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Sidenote: 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

by yreg 5y ago

Sidenote: 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 ago
Don't they adjust for that when splits happen?
- dmurray 5y ago
  No. Lots of other measures do, but not the DJIA.
- christophilus 5y ago
  Nope. It’s price weighted. Hence the comment on how dumb it is.
  - dheera 5y ago
    Sounds 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 ago
      It’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 ago
        So 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 ago
        They did, it's called the s&p 500, and it's run by the same company.
        kortilla 5y ago
        If you change the specification, that’s a new index FFS. It’s like changing the specification for Fahrenheit.
        dheera 5y ago
        Oh I'd __love__ to change the specification of Farenheit so that people get confused and stop using it.
- yreg 5y ago
  No. 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 ago
    Amazon is small fry compared with BRK-A, which was up $8,854 on Friday - over twice Amazon's share price.
  - dheera 5y ago
    Just weight it by 0.1 or whatever? Simple solution.
    - mastax 5y ago
      The 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 ago
        So 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 ago
        The 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 ago
The 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 ago
  The S&P 500 and Dow are just simple algorithmic trading based on an underlying thesis (US does well) with good historic performance.
  - tkojames 5y ago
    S&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 ago
  The 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 ago
    Yea 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 ago
  The 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 ago
Also, it's an actively managed index. Companies are added and subtracted.
perl4ever 5y ago
The 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.

by yreg 5y ago

dheera 5y ago

Don't they adjust for that when splits happen?

dmurray 5y ago
No. Lots of other measures do, but not the DJIA.
christophilus 5y ago
Nope. It’s price weighted. Hence the comment on how dumb it is.
- dheera 5y ago
  Sounds 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 ago
    It’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 ago
      So 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 ago
        They did, it's called the s&p 500, and it's run by the same company.
      - kortilla 5y ago
        If you change the specification, that’s a new index FFS. It’s like changing the specification for Fahrenheit.
        dheera 5y ago
        Oh I'd __love__ to change the specification of Farenheit so that people get confused and stop using it.
yreg 5y ago
No. 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 ago
  Amazon is small fry compared with BRK-A, which was up $8,854 on Friday - over twice Amazon's share price.
- dheera 5y ago
  Just weight it by 0.1 or whatever? Simple solution.
  - mastax 5y ago
    The 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 ago
      So 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 ago
        The 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 ago

The 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 ago
The S&P 500 and Dow are just simple algorithmic trading based on an underlying thesis (US does well) with good historic performance.
- tkojames 5y ago
  S&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 ago
The 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 ago
  Yea 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 ago
The 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 ago

Also, it's an actively managed index. Companies are added and subtracted.

perl4ever 5y ago

The 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.