On the International Business Machines Industrial Average

Company

Price

YTD Return

Dow Weight

Ratio to Equal Weight

Ticker

Mkt Cap ($B)

Weight MC

Ratio to Dow Weight

AA Alcoa Inc

 8.63

-0.23%

0.51%

 0.15

AA

 9.21

0.23%

2.20

AXP American Express Co

56.42

19.61%

3.35%

 1.00

AXP

63.96

1.62%

2.07

BA Boeing Co

70.36

-4.08%

4.17%

 1.25

BA

52.90

1.34%

3.12

BAC Bank of America Corp

 8.15

46.58%

0.48%

 0.14

BAC

87.83

2.22%

0.22

CAT Caterpillar Inc

87.63

-3.28%

5.20%

 1.56

CAT

57.25

1.45%

3.59

CSCO Cisco Systems Inc

19.12

5.78%

1.13%

 0.34

CSCO

 101.97

2.58%

0.44

CVX Chevron Corp

 111.29

4.60%

6.60%

 1.98

CVX

 218.37

5.52%

1.20

DD E. I. du Pont de Nemours and Co

50.24

9.74%

2.98%

 0.89

DD

46.74

1.18%

2.52

DIS Walt Disney Co

49.17

31.12%

2.92%

 0.87

DIS

88.22

2.23%

1.31

GE General Electric Co

20.64

15.24%

1.22%

 0.37

GE

 217.93

5.51%

0.22

HD Home Depot Inc

56.55

34.51%

3.35%

 1.01

HD

84.88

2.14%

1.56

HPQ Hewlett-Packard Co

17.64

-31.54%

1.05%

 0.31

HPQ

34.77

0.88%

1.19

IBM International Business Machines Co…

 195.70

6.43%

11.61%

 3.48

IBM

 223.64

5.65%

2.05

INTC Intel Corp

25.04

3.26%

1.48%

 0.45

INTC

 125.28

3.17%

0.47

JNJ Johnson & Johnson

67.74

3.29%

4.02%

 1.21

JNJ

 186.76

4.72%

0.85

JPM JPMorgan Chase and Co

37.23

11.97%

2.21%

 0.66

JPM

 141.43

3.57%

0.62

KFT Kraft Foods Inc

41.28

10.48%

2.45%

 0.73

KFT

73.25

1.85%

1.32

KO The Coca-Cola Co

38.11

8.93%

2.26%

 0.68

KO

 171.57

4.34%

0.52

MCD McDonald’s Corp

88.25

-12.04%

5.23%

 1.57

MCD

88.99

2.25%

2.33

MMM 3M Co

91.98

12.54%

5.45%

 1.64

MMM

63.59

1.61%

3.39

MRK Merck & Co Inc

42.80

13.53%

2.54%

 0.76

MRK

 130.35

3.29%

0.77

MSFT Microsoft Corp

30.26

16.54%

1.79%

 0.54

MSFT

 253.64

6.41%

0.28

PFE Pfizer Inc

23.74

9.70%

1.41%

 0.42

PFE

 177.33

4.48%

0.31

PG Procter & Gamble Co

66.68

-0.04%

3.95%

 1.19

PG

 183.65

4.64%

0.85

T AT&T Inc

36.56

20.90%

2.17%

 0.65

T

 210.91

5.33%

0.41

TRV Travelers Companies Inc

64.80

9.51%

3.84%

 1.15

TRV

24.97

0.63%

6.09

UTX United Technologies Corp

79.20

8.36%

4.70%

 1.41

UTX

72.21

1.82%

2.57

VZ Verizon Communications Inc

42.25

5.31%

2.51%

 0.75

VZ

 120.37

3.04%

0.82

WMT Wal-Mart Stores Inc

71.56

19.75%

4.24%

 1.27

WMT

 242.16

6.12%

0.69

XOM Exxon Mobil Corp

87.31

3.01%

5.18%

 1.55

XOM

 403.02

10.18%

0.51

Total

 1,686.33

 3,957.15

High

47%

 3.48

10.18%

6.09

Low

-32%

 0.14

0.23%

0.22

Ratio

24.01

43.76

 27.97

As I was considering the Dow Jones Industrial Average, I considered how much influence IBM has relative to an equal-weighted index.  It has 3.48 times more influence that the average.  Then I considered the lack of influence of Bank of America [BAC], whose influence is 86% less than the average.  It may be up 47% YTD, but it budges the index but little despite its large market cap.

Such is life in a price weighted index that was designed to work around 1900. Add up the prices, divide by a number, and there is the index.

