Deep Inside the Dow

Deep Inside the Dow April 3, 2009
By John Mauldin

Tonight (Saturday) some 450 people will come together in San Diego to honor Richard
Russell, who has been writing the Dow Theory Letter for over 50 years. In that spirit, in today’s letter we are going to look deep inside the Dow, back to its very roots. The Dow is a price-weighted index as opposed to a cap-weighted index. Does that make a difference in performance? Specifically, does it affect how the Dow has performed since it was expanded to 30 names in 1928? There are some real surprises we have found, and I think you will find this letter very interesting.

What About the Original Dow Jones 30 Stocks?

The Dow Industrials was expanded to 30 names from 20 on October 1 of 1928. Today,
only nine names of the original 30 remain in the Dow. The committee at Dow Jones
has replaced the other names as the companies grew out of favor, were merged
into other stocks, were considered too small, or the committee felt that other
companies better represented the industrial prowess of the US economy.

For instance, in November of 1999, Goodyear and Chevron were removed in order to
allow Microsoft and Intel to join the Dow 30, where the two tech giants proceeded
to rise handily the next few quarters. However, it has not been that pretty
since the end of 2000, with both stocks down approximately 60% from their entry
price, and much further from their peak price. Chevron proceeded to move up some
60% in price after it was removed, at which point Chevron was inserted back
into the Dow 30 on February 19, 2008, where it is now down about 15%. Not a
good run for the selection committee.

But it is not all bad. If you look at the deletions and additions, you find some
interesting timing issues. Some additions were excellent in terms of
performance. Some avoided later bankruptcies.

Thinking about the Dow, I wondered how much the committee had helped or hurt the Dow
performance over the last 80 years. What if we went back to the original 30
stocks and simply bought them and held them until today? Good, bad or
indifferent, what would the results be?

I asked that question to good friend Rob Arnott of Research Affiliates. It turns out that
he and Jeremy Siegel (of Wharton and Stocks for the Long Run fame) were corresponding over that very same question about the S&P 500. Rob helpfully sent my question on to one of his top research associates, Ms. Feifei Li, who spent a lot of time and effort to get me several
large spreadsheets, some of which are over 800 pages long. The rest of this
letter is based on her research, some very helpful comments, and observations
by Rob, with some homework by me. Any wrong conclusions are all mine.

So, the question of the day: would you have been better off investing in the index, or buying the 30 stocks and holding them? Further, would it make any difference if you price-weighted them or equal-weighted them (explanations below)? What about inflation? And how does
that compare to the S&P 500?

And before you answer, remember that one stock, Bethlehem Steel, went bankrupt. You would be stuck with Chrysler, which was removed in 1979 for IBM, which itself had been taken out in 1939 for AT&T. There have been 55 changes in the components of the Dow over
the last 80 years. Some of the original 30, listed below, we would all recognize. But our kids might not remember Victor Talking Machines or Nash Kelvinator (Nash Auto).

(Sidebar: As a country, we let LOTS of auto companies fail over the decades. My Dad worked at Nash Auto in Wisconsin during the Depression because he could play baseball for their
semi-pro team. Remember Rambler or Studebaker? But now we obsess about keeping
an auto industry and union jobs.)

The Original Dow 30 Components

The following companies are the original members of the Dow 30 on October 1, 1928:

Allied Chemical, American Can, American Smelting, American Sugar, American Tobacco B, Atlantic Refining, Bethlehem Steel, Chrysler, General Electric Company, General Motors
Corporation, General Railway Signal, Goodrich, International Harvester, International Nickel, Mack Truck, Nash Motors, North American, Paramount Publix, Postum Incorporated, Radio Corporation of America, Sears Roebuck & Company , Standard Oil (N.J.), Texas Company, Texas Gulf Sulphur, Union Carbide, U.S. Steel, Victor Talking Machine, Westinghouse Electric, Woolworth, and Wright Aeronautical.

Almost immediately the Dow 30 changed, as Radio Corporation of America bought Victor
Talking Machines in January of 1929. Since RCA was already in the Dow, they
added National Cash Register instead. Over time, US Steel became Marathon Oil.
The remains of what was once mighty Woolworth are now Footlocker. Westinghouse
is CBS. So, there have been some changes over time, leaving us only nine of the
original Dow 30 still in the index.

For the insatiably curious, you can go to
and find a trove of data, including the additions and deletions over time.

Before we get into the actual data, a little about methodology. There is some
subjectivity here. For instance, RCA was bought by GE in 1985. We did not then
double-weight GE; we simply had one less component in our model. When Bethlehem
Steel went bankrupt, that took away another component. While some stocks have clear trails all the way up until December of 2008, like Woolworth/Footlocker, others were taken private. We made our best effort to rationalize the data with the real world.

