One of the comments to my previous post, The Human Index, prompted this post.
As the Dow flirts with a new high (and the financial media tests everyone’s patience), it’s worth remembering how far the average investor has fallen and why. In this post, I discuss how far the fall has been.
As for why – that’s a topic that underlies everything written on this blog. Investing is about the price paid and the value received. If valuation seems a dry topic in the abstract, it’s worth remembering the real world cost of ignorance.
Once again, I quote from Graham. I’ve used this quote before. It’s my favorite Graham quote. It’s also the best thing you can learn from this blog (I’ve bolded two phrases of immeasurable importance):
“…the influence of what we call analytical factors over the market price is both partial and indirect – partial, because it frequently competes with purely speculative factors which influence the price in the opposite direction; and indirect, because it acts through the intermediary of people’s sentiments and decisions. In other words, the market is not a weighing machine, on which the value of each issue is recorded by an exact and impersonal mechanism, in accordance with its specific qualities. Rather should we say that the market is a voting machine, whereon countless individuals register choices which are the product partly of reason and partly of emotion.”
The view of the market to the average investor isn’t really comparable to the view of the market to the average dollar. Individuals don’t have their assets distributed evenly across the various equity issues available in the major public markets. A lot of individuals who have held every share they had six years ago are nowhere near where the Dow is today, because they own the wrong Dow stocks and they own very poor performing non-Dow stocks.
Eastman Kodak (EK)
General Motors (GM)
Home Depot (HD)
United Technologies (UTX)
Exxon Mobil (XOM)
Which did more people own in 2000, List A or List B? Which do more people own today? And, in 2000, which list did people think would perform better?
List A is the worst performing Dow stocks since the last high; List B is the best performing Dow stocks.
Other notable issues include Disney (DIS), McDonald’s (MCD), and Coca-Cola (KO). These are the kind of stocks people would love to buy and hold forever. They are sentimental favorites. They are also below where they were trading at the last high – although, they are about in the middle of the pack for Dow stocks.
So, I’d have to say the Dow doesn’t really measure the performance of individual investors’ accounts at all. There’s a selection bias for individuals that isn’t reflected in the DJIA. Obviously, there are also some popular stocks that aren’t part of the Dow.
Recently, internet stocks are the best example. Generally, …Read more