Dow Watch: Buying the Stocks vs. Buying the Index
Has its committee helped or hurt its fortunes?
The Dow Industrials was expanded to 30 names from 20 on October 1, 1928. Today, only 9 names of the original 30 remain in the Dow. The committee at Dow Jones has replaced the other names as the companies grew out of favor, were merged into other stocks, were considered too small, or as other companies better represented the industrial prowess of the US economy.
For instance: In November 1999, Goodyear (GT) and Chevron (CVX) were removed in order to allow Microsoft (MSFT) and Intel (INTC) to join the Dow 30, where the 2 tech giants proceeded to rise handily the next few quarters. However, it hasn't been that pretty since the end of 2000, with both stocks down approximately 60% from their entry price and much further from their peak price. Chevron proceeded to move up some 60% in price after it was removed, at which point it was inserted back into the Dow 30 on February 19, 2008 (where it's now down about 15%).
Not a good run for the selection committee.
But it's not all bad. If you look at the deletions and additions, you find some interesting timing issues. Some additions were excellent in terms of performance. Some avoided later bankruptcies.
Thinking about the Dow, I wondered how much the committee had helped or hurt the Dow performance over the last 80 years. What if we went back to the original 30 stocks and simply bought them and held them until today? Good, bad or indifferent, what would the results be?
I asked that question of my good friend Rob Arnott of Research Affiliates. It turns out that he and Jeremy Siegel (of Wharton and Stocks for the Long Run fame) were corresponding with regard to that very same question, vis-a-vis the S&P 500. Rob helpfully sent my question on to one of his top research associates, Ms. Feifei Li, who spent a lot of time and effort to get me several large spreadsheets - some of which are over 800 pages long. The rest of this letter is based on her research, some very helpful comments, and observations by Rob, with some homework by me. Any wrong conclusions are all mine.
So, the question of the day: Would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does that compare to the S&P 500?
And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM (IBM), which itself had been taken out in 1939 for AT&T (T). There have been 55 changes in the components of the Dow over the last 80 years. Some of the original 30, listed below, we'd all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).
(Sidebar: As a country, we let lots of auto companies fail over the decades. My father worked at Nash Auto in Wisconsin during the Depression because he could play baseball for their semi-pro team. Remember Rambler or Studebaker? But now we obsess about keeping an auto industry and union jobs.)
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