Friday, November 12, 2010

You can't see what you don't measure...

The Big Picture

If the goal of the Dow Jones Index is to give a single-number summary of the US equity market, the articles listed above argue (convincingly, IMO) that the goal is not being met.

By weighting the prices of a small number of stocks, instead of the market capitalizations of a large number of stocks, the Dow fails to capture the true effects of money flowing in and out of the market as a whole.

Given the amount of time and energy spent following the Dow Jones Index, I would argue that there should be a strong effort to make the index as accurate as possible (or restate the goal). Or, as the Slate article suggests, use a different index.

That's why money managers prefer to use broader market-cap weighted indexes to help create their own portfolios and benchmark their own performances. 

Another alternative: RAFI 1000

EDIT: My title was inspired by a quote I'd read before. Here, it is used in a article describing how airport security in the US could be vastly improved by focusing on the people, rather than the threats.

We have a saying in Hebrew that it's much easier to look for a lost key under the light, than to look for the key where you actually lost it, because it's dark over there.

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