Why joining the Dow is a kiss of death

Changes to the index focus on Wall Street fads that flame out soon after companies join the 30 components.

By InvestorPlace Sep 20, 2010 9:46AM
Arrow © Photodisc/SuperstockBy Jeff Reeves, InvestorPlace.com

You might think companies would fall all over themselves to join the Dow Jones and shareholders would find stability in the index's ranks. But the truth is that joining the list of 30 components is a stomp on the neck rather than a stamp of approval.

The reason appears to be that Wall Street "experts" in charge of the index focus on the latest fad investments, stocks that are peaking rather than corporations that are truly representative of the U.S. economy.


Take a look at this list of the 12 most recent additions to the Dow and how they have performed since joining the index:

Company Date Added Gain/Loss Dow's Gain/Loss
Home Depot 11/1/1999 -38% 1%
Intel 11/1/1999 -50% 1%
Microsoft 11/1/1999 -47% 1%
AT&T 11/1/1999 -45% 1%
AIG 4/8/2004 -97% 3%
Pfizer 4/8/2004 -51 3%
Verizon 4/8/2004 -14% 3%
Bank of America 2/19/2008 -67 -15%
Chevron 2/19/2008 -8% -15%
Kraft Foods 11/22/2008 -12 -8
Cisco Systems 6/8/2009 6 20%
Travelers 6/8/2009 15 20%


That's pretty disturbing if the folks in the ivory towers of investing make the rookie mistake of believing that today's dominant companies will be relevant, or even exist, a few years down the road.


Obviously, performance alone shouldn’t be cause for inclusion in the list of 30 Dow components. And one could argue that the inclusion of fashionable stocks at their peak is a necessary evil, since the broader economy and stock market suffer in kind as these sectors decline. The failure of AIG, for instance, should have brutalized the Dow in the same way it wreaked havoc in all corners of the investment world. It’s only fair that the boom-and-bust nature of our economy is represented in the Dow components.


But the fact that the most recent additions are consistently the worst performers is telling.

There's a laundry list of objections that investors have against the Dow. Some feel the list of only 30 components allows the index to swing too much based on a few outliers. Others believe the makeup of the list is the biggest problem, notably leaving out tech giants Apple Inc. (AAPL) and Google Inc. (GOOG) while including Alcoa (AA), which has a market cap of a mere $11 billion.


Critics should add the fair-weather changes to the index to their list of complaints. After all, an index that is widely quoted by the mainstream media as a synonym for "the stock market" shouldn't be skewed towards the flavor of the month.


As of this writing, Jeff Reeves did not own a position in any of the stocks named here.


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