What the Heck is the Dow and Why Does it Matter?

You sort of know, you sort of fake it. Let’s solve this once and for all.

All your life you’ve heard a term, or a phrase, and you don’t exactly know what it means. Still, you more or less understand what it is related to, so when you hear it, your brain just glides along, putting up little protest. After all, you understand most of the conversation. It’s a lot like using your high school French to order a sandwich in Paris—you don’t understand everything, but you get close enough to get the job done. But deep down you don’t truly know what this particular word means or where it came from. On some level, that makes you question everything you know on any related topic. For so many people, one such term is “THE DOW”.

Every night on the evening news and occasionally as the headline of the New York Times or the Wall Street Journal, we hear “the Dow” has sputtered, spiked or hit a new high or recent low. It is a term you have probably heard thousands of times by the time you reached adulthood. But have you ever secretly wondered: what the heck is the Dow? Does it really matter for my investments? In the name of all askers of so-called dumb questions which turn out to be great questions, I salute you for clicking on this post! Today you are going to put this issue to bed once and for all.

First of all, what is the Dow? The Dow Jones Industrial Average (stock symbol: DJIA) is a way to take the temperature of the stock market overall. Started by Charles Dow in 1896, the Dow originally tracked the prices of a collection of twelve stocks from twelve solid companies that were traded on the New York Stock Exchange. The companies were all industrials—electric companies, gas companies, cotton oil refining companies, sugar refining companies, as well as producers of tobacco, leather, rubber and lead*. It was natural to call the list the “Dow Jones Industrials” since they were assembled by Dow and were all industrial companies.

The value of the original collection, or index, was calculated by adding together the price of one share of each of the twelve stocks on the list. Later, the formula would change to divide the total value of the stocks by what is called the Dow Divisor. This formula is designed to counter the effects of any stock splits that have occurred among its list of stocks. (If nothing else, the symbol would make a cool tattoo.) In its early years, the Dow had an average value in the mid-60s. In other words, one share of each of the twelve stocks added together to be worth roughly $60. The Dow is always quoted as a dollar value. The Dow is always quoted as a dollar value. It did not break 100 until 1914. Today’s recent quote is $28,653.87, up from a 52-week low of roughly $18,500.00 posted in March of this year.

Just following the original thirty companies’ trajectory from 1896 to today is fascinating. For example, a cattle feed company became a chemical company over the years. American Cotton Seed Oil Company became Hellmans/Best Foods because at some point they discovered that mayonnaise could be made from their oil. Companies often grow this way. When the National Lead Company was looking for new markets for its lead mines, it discovered that adding lead to housepaint increased the durability of the paint. So they became the Dutch Boy Paint company, and through their marketing efforts, houses all over the United States became brighter, more colorful, and, yes, more toxic. As for cotton seed oil, Hellmans/Best was in turn acquired by Unilever. Unilever is now a component of the Dow Jones Sustainability Index (DJSI) over one hundred years later.

Today’s Dow tracks thirty companies. Since the Dow only tracks a small sliver of large cap (as opposed to mid cap or small cap) companies, there are those who argue that it is not the best measure of the health of the stock market as a whole. Other competing indices (pronounced: IN-di-seez. econ plural for index) such as the Standard & Poors 500 Index, founded in 1957, or the Russell 3000 (Not to be confused with Andre 3000), founded in 1984, are widely followed today. Rather than taking the value of one share from each company, both of these broader indices are weighted to give more importance to the larger companies on their lists and less importance to the smaller companies. The S&P 500 lists 500 large companies, and the Russell lists 3000 companies—or roughly 98% of the entire US-Equities (aka Stock) Market. Many analysts consider these two indices to be better measures of the health of the market than the Dow. Still, the Dow widely followed to this day.

If you wanted to invest in every company on the Dow, you could purchase a share of what is called an index tracker fund. These tracking stocks can be either mutual funds or Exchange Traded Funds (ETFs), and they have become a popular and affordable way to manage your investments. If you wanted to invest in the Dow Jones Industrials all together as a single investment, you could buy a single share of State Street Global Advisors’ DIA tracker stock. If you were more interested in the broader S&P 500, you could buy a single share of Invesco’s QQQ EFT, and your fortunes would rise and fall with the index.

It is important to note that today’s Dow looks very different from the Dow of 1896. The thirty companies tracked today comprise a very different version of industrial companies, focusing on consumer goods such as Apple, Nike, Johnson & Johnson, McDonalds, Merck Pharmaceuticals, Goldman Sachs, Visa, Verizon and the Walt Disney Company. The companies on the list are updated and picked by the board of Down Jones & Company, which today is owned by Rupert Murdoch’s News Corp.

If you think the Dow is no longer relevant or useful, let me tell you that, in October of 2008, when the Dow had already fallen precipitously to 9000, I called the Dow bottom of 6500—a number which sounded admittedly absurd at the time. The market had already fallen so far and so long from its September 2007 high of nearly 14,000. This had to be the bottom. There was no way the Dow was going to fall another 50%. Popular thought was completely against me.

But six months later, on March 10, 2009, the Dow hit 6500—a low it had not seen in fourteen years. I claim no superpowers or complex algorithms in settling on this 2009 bottom, and I am not planning on selling you the Brooklyn Bridge or signing you up for my cult. I just want to point out that common sense and an appreciation of history are still very good tools to carry in your investment kit. But that’s a story for another time.

* I feel it is important to mention here that it is likely many of these early cotton, sugar, tobacco, rubber and other companies from the 1896 Dow may have had ties to slavery if they were in operation pre-emancipation.