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Comment by yreg | Hacker News Reader

Sidenote: Dow Jones Industrial average is an incredibly archaic and dumb metric. It weights companies by price per share, not by market cap.

So when Apple does a 1 to 4 stock split its influence on DJI nonsensically falls by 75%.

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The Dow was designed for easy calculation before computers. And it's pretty correlated to the S&P 500 anyway.

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.

Don't they adjust for that when splits happen?

No. Lots of other measures do, but not the DJIA.

Nope. It’s price weighted. Hence the comment on how dumb it is.

Sounds like a simple thing to solve if they just let me make a pull request for the function getDJIAValue() or wherever the hell it lives. Based on price is fine -- when splits happen just adjust the weight by the split factor. Are they really that incompetent at coding?

>Based on price is fine -- when splits happen just adjust the weight by the split factor

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.

> Are they really that incompetent at coding?

Wait, you think this is a _coding_ issue?

It’s not an error in the implementation, the problem lies within the index specification: https://www.spglobal.com/spdji/en/documents/methodologies/me...

So change the specification. Fire the person who hasn't changed it already and schmoozing with beer in a Manhattan high rise, and put an engineer in charge.

They did, it's called the s&p 500, and it's run by the same company.

If you change the specification, that’s a new index FFS. It’s like changing the specification for Fahrenheit.

Oh I'd __love__ to change the specification of Farenheit so that people get confused and stop using it.

No. Apple was the largest component and now it’s 19th.

Also amusingly, DJIA is unable to include Amazon since it would obliterate the rest of the index.

Amazon is small fry compared with BRK-A, which was up $8,854 on Friday - over twice Amazon's share price.

Just weight it by 0.1 or whatever? Simple solution.

The whole point of the DJIA is that the same rules have been used for a long time. If you want a better index there are many available.

So version it in a repo e.g. on Github, and ensure continuity in the DJIA index from one version to the next on the date the version is committed. We have technology, we should use it.

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.

The index you're describing has already been created by Charles Schwab as SCHV in 2009 (and SPCH in 2005 for the S&P, and ...). There are already new indexes -- lots of them. DJIA is useful because it's an index calculated using the same metric for over a hundred years, so you can track performance for reporting and public perception.

> so you can track performance for reporting and public perception

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.

They adjust for it in the sense that the value of the index itself doesn’t drop, but yes, Apple’s proportion needlessly changes.

Also, it's an actively managed index. Companies are added and subtracted.

The s&p 500 is worse In my opinion. They make it sound like it is the top 500 public companies in the us. Which is not the case. They have group that picks them based on a bunch dumb rules. I like the total stock market index's. If you have people picking what goes into the index they why bother just buy active managed index funds.

The S&P 500 and Dow are just simple algorithmic trading based on an underlying thesis (US does well) with good historic performance.

S&p 500 is not a simple algorithmic trading system. That is the problem! They have a selection committee.. https://en.m.wikipedia.org/wiki/S%26P_500

The S&P 500 isn't ideal, but it's much better than the Dow. Both indices are a selection of companies, but the Dow is smaller which leaves much more room for judgment calls. Additionally, that the Dow is weighted by share price is completely ridiculous.

(If you actually want to index, though, a total market fund makes much more sense)

Yea true. But most people I think know the Dow is kinda of BS handpicked list. Where the S&P 500 pretends it is the top public 500 companies in the USA. Just always kinda bother me how they advertise it. Most of them will become useless anyways. Firms are going to be using in house index so they don't have to pay the fees. Fidelity is doing this with there free index funds.

The simple premise that S&P500 weights its components based on market cap already puts it lightyears ahead of DJIA.

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's a published methodology on how the S&P 500 works. It's quite predictable, as this is a desirable feature on any index. While it's true that there's a human index committee that meets, it's mostly for tie breakers. They strive for diversity and typically lean on precedence to make their picks.

Also, almost nobody thinks the S&P5 is worse than the Dow. I'm not sure how you can back that up.

Is there a better index fund to own then?

Index != fund.

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.

check out the Russell 3000 Index - that might be better

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