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?

company ticker

mktcap

Percentage

Apple Inc. AAPL

607,542

11.02%

Exxon Mobil Corporation XOM

408,049

7.40%

Microsoft Corporation MSFT

259,047

4.70%

Wal-Mart Stores, Inc. WMT

243,581

4.42%

International Business Machine IBM

229,949

4.17%

General Electric Company GE

221,736

4.02%

Google Inc GOOG

221,447

4.02%

Chevron Corporation CVX

221,055

4.01%

AT&T Inc. T

214,434

3.89%

Berkshire Hathaway Inc. BRK.A

212,869

3.86%

Johnson & Johnson JNJ

186,927

3.39%

Procter & Gamble Company, The PG

184,536

3.35%

Wells Fargo & Company WFC

179,753

3.26%

Coca-Cola Company, The KO

177,961

3.23%

Pfizer Inc. PFE

177,699

3.22%

Philip Morris International In PM

157,413

2.86%

Oracle Corporation ORCL

157,217

2.85%

JPMorgan Chase & Co. JPM

140,478

2.55%

Merck & Co., Inc. MRK

131,998

2.39%

Intel Corporation INTC

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 Inc V

104,389

1.89%

Abbott Laboratories ABT

103,451

1.88%

Cisco Systems, Inc. CSCO

102,102

1.85%

Schlumberger Limited. SLB

99,235

1.80%

Walt Disney Company, The DIS

90,539

1.64%

Comcast Corporation CMCSA

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

One thought on “On the International Business Machines Industrial Average

  1. 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.

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