Deciphering the Dow (September 29, 2009)

The Dow Jones Industrial Average is what most people think of when they hear the market is up or down. It’s not necessarily a true reflection of the market.

History:

The Dow Jones Industrial Average was founded by Charles Dow on May 26, 1896. It was used to represent the average of 12 stocks from the leading American industries. Of the original 12 stocks forming the Dow Jones Industrial Average compiled later in 1896; no longer railroad stocks only General Electric is still currently part of the index.

The Dow Jones Industrial Average now consists of 30 stocks which are considered titans of the industry or the blue chip companies. They are:

Company Symbol Industry
3M MMM Conglomerate
Alcoa AA Aluminum)
American Express AXP Consumer finance
AT&T T Telecommunication
Bank of America BAC Banking
Boeing BA Aerospace and defense
Caterpillar CAT Construction and mining equipment
Chevron Corporation CVX Oil & gas
Cisco Systems CSCO Computer networking
Coca-Cola KO Beverages
DuPont DD Chemical industry
ExxonMobil XOM Oil & gas
General Electric GE Conglomerate
Hewlett-Packard HPQ Technology
The Home Depot HD Home improvement retailer
Intel INTC Semiconductors
IBM IBM Computers and technology
Johnson & Johnson JNJ Pharmaceuticals
JPMorgan Chase JPM Banking
Kraft Foods KFT Food processing
McDonald's MCD Fast food
Merck MRK Pharmaceuticals
Microsoft MSFT Software
Pfizer PFE Pharmaceuticals
Procter & Gamble PG Consumer goods
Travelers TRV Insurance
United Technologies UTX Conglomerate)
Verizon Comm VZ Telecommunication
Wal-Mart WMT Retail
Walt Disney DIS Broadcasting and entertainment



The Dow averaged a 5.3% return compounded annually for the 20th century, for the 21st century to match this feat the Dow would have close 2099 at about 2,000,000.

The stocks are relatively safe investments which allow you to make a decent return. The companies listed in the DOW will not make you rich but are pretty stable and shouldn’t make you poor.


Computing the Average:

The DJIA is the sum of the prices of all 30 stocks divided by a Divisor (the Dow Divisor).


With p = prices of the stocks of the DJIA & d = the Dow Divisor.


The divisor is adjusted for stock splits, spinoffs or structural changes to ensure that such events do not in themselves alter the numerical value of the DJIA.

The Dow Divisor is currently 0.132319125 as September 28, 2009.

For every $1 change in price in a particular stock within the average there is a 7.56 point movement.

Summary:

When you hear about the DOW being up or down think of major industries in the United States and how investors are perceiving their value. I myself value a public company at 10 times earnings + liquidity value.