Kingsmill's Investment Miscellanea: Friday May 28th, 2021

May 28, 2021 | Joshua Kingsmill


Key Takeaways

  • The Dow Jones was invented 125 years ago
  • Just as investors ought to adjust their portfolios to reflect the economy, so too has the Dow Jones
  • The “record highs” of the Jones, shouldn’t be a surprise after more 1,400 + of them

This week, I read that the Dow Jones composite celebrated 125 years of existence. This is one of the often cited “market indicators”


Part of the enduring success of the Dow as a measure is it simplicity: Many people aren’t aware of what the Dow actually measures. Here is what the founder, Edward Davis Jones came up with: in 1896:

  • He selected the 12 companies that he arbitrarily believed represented the “direction of the American stock markets”
  • Add up those closing stock prices every day, and divide by 12

That’s it: Today its now 30 stocks, their share price summed up and divided by 30.


A look at these companies gives a neat perspective into how the stock market, its constituents, and the U.S. economy have changed: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather, and U.S. Rubber. Very heavy industrial and manufacturing.


At the time, these companies were among the titans of American industry. Of the original 12 companies, General Electric has remained in business and was the only company that retained its place on the DJIA under its original name since the index's inception for over 120 years, but was removed a few years ago. Others from this list were broken up, taken over, dissolved, or relegated to subsidiary status over the years. FUN FACT: Procter & Gamble Co. which was added in 1932, is the current component with the longest continuous tenure.


Of course, buying and holding forever doesn’t work: the Dow, just as any good portfolio isn’t static: Stocks that have come and gone over the years include Eastman Kodak Co., Sears, Roebuck & Co., Woolworth and Studebaker. At one point all of these were iconic brands.


Today, if you look at the now 30 stocks in the Dow, it’s representative of an entirely new genre of companies where production is much less important than service and technology. The index still has industrial firms like 3M Co. and Boeing Co. But these days it also includes financials such as JPMorgan Chase & Co., consumer companies like Coca-Cola Co. and Walmart Inc. and Apple Inc. and Microsoft Corp. The Dow got its most recent makeover last August, when Inc., Amgen Inc. and Honeywell International Inc. replaced Exxon Mobil Corp. , Pfizer Inc. and Raytheon Technologies Corp.


I will leave with this chart which is illuminating. The Dow has risen an average of 7.69% each year and notched 1,464 record closes (I get a kick out of the press announcing breathlessly, so often that the “Dow has hit a new high”, as if it’s some special event, that rarely occurs). It climbed above 100 in 1906, topped 1000 in 1972 and crossed 10000 in 1999. Just this year, as the U.S. economy continued to shake off its pandemic-induced slowdown, the Dow bounded above every milestone from 31000 to 34000.


I am going to make a home-grown prediction this week. The Toronto Blue Jays, the only Canadian team in Baseball, who have played home games this year in Florida, and currently Buffalo, will be moving back to Toronto in August. Yours truly has season tickets, and will be inviting select readers to attend games at that point. We can watch them as they make another playoff appearance!