Adding and Subtracting Value

Now, the rather stark conclusion. As Rob noted to me in the
email he sent with the data, “If Dow Jones hadn’t tinkered with the index, the
30 companies would have merged or failed their way down to just 9
survivors. Of the 21 companies in the original 30 that are now gone, 20
disappeared through M&A, some were replaced by successor firms and others
not, and only one (Bethlehem Steel) failed outright. But this no-fiddling
index would have topped out at just over 30,000 in October 2007 and would have
finished 2008 at 14,600. Ugly decline, but not as ugly as a level of 8776
[now down to 7300 as I type this]. This compounds out to a 0.7% per year greater
return than the actual Dow 30 results. The difference comes from dropping
companies when they’re out of favor, and trading at deep discounts, only to
replace them with popular large-cap, high-multiple newcomers.”

Like Intel and Microsoft, as a prime example. And in the
graph below, there was an almost immediate difference between the returns as
RCA bought Victor, as mentioned above. But RCA was already in the Dow, so we
did not double down on RCA but simply rebalanced with one less component for
our 30.

The graph below is going to be hard to read for those who
print it out in black and white, but I will try and talk you through it.

We track the original Dow 30 equal-weighted, the original Dow 30 using the Dow
price-weighting methodology, and the S&P cap-weighted, for comparison. Also
the Dow Total Return Index, the Dow price-only (no dividends), and the Dow 30
Real Price Index, or inflation-adjusted.

So, looking at the lines from the bottom and going up. First, let’s see how you
would have done on an inflation-adjusted basis with just the actual Dow 30.
It’s not pretty. The price-only inflation-adjusted index returns for the last
80 years are only a mediocre 1.4%! The price level of the Dow 30 is
currently less than twice that of its August 1929 peak, net of inflation.
Sadly, we last saw the 1929 peak level as recently as October of 1992. That
means that an investor in the Dow 30, in August 1929, would have pocketed only
the dividends, with no real price appreciation, for some 63 years.

Rob couldn’t resist writing Jeremy, “Net of taxes on the dividends and cap gains taxation on the inflation “gains,” the real after-tax return would have been awfully skinny. Jeremy, I hope you’ll forgive me for saying so, but that’s a ‘Long Run’ indeed!”

The next line is the Dow 30 price-only index (without dividends). That gives us a
4.6% annual average return. The next line up is the Dow 30 total returns, including
dividends, which is 8.9%; this shows how important dividends are to the total
return of the Dow. And with dividends now fairly skinny and being cut almost
monthly by some component or other, we are left to wonder what total return
will be over the next few years.

Next, we find that the S&P 500 cap-weighted index outperforms the Dow by about 0.2%
annually, for a total return of 9.1%. Not much difference there.

Now we come to the interesting part. The next-to-the-top line is the original Dow 30,
using a price-weighted index, just like the current Dow 30 uses. The only
changes in the next 80 years are companies getting bought or dying. That
“Original 30” gives us an annual return of 9.6%. Just 0.7% a year, so you might
think, not much difference. But if you start with $100 and compound it for 80
years, that 0.7% becomes a quite large differential. With the Dow 30, your $100
would have grown to $96,993 as of December 2008, but the Original 30
would have grown to $161,603.

And there is an even bigger differential if you simply equal-weight the components
rather than use a price-weighting methodology. Your $100 grows at a 10.4% clip
and becomes $272,554, or almost three times the actual Dow 30. This is probably
due to the fact that, whenever a change was necessary, it would be natural to
add one of the more popular and respected large-cap growth stocks that wasn’t
already on the list. It’s hard to earn a “risk premium” on assets that
are not seen as having much risk!

What accounts for the difference?
There were 34 changes in Dow components in the first five years. Many were
dropped and then added back in. It was a VERY fluid index. There were two
changes in 1939. IBM was dropped for AT&T, and Nash Kelvinator was again
dropped for United Technologies. (NK was dropped the first time in 1930, only
to be added back in 1932.) But, most of our Original 30 survived the Depression,
so the Original 30 was largely unchanged during those tumultuous years.

Then, from 1939 there were no changes until 1956, when International Paper was added, followed by four changes in 1959. There were only three changes in the late 1970s and five in the ’80s, but since then there have been 17 changes. The past two decades
hardly qualify for buy and hold.

And we may see more changes. Anyone care to speculate on when General Motors gets replaced? Can you have a bankrupt component of the Dow, which typically removes a stock below $10? GM is now at $2, which is basically a call option on the Obama administration not completely wiping out shareholders in a bankruptcy. GE was down to $5.89 before rebounding today to $10.89. Could you really replace GE?

