Photo: Associated Press
The concept of the Dow Jones Industrial Average gets a lot of finance geeks fumed because it’s a price-weighted (not market-cap-weighted) index of just 30 stocks, which are more or less picked arbitrarily.To the critics, Dow 13,000 is a meaningless milestone. A distorted snapshot of the economy.
The Wall Street Journal’s Jason Zweig takes this discussion to the next level.
In his effort to find a better way to measure the Dow, he talked to two west coast finance minds — Meir Statman and Jonathan Scheid — who offer a “Real Wealth Dow” that adjusts for both dividend reinvestment and inflation.
From Jason Zweig’s piece:
So I asked Meir Statman, a finance professor at Santa Clara University, and Jonathan Scheid, president of Bellatore Financial, an investment firm in San Jose, Calif., to calculate where the Dow would be today with all dividends reinvested back into the index. Counting dividends, the Dow would have closed this Tuesday at 1339410.97—more than 100 times above its official close.
Dividends are like one of those mirrors in a funhouse, blowing the Dow up to elephantine proportions. But you also can stand the Dow in front of a funhouse mirror that shrinks everything by taking inflation into account.
Recalibrating the index to factor in inflation, the Dow would have closed on Tuesday at 456.22. That is 96.5% below its nominal value. From this angle, the customary way of citing the Dow appears ridiculously overstated.
Now consider what Messrs. Statman and Scheid call the “Real Wealth Dow.” This theoretical index, which accounts for dividends and inflation alike, would have closed on Tuesday at 46986.48.