Even an equal weighted index would be more realistic.  But what if we created a market cap (actually float) weighted DJIA, like the S&P 500?

At this point, Exxon Mobil would be the heavy hitter, and small Alcoa the baby.  Prediction: Alcoa and The Travelers will leave the Dow, to be replaced by Oracle and Berkshire Hathaway “B” shares.

Wait! Oracle?! Why not Apple or Google?  Their share prices are too high, and the DJIA is too messed up already.  If Bank of America wanted to help the Dow, they would do a 1-10 reverse split, as should Alcoa, should they stay in the Dow.

The DJIA is a historical accident that has more then outlived its 15 minutes of fame.  It does not represent the market as a whole.  The best that Dow Jones News Corp could do is remake it as a megacap market cap weighted index.  Then it might have real punch and validity.  Call it the News Corp Industrial Average [NCIA].  What might that index look like?

companyticker

mktcap

Percentage

Apple Inc.AAPL

607,542

11.02%

Exxon Mobil CorporationXOM

408,049

7.40%

Microsoft CorporationMSFT

259,047

4.70%

Wal-Mart Stores, Inc.WMT

243,581

4.42%

International Business MachineIBM

229,949

4.17%

General Electric CompanyGE

221,736

4.02%

Google IncGOOG

221,447

4.02%

Chevron CorporationCVX

221,055

4.01%

AT&T Inc.T

214,434

3.89%

Berkshire Hathaway Inc.BRK.A

212,869

3.86%

Johnson & JohnsonJNJ

186,927

3.39%

Procter & Gamble Company, ThePG

184,536

3.35%

Wells Fargo & CompanyWFC

179,753

3.26%

Coca-Cola Company, TheKO

177,961

3.23%

Pfizer Inc.PFE

177,699

3.22%

Philip Morris International InPM

157,413

2.86%

Oracle CorporationORCL

157,217

2.85%

JPMorgan Chase & Co.JPM

140,478

2.55%

Merck & Co., Inc.MRK

131,998

2.39%

Intel CorporationINTC

131,729

2.39%

Verizon Communications Inc.VZ

125,522

2.28%

PepsiCo, Inc.PEP

114,215

2.07%

Amazon.com, Inc.AMZN

109,025

1.98%

QUALCOMM, Inc.QCOM

107,805

1.96%

Visa IncV

104,389

1.89%

Abbott LaboratoriesABT

103,451

1.88%

Cisco Systems, Inc.CSCO

102,102

1.85%

Schlumberger Limited.SLB

99,235

1.80%

Walt Disney Company, TheDIS

90,539

1.64%

Comcast CorporationCMCSA

90,482

1.64%

Grand Total

5,512,183

 

What are the new companies? Comcast, Schlumberger,  Abbott Labs, Visa, QUALCOMM, Amazon, Pepsico, Oracle, Philip Morris, Wells Fargo, Berkshire Hathaway, Google, and Apple.

Who leaves? Alcoa, Travelers, United Technologies, 3M, McDonalds, Kraft Foods, Hewlett-Packard, Home Depot, Du Pont, Caterpillar, Bank of America, Boeing and American Express.

Now, that said, give the folks at News Corp Dow Jones some credit.  They created a flawed Behemoth index, but it is the only widely quoted Behemoth index, and my adjustment of it only improves the market capitalization by ~40%.  That said, capitalization-weighting makes it a much more rational index, and so I call upon Dow Jones News Corp to make the changes that the sentimental at Dow Jones never would, and turn the DJIA into the NCI.  Not an average, but a real Behemoth index that measures the performance of the largest companies of the US, which comprise ~30% of the total market capitalization.

There is the challenge, and taking it on will benefit investors for the next 100 years.  Are you man enough to take it on, News Corp?

Full disclosure: Long CSCO, CVX, HPQ, INTC, TRV, WMT, ORCL

1 Comment

  • cig says:

    Well the S&P100 or STOXX USA 50 are there if you want a reasonable large cap index. People who still look at the DJIA are not going to be interested by an improvement in index methodology, if they were they would already have switched.

    Besides if you compare the behaviour of DJIA vs better indices, there’s not that much difference, basically in relatively efficient markets, indexing methodology in relatively irrelevant, any random weighted random selection of a few dozen large caps will behave pretty much the same as any other.

    I mean on most days most stock markets behave the same, it took the big earthquake in Japan for the Nikkei to decouple from the SP500 — they had hugged each other for like 3 years before that in currency normalised total return terms.