Can we find some nuggets of investing wisdom here? I think the thing that stands
out most to me is how the slight difference of value over growth builds up over
time, which is what a number of other studies show. This goes along with my
numerous exhortations that the valuations you start with when you invest in
stocks have a great influence on the long-term returns.

A market-cap-weighted index will tend to perform better than a price-weighted
index over time, again because of the value orientation of the cap weighting.
But equal weighting or, better yet, weighting and indexing according to
valuation fundamentals like price to earnings, price to sales, price to book,
etc. is even better. We don’t have time to delve back into the research on
fundamental indexes, but the letters I have written on it are in my archives at

A Few Thoughts from Richard Russell

As noted above, well over 400 guests will honor Richard Russell this weekend for
50 years of writing the incomparable Dow Theory
. A lot of people ask him how can they succeed as writers. He
recently made some comments which I thought I would pass on, because they are
so right. Also, he gives us a few fascinating moments, looking back over his

But first, let me thank the following firms and people for their generous support of this evening as sponsors, which will allow us to make a donation in Richard’s name to his
favorite charity, the Autism Foundation in San Diego:

Matthew Connors of ProFunds

Ian McAvity of Deliberations

Bill Bonner, founder of Agora and editor of The Daily Reckoning
( )

Monex (

Frank Trotter of Everbank (

Martin Zweig

Robert Prechter (

And now, let’s turn to Richard:

“I’ve been in this business a l-o-o-o-n-g time, and I’ve known a lot of great people,
mostly through their subscriptions. Stanley Kubrick, the genius movie producer
and director, was a subscriber for many years. Stan was a gold man, and we used
to correspond. Stanley would tear off a piece of yellow paper and write notes
to me. He invited me to visit his studio, 30 miles outside of London. When I
visited England years ago, damn it, I completely forgot to visit him, a mistake
I’ve always regretted.

“Marlon Brando’s dad was a subscriber for years. I had met his Marlon while he was shooting On the Waterfront. I exchanged services with the great Hamilton Bolton, genius writer for The Bank Credit Analyst. Marty Zweig is a good friend of mine, and when Marty retired I took over his advisory — this was years ago, and I still have many of Marty’s subscribers on the books. I knew Garfield Drew, the original interpreter of the odd lots. I also knew E.
George Schaefer, who authored his famous Dow Theory Trader advisory during the 1940s through the ’70s. George used to run four-page ads in Barron’s.

“John Magee was a friend of mine. John had a sign posted on
his wall. It said, ‘Don’t tell me what to buy, tell me WHEN to buy it.’ Bob
Bleiberg, the brilliant editor of Barron’s, was my friend and mentor.
Bob was responsible for popularizing technical analysis of stock trends.
General Marion Cooper was a subscriber. Coop invented the concept of King Kong
and he produced the original movie. Coop was also adjutant general to Claire
Chennault of the famous Flying Tigers, in Asia. The Tigers, with their outdated
P-40s (painted like sharks), played hell with the Japanese off China.

“I’m very friendly with that fabulous pair, the gifted Aden
sisters. I count Jim Grant (Interest Rate Observer) as a good
friend (Jim is probably the best writer in the business). Then there’s Robert
Prechter of Elliott Wave fame (I originally urged Bob to go into business, and
he’s built up a wide following since). A few years ago, I took over Julian
Snyder’s business when Julie wanted to retire. I still talk with my old buddy
Joey Granville. Other old-timers I keep in touch with are Jim Dines and Mister
International — the one and only Sir Harry Schultz.

“I guess my strangest subscriber was a priest who worked in
a leper colony in West Africa. I never could figure out why he was interested
in the stock market. The Bank of China was a subscriber; I don’t know whether
they still are. Many Arab organizations are subscribers. I used to say that I
was the only Jew who the Arab big-wigs really listened to. Paul Penner, CEO of
Agnico-Eagle, was a good friend of mine. Paul devoted his life to that gold
mine, which is now one of the leading gold mines in Canada.

“The tireless, peripatetic John Mauldin is a good friend, and how John gets it all done (he has a million readers for his famous column) is a mystery to me.

“And it goes on and on. I did find that the stock market and finance was a totally democratic business. On Wall Street they don’t give a damn who you are or what color or religion you are — they only care about whether you know anything, which I believe is one of the best things about the money business.

How to Succeed at Writing

“I’ve been asked a thousand times, ‘What’s the secret of success in the advisory business?’

(1) You’ve got to be an obsessive nut to start with.

