2024 has been a banner year for stocks so far–except if you hold the Dow Jones Industrial index. The numbers as I’m writing this are as follows:

ytd 1yr

NASDAQ Composite (2500+stocks) +14.0% +29.4%

S&P 500 (500 stocks) +10.8% +24.9%

Dow Jones Industrials (30 stocks) +1.2% +15.5%.

Nevertheless, Dow Jones remains a powerful brand name. At least it seems to me, the Dow is the index most frequently cited in the press and the most important measure of the domestic stock market in the minds of most individuals. But every professional investor knows that the Dow indices are a terrible measure of what stocks in general are doing.

One obvious issue is that the Dow Industrials contains only thirty names.

More important, the Dow indices were invented well over a century ago. Back then their value had to be calculated by hand. Charles Dow decided that the best way to proceed, particularly since he wanted daily figures, was the simplest: just add up the per share prices of the index constituents each day and divide by the number of issues, to get the value of the index. (Stock splits eventually made this more complicated, but that was fixable, more or less.)

The problem with this is that it paid no attention to the total market value of a company, just the share price. Take two companies, each with a market cap of $1,000,000. Company A has 1000 shares with a value of $1000 each; Company B has 10,000 shares with a value of $100 each. Using the Dow method of calculation, Company A has 10x the weight in the index of Company B.

So Company B really doesn’t matter very much. And if Company A is a clunker, it has the potential to distort the entire index.

Today’s Dow, which is owned by a consortium of Standard and Poors, News Corp (through ownership of Dow Jones) and the Chicago Mercantile Exchange, keeps the same calculation method today. Through clever manipulation of membership in the index, the group has kept the index from being totally irrelevant in today’s world. Not so far this year, though.

The main value of the index, in my view, is the brand name. No professional equity portfolio management organization uses it to monitor and control the portfolios it manages for others–that’s S&P, FT or maybe MSCI (for global/international). There may be a nostalgia portfolio that uses the Dow, but, if so, it has the relevance of, say, a wood-burning locomotive in today’s transportation world.

In my mind, the only semi-interesting aspect of the Dow is that you know anyone citing the Dow as a performance benchmark is clueless.