Hacker News Reader

Comment by xnx | Hacker News Reader

DJIA is kind of a joke index. SP500 is much better.

The Dow Jones index serves a different purpose: it's meant to be easy to update without the use of a computer. It's easy to update and publish the index since the math is a lot easier, and doesn't involve pulling in hundreds of quotes and trying to tabulate a weighted average.

It's not that useful now that we have computers, but in the early 1900s it was a reasonably good approximation of a market cap using fast math.

Index funds didn't exist until 1975 while the Dow was formed in 1896. So I suppose it didn't really matter if the Dow was tracking things well, it wouldn't have impacted your investments.

It was still useful to have a general idea of how stock markets were valued, particularly in light of the events on and about 29 October 1929, a/k/a Black Tuesday. Valuation of equities markets themselves has a profound impact on the monetary and financial systems as a whole.

On which point, John K. Galbraith's The Great Crash: 1929 (1954) remains an excellent history of those events (and notes the DJIA's value frequently), as well as a general primer on equities and investments, and how they may go wrong.

I love that so many people keep saying this so confidently yet if anyone bothered to look they’d see that the correlation between the two is nearly perfect over any timeframe including the past five years

Yes, it is entirely symbolic and has been for decades. The only purpose it really serves is differentiating those who know a little bit about stock markets and those who don't. It's annoying that serious media outlets continue to publish it, alongside valid indexes, implying that it has anywhere near the same level of legitimacy. Also, I don't like it.

May I know why you consider it a joke? I obviously have no much clue about it all

If you want to estimate the stock market, would you rather:

1. sum 500 of the biggest companies by size (price * n shares).

2. have WSJ editors select 30 companies by any criteria they see fit, but you don't get to see the size of the companies, only the share price.

Note that the DJIA also changes constantly over time (as discussed elsewhere in this thread), as do the weights assigned to the individual companies constituting it.

The way that the DJIA changes isn't the same as an index of, say, the n most highly capitalised equities might (Fortune 5, 10, 20, S&P 500, etc.).

Wonder how much DJIA had to give to get them to list.

Reply on news.ycombinator.com