(2) You have to be able to write in a way that people understand and
like to read.

(3) You can’t come across as a phony who knows it all. Readers know that
nobody knows it all.

(4) It helps if you have a long life and don’t want to retire.

(5) You need a wife who can put up with a husband whose head is full of
the markets 24 hours, day and night.

(6) Woody Allen said the 90% of success in life is just showing up. If
you can show up for the markets 250 days a year, you’re ready to start an
advisory service (but I wouldn’t wish this business on my worst enemy — it’s
the closest thing to absolute madness. No wonder nobody else has lasted in the
business 50 years).

(6) This is a lonely business. So be prepared. Need a friend? Get a dog.
Need two friends? Get two dogs.

(7) One last thing — you must have thick skin, because no matter what
you write, some subscriber will send an e-mail calling you a moron or
brain-damaged, and the scary thing is, that makes you think, because they may
be right.”

Conversations on Banks

This week I recorded a special conversation with Chris Whalen and Rich Lashley, two of
the real experts on the US banking system. I learned a lot and found it a
fascinating time. The Conversation will be up for subscribers the early part of
next week. We will send you a notice. If you would like to know more about
Conservations with John Mauldin, you can go to
The regular price for a yearly subscription is $199, but you can subscribe now
for $109 and still get access to the previous timely Conversation with Ed
Easterling and Lacy Hunt, as well as one with Nouriel Roubini. Don’t wait, as I
am sure my staff will only keep raising the price. To find out more, just click
on the link and put in code JM77, which will give you the discounted price.

And for organizations that would like to purchase a
discounted multiple subscription for all their brokers or partners, just drop
Tiffani a note at and she will get
back to you.

Copenhagen, London and Orange County, etc.

I will report at some point on the
fascinating afternoon I had with Dr. Hans Keirstead, a professor at the
University of California, Irvine, and one of the leading stem cell researchers
in the world. We are on the cusp of amazing changes in medicine. Real therapies
for numerous major killers like MS and spinal cord injuries are around the
corner. It was a very upbeat session.

Today, I am in La Jolla for my
Strategic Investment Conference, co-hosted with my partners Altegris
Investments. I will be talking on how I see the global economy shaping up over
the next few years. Eventually, that talk will make it into this weekly letter.
Saturday night is the Richard Russell Tribute Dinner. Then home for a week.
Easter weekend, all seven kids will be home. Then the following week I go to
Copenhagen for a board meeting; and I will be in London, Thursday April 16 to
meet with my European partners, Absolute Return Partners, and clients. The next
weekend I go back to California for a conference sponsored by Rob Arnott, and
then the next week I’ll be a day or so in Orlando, where I’ll speak at the CFA
conference on the state of the alternative investment industry.

At the end of May (29-31), I will
be in Naples, where I will be doing a seminar with Jyske Global Asset
Management and Gary Scott. You can see more at

A quick note: There has been a lot
of writing on mark-to-market. There were a few bloggers who said I was wrong
(some rather rudely) about the mark-to-market changes that were coming. I hope
by now they see they were wrong and have edited their remarks. And for a sense
of what the mark-to-market controversy is all about, I suggest you look at this
video presentation by Barry Habib of Mortgage Market Guide. Barry was on top of
the issue months ago as the source of a lot of problems. It is done in a way
that everyone can understand.

This is a fun weekend. Almost 300
clients and friends are at my sold-out conference in La Jolla. And because of
the Russell dinner, so many writers and publishers are here as well. And my
business partners from around the world. And Tiffani is her usual well-dressed
self. She rarely buys new clothes, but for whatever reason she goes all out for
this weekend, and her attire is now subject to oohs and aahs, and she has a
reputation to live up to. Dad is proud.

Have a great week, and find a few
friends, at least over the phone, to share some time with. It is about the
healthiest thing you can do.

Your ready to listen and learn this weekend analyst,
John Mauldin

Copyright 2009 John Mauldin. All Rights Reserved
If you would like to reproduce any of John Mauldin’s E-Letters you must include the source of your quote and an email address ( Please write to and inform us of any reproductions. Please include where and when the copy will be reproduced.

John Mauldin is the President of Millennium Wave Advisors, LLC (MWA) which is an investment advisory firm registered with multiple states. John Mauldin is a registered representative of Millennium Wave Securities, LLC, (MWS) an NASD registered broker-dealer. MWS is also a Commodity Pool Operator (CPO) and a Commodity Trading Advisor (CTA) registered with the CFTC, as well as an Introducing Broker (IB). Millennium Wave Investments is a dba of MWA LLC and MWS LLC. All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors before making any investment decisions.

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