdji/en/documents/methodologies/me...
- dheera 5y agoSo change the specification. Fire the person who hasn't changed it already and schmoozing with beer in a Manhattan high rise, and put an engineer in charge.
- wheybags 5y agoThey did, it's called the s&p 500, and it's run by the same company.
- kortilla 5y agoIf you change the specification, that’s a new index FFS. It’s like changing the specification for Fahrenheit.
- dheera 5y agoOh I'd __love__ to change the specification of Farenheit so that people get confused and stop using it.
- yreg 5y agoNo. Apple was the largest component and now it’s 19th. Also amusingly, DJIA is unable to include Amazon since it would obliterate the rest of the index.
- iso1210 5y agoAmazon is small fry compared with BRK-A, which was up $8,854 on Friday - over twice Amazon's share price.
- dheera 5y agoJust weight it by 0.1 or whatever? Simple solution.
- mastax 5y agoThe whole point of the DJIA is that the same rules have been used for a long time. If you want a better index there are many available.
- dheera 5y agoSo version it in a repo e.g. on Github, and ensure continuity in the DJIA index from one version to the next on the date the version is committed. We have technology, we should use it. I could add a clause that says if a share splits its weight gets multiplied accordingly, and that would have the effect of (a) DJIA stays continuous now (b) DJIA stays continuous through next split. It doesn't disrupt anything now, and prevents future inadvertent disruptions. Anyone that is insisting we shouldn't change it is stuck in a backward age. Honestly I don't understand why there are so many no-sayers on HN. We should be building the future, not making excuses.
- freeone3000 5y agoThe index you're describing has already been created by Charles Schwab as SCHV in 2009 (and SPCH in 2005 for the S&P, and ...). There are already new indexes -- lots of them. DJIA is useful because it's an index calculated using the same metric for over a hundred years, so you can track performance for reporting and public perception.
- tkojames 5y agoThe s&p 500 is worse In my opinion. They make it sound like it is the top 500 public companies in the us. Which is not the case. They have group that picks them based on a bunch dumb rules. I like the total stock market index's. If you have people picking what goes into the index they why bother just buy active managed index funds.
- carnitine 5y agoThe S&P 500 and Dow are just simple algorithmic trading based on an underlying thesis (US does well) with good historic performance.
- tkojames 5y agoS&p 500 is not a simple algorithmic trading system. That is the problem! They have a selection committee.. https://en.m.wikipedia.org/wiki/S%26P_500 https://en.m.wikipedia.org/wiki/S%26P_500
- jefftk 5y agoThe S&P 500 isn't ideal, but it's much better than the Dow. Both indices are a selection of companies, but the Dow is smaller which leaves much more room for judgment calls. Additionally, that the Dow is weighted by share price is completely ridiculous. (If you actually want to index, though, a total market fund makes much more sense)
- tkojames 5y agoYea true. But most people I think know the Dow is kinda of BS handpicked list. Where the S&P 500 pretends it is the top public 500 companies in the USA. Just always kinda bother me how they advertise it. Most of them will become useless anyways. Firms are going to be using in house index so they don't have to pay the fees. Fidelity is doing this with there free index funds.
- yreg 5y agoThe simple premise that S&P500 weights its components based on market cap already puts it lightyears ahead of DJIA. Also including 500 big companies is much more reasonable than including just 30. --- People lately criticize S&P committee for the rule that a company needs to report 4 consecutive profitable quarters in a row to be included. Thanks to this they've missed the boat on Tesla and they had to eventually include it as the 8th largest component. Someone on this forum joked that they should amend the rule to say: A company needs to report 4 consecutive profitable quarters in a row and the CEO name must not rhyme with melon tusk.
- bishoprook2 5y agoAlso, it's an actively managed index. Companies are added and subtracted.
- perl4ever 5y agoThe Dow was designed for easy calculation before computers. And it's pretty correlated to the S&P 500 anyway. In theory, price weighting is a poor way to index, but look at it from the other side of the coin - if you choose 30 stocks, from all sectors, how likely is it that you'll get a different return from the market even if you try? Not very. It's only relatively recently that it became popular to never split and let stock prices grow without limit, too. If the prices are mostly in a small range, then the index is similar to an equal weighted one.
- tehlike 5y agoIndexing is less of a hindsight at this point.
- riazrizvi 5y agoBased on the example of USA Inc? Over this time period what about Germany Inc? Or China Inc? Had Hitler used his artillery to wipe out the British Expeditionary Force retreating at Normandy, UK Inc investors would have lost their shirts.
- 5faulker 5y agoThe key here is hindsight.
- tshaddox 5y agoAlso expected human lifespans.
- eloff 5y agoThat's apples to oranges. The Dow has a long history of excellent returns. Those lottery numbers do not.
- carnitine 5y agoThe Dow is arbitrary. It happened to do well, if you bought a Japanese index in 1929 you’d do well for 60 years and then make losses which would require another 30 years to recover from.
- eloff 5y agoYou're measuring conveniently from the top of the epic bubble in the late eighties. But yes the US has been a better long term bet than Japan. That doesn't mean it's "arbitrary".
- pessimizer 5y ago> measuring conveniently That's a bizarre but accurate way to describe "citing a specific example."
- eloff 5y agoIf you pick the top or bottom of the market as a starting point you can tell a very misleading story about returns over time. Starting and ending points matter a lot.
- ww520 5y agoDow kicks out underperformers and brings on good ones from time to time. That ensures only the good ones remain. I wonder how those changes affect performance.
- ip26 5y agoThe note was more about how good the supposedly ‘unexciting’ rates of return actually were, not about market timing. risk free bonds are yielding 5%
- chrismarlow9 5y agoThe underlying factors that drive and produce the outcomes of these two systems makes me think your comparison is a false equivalence. I guess there's an element of randomness to everything and any company could go under overnight, but in general I think you can rely on hindsight in terms of performance. The higher you get up the ladder and aggregate, the more stable I feel that is. If you're just comparing the methodology of extrapolating expected returns from hindsight I would agree with you. I guess what I'm saying is using hindsight to pick a direction seems logical. And doing it from a broad perspective seems more stable (using hindsight to predict if a company will go up vs using hindsight to estimate if a sector ETF will go up). However, I agree that I don't think you can estimate how much it will go in that direction. There's probably a fallacy in my logic there somewhere. But the results in the real world are good. If those returns are all just luck, well at least I had fun and made some money.