What do you think of when someone says "The Dow"? Most people think of the Dow Jones Industrial Average – a mix of some roughly 30 companies (the number isn't fixed and does change). But very few people know the names on the list, or why those companies are selected. As time has passed, most people think of "The Dow" as "blue chip" companies that are supposed to be the largest, strongest and safest companies on the New York Stock Exchange. For this last reason, it's probably time to think about killing "The Dow." It's certainly clear that what the selection committee thought were "blue chip" a year ago was off by about 50% – with many names gone or nearly gone (like AIG, GM, Citibank) and many struggling to convince people about their longevity (like Pfizer).
Quick history: "The Dow" is named afrer the first editor of the Wall Street Journal Charles Dow (co-founder of Dow Jones, owner of the Journal) who wrote in the late 1800s. Building on his early thoughts about markets, something called "Dow Theory" was developed in the early part of the 1900s. Simply put, this said to get a selection of manufacturing companies, and average their prices (the Dow Jones Industrials). Then, get a selection of transportation companies and average their prices (the Dow Jones Transportations [see, you forgot their were 2 "Dows" didn't you]). Then, watch these averages. If only one moves, you can't be predictive, but if both moves it means that businesses are both making and shipping more (or less) so you can bet the overall market will go the direction of the two averages. So it was a theory trying to predict business trends in an industrial economy by following two rough gages – production and transportation – using stock prices. [note: the first study of Dow Theory in 1934 said it didn't work – and it's never been shown to work predicatably.]
Don't forget, in this most quoted of all market averages the third word is "Industrial." The reason for creating the average was to measure the performance of industrial companies. And across the years, the names on the list were all kinds of industrials. Only in the most recent years was the definition expanded to include banks. But that was considered OK, because above all else "the Dow" was a measure of leading companies in an "industrial" economy and the banks had become key components in extending the industrial economy by providing leverage for "hard assets".
Marketwatch.com today asked the headline question "Is the Dow doing its job?" The article's concern was whether "the Dow" effectively tracked the economy because so many of its components have recently traded at remarkably low prices per share - 5 below $10 – and even 1 below $1! Historically these would have been swapped out for better performing companies in the economy. Faltering companies were dropped (like how AIG was dropped in the last year) – which meant that "the Dow" would always go up; because the owners could manipulate the components! [the owners are still the editors at The Wall Street Journal now owned by News Corp.] But even the editor of the Dow Jones Indexes said "While we wouldn't pick stocks that trade under $10 to be in the Dow [Citi and GM] are still representative of the industries they're in, and their decline in the recent past is part of the story of the market recently."
Recently, "the Dow" has taken a shellacking. And the reasons given are varied. But one thing we HAVE to keep in mind is that any measure of "industrial" companies deserves to get whacked, and we should not expect those industrial companies to dramatically improve. In the 1950s when the thinking was "what's good for GM is good for America" we were in the heyday of an industrial economy. And that phrase, even if never really used by anyone famous, made so much sense it became part of our lexicon. But we aren't in an industrial economy any more. And the failure of GM (as well as the struggles at Ford, Chrysler and Toyota) shows us that fact. If "the Dow" is a measure of industrial companies - or even more broadly, companies that operate an industrial business model – it is doing exactly what one should expect. And to expect it to ever recover to old highs is simply impossible.
The industrial era has been displaced, and in the future high returns will be captured by businesses that operate with information-intensive business models. Google should not be placed on the DJIA. We need a new basket – a new index. We need to put together a collection of companies that represent the strength of the economy – where new jobs will be created. Companies that use information to create competitive advantage and high rates of return — like how in an industrial economy businesses used "scale" and "manufacturing intensity" and "supply chain efficiency" to create superior returns. If we want to talk about "blue chip" companies that are more likely to show economic leadership, gauge the capability to succeed and the ability to drive improved economic output, we need a list of companies that are the big winners and demonstrate the ability to remain so by their superior understanding of the value in information and how to capture that value for investors, employees and vendors.
This index is not the NASDAQ. It would include Google, currently leading this new era as Ford did the last one 100 years ago. But other likley participants would be Amazon for demonstrating that the value of books is in the content, not the paper and that the value of retailing is not the building and store. Apple has shown how music can eclipse physical devices, and is leading the merger of computer/phone/PDA/wireless connectivity. Infosys is a leader in delivering information systems in 24×7 global delivery models. Comcast is leading us to see that computers, televisions, gaming systems, telephones and all sorts of communications/media will be delivered (and used) entirely differently. News Corp. is blurring the lines of media spanning all forms of content development as well as delivery in a rapidly shifting customer marketplace. Nike, or maybe Virgin, is showing us that branding is not about making the product – but instead about connecting products with customers. Roche for its ownership of Genentech and its deep pool of information on human genetics? What's common about these companies is that they are not about making STUFF. They are about using information to make a business, and capturing the value from that information.
RIP to the Dow Jones Industrial Average. It's future value looks, at best, unclear. What we need to do now is redefine what is a "blue chip" in this new economy. What are your ideas? Who should represent the soon to be exploding marketplace for biotech solutions based on genetics? Who will lead the nanotech wave? Who would you put on this new "blue chip information index"? Send me your ideas. And in the meantime, we can recognize that even those who created and manage the venerable "Dow" aren't really sure what to do with it.
