If we can use hindsight in our trades, I'd recommend using the numbers 60, 54, 36, 24 and 7, on last week's Powerball lottery that paid out $211mm. That's a 100,000,000x return!!
So when Apple does a 1 to 4 stock split its influence on DJI nonsensically falls by 75%.
In theory, price weighting is a poor way to index, but look at it from the other side of the coin - if you choose 30 stocks, from all sectors, how likely is it that you'll get a different return from the market even if you try? Not very.
It's only relatively recently that it became popular to never split and let stock prices grow without limit, too. If the prices are mostly in a small range, then the index is similar to an equal weighted one.
Also amusingly, DJIA is unable to include Amazon since it would obliterate the rest of the index.
I could add a clause that says if a share splits its weight gets multiplied accordingly, and that would have the effect of (a) DJIA stays continuous now (b) DJIA stays continuous through next split. It doesn't disrupt anything now, and prevents future inadvertent disruptions.
Anyone that is insisting we shouldn't change it is stuck in a backward age. Honestly I don't understand why there are so many no-sayers on HN. We should be building the future, not making excuses.
Well you can't track performance if splits wreak havoc on it. Garbage in, garbage out. So __at least__ fix that by adjusting weight when splits happen. THEN you can track performance for reporting.
Wait, you think this is a _coding_ issue?
It's not fine since companies have varying counts of shares, nevermind the stock splits.
The proper solution is getSharePrice() * getShareCount(). Which is what most other indeces do.
Also, almost nobody thinks the S&P5 is worse than the Dow. I'm not sure how you can back that up.
(If you actually want to index, though, a total market fund makes much more sense)
Also including 500 big companies is much more reasonable than including just 30.
---
People lately criticize S&P committee for the rule that a company needs to report 4 consecutive profitable quarters in a row to be included. Thanks to this they've missed the boat on Tesla and they had to eventually include it as the 8th largest component.
Someone on this forum joked that they should amend the rule to say: A company needs to report 4 consecutive profitable quarters in a row and the CEO name must not rhyme with melon tusk.
There are funds that are more diversified than funds tracking S&P (e.g. $VOO tracks S&P 500). $VTI should represent the total US market. $VWRL should represent the total worldwide market.
Not sure about “better to own” though - that depends on your risk profile. Of course both of them underperformed S&P 500 in the recent history.
Nor did I say the US is arbitrary, I said the Dow was, which it is given it’s fairly illogical weighting rules and arbitrary size limits. But the US is also somewhat arbitrary, it happens to have been the best performing economy over a period in which it won a World War and Cold War, and became the largest power in the world. To say it is the obvious choice now is to make a massively uncertain bet. I’m sure in 1929 the obvious choice was Britain who at the time controlled the largest empire ever, rather than the US, yet a British index would not have performed nearly as well.
You are right about the arbitrary rules of the dow. If you're going to do index investing, I would much rather the S&P 500.
That's a bizarre but accurate way to describe "citing a specific example."
"and then make losses which would require another 30 years to recover from."
Make losses starting from that high in the late eighties. Why choose that date to start from. Start a decade earlier and it doesn't look so grim. Look at the average return since 1929 and it's good as well. Pick a better date than 1929 and get a fairer picture.
You gave a statistic that is meaningful only in the context of picking the worst possible date for comparison. Surely you can understand that.
It’s no more absurd than projecting stock returns over 100 years.
In the first case, uh, one can either talk about the empirical distribution, and like, because the downside is limited ("all the money one invested in it"), if one puts p-value-ish confidence intervals on it (I don't know the right way to talk about this) on it, and, assuming we treat the behavior at different times in history as comparable, or like, if we assume that the current moment is randomly sampled from the time in which the stock market exists, or something like that, uh, I imagine that it would be possible to say something like "If the stock market across time-as-a-whole and like, selecting when you buy in and cash out at random, with like, some bound on how far apart those two are, had a negative expectation value, then we would see behavior like this with probability less than p" ? I don't know what the value of p would be, but, I suspect it would be fairly small, at least, for some ways of formulating the statement.
Or, one could take a subjective probability distribution view of, uh, what the unknown objective distribution is, and so the statement that it has a positive expected value is just a statement that one assigns a high probability to it having a positive expected value.
Or, one could just take a subjective probability distribution view of like, how it will behave, and interpret the statement as subjectively assigning positive expected value of investing in the stock market.
I think? This seems to make sense to me, but, I've not like, read much about philosophy of probability or whatever, and also I could be missing (or wrong about) some of the math.
But, in any of these 2 (or 3) cases, it doesn't make sense to me to say that it is "impossible to say" whether "the stock market in not a game with net negative expected value".
I guess there's an element of randomness to everything and any company could go under overnight, but in general I think you can rely on hindsight in terms of performance. The higher you get up the ladder and aggregate, the more stable I feel that is.
If you're just comparing the methodology of extrapolating expected returns from hindsight I would agree with you.
I guess what I'm saying is using hindsight to pick a direction seems logical. And doing it from a broad perspective seems more stable (using hindsight to predict if a company will go up vs using hindsight to estimate if a sector ETF will go up). However, I agree that I don't think you can estimate how much it will go in that direction.
There's probably a fallacy in my logic there somewhere. But the results in the real world are good. If those returns are all just luck, well at least I had fun and made some money.
risk free bonds are yielding 5%