Herewith a simple proposal to reduce the anxiety associated with the rise and fall of the Dow Jones industrial average: Be less anxious.
I am driven to this suggestion by a letter I received last week from a man who sold almost his entire portfolio as the Dow plunged nearly 267 points a week ago Friday. "I'm tired of this buy and hold bunk," he wrote.
He sent me a list of the stocks he sold, and since then, they've all gone back up, and then some.
Generally, I'm not wedded to the buy and hold philosophy. I myself thought briefly that Friday that the big one had arrived: that for the first time, I would have to bid farewell to the good times. Here's lookin at you kid. But I came to my senses.
Sell if you must. But the swinging pendulum of the Dow should not be the dispositive factor in our decisions. If you find that you're too anxious, just take a look at what the Dow really is.
It's 30 stocks of huge old-timey companies traded on the New York Stock Exchange. Nothing to be ashamed of, but sometimes it's representative of the market, sometimes not. When it is, it's an accident or it's self-fulfilling, meaning that a plunge in the Dow scares people into selling a lot of stocks that aren't in the average, and a rising Dow encourages across-the-board buying.
Charles H. Dow created the average in 1896 with 12 stocks. By 1928 it was raised to 30. In the old days, you could just add up the prices and divide by 30. But companies came and went and stocks split and split again, so Dow Jones & Co., which manages the Dow and other market averages, generated a number to compensate for all the changes, the "divisor" and its accompanying multiplier. Now they have to do some math. Each day they add up the share prices of the 30 companies, multiply by 5.07 and get an average. The same math produces the contribution to the index movement by any single stock.
For example, the big mover this past Friday was J.P. Morgan & Co., up 7-7/16. Multiply 7-7/16 by 5.07 and you got 37.7 points added to the Dow average. The market capitalization of each stock--its price times the number of shares outstanding--is irrelevant to computing the average. The companies with the biggest market value are treated no differently than the smaller ones.
That's how a 16-point drop in International Business Machines Corp. Thursday, following the company's warning about Y2K's negative impact on sales, resulted in 81 points being lopped off the Dow, which all told fell 94.67 points, or roughly 1 percent.
Now, how did this compare with the movement of other equity indexes? Badly. The Nasdaq composite (1,000 stocks, mostly tech) was actually up half a percentage point. The Standard & Poor's 500 was down in the neighborhood of half a percentage point, along with the S&P industrials, the S&P 1500, the Russell 1000, the Russell 3000 and the Value Line index.
I don't claim the Dow is meaningless. Indeed, one of the lessons of the week was that in baseball league championships, and in the markets, it's fundamentals that count: hitting, pitching and quarterly announcements.
J.P. Morgan (ticker symbol: JPM), as it happens, had hit one out of the park on Monday to keep hope alive, and turned the Dow around just as it was sinking. The fourth-largest U.S. bank reported that it earned $2.22 a share in the third quarter, above expectations. JPM opened at 108, sat around at 110 and then surged to 113 by the close, a 7-5/16 rise. Others chipped in a run here and there.
It is what it is and only that, yet there it is, The Dow, right up there along with the pantheon of news that really matters, The Weather and The Scores. These are the "must haves" of the daily news diet.
Actually, I believe we should treat the Dow like a sports score most of the time. The difference is that in baseball, the game is over and everyone goes home. The baseball season ends. The Dow never ends. It just crosses "psychologically important" barriers.
Remember Dow 10,000?
We crossed it again on Monday morning, only we were going the wrong way.
We were on the eve of market Armageddon, caused by the alignment of an Alan Greenspan speech with an Intel Corp. earnings report with a key inflation number, all in the month of anniversaries of two big crashes, not to mention Halloween. (Imagine what some anthropologist will say about us a thousand years from now? "There is evidence of strange superstitious ritual in the 10th month of each year. . . . Fossilized remains of men and women in suits were found clustered in front of primitive screens. . . . ")
Traders started selling like crazy. These are the same people who worry about the speeches of Greenspan, rapidly becoming known as Chainsaw Al. There's rarely actual news in the speeches, meaning he almost never tells us something we didn't already know. The news is that he's saying it, which I suspect even he would concede signals nothing about whether or not he favors or doesn't favor hiking interest rates.
It's also news when he doesn't say it. Tuesday he gave a speech and didn't talk about the U.S. markets. It was a big story that he didn't.
It's a pathetic commentary on the money managers of America that they buy or sell securities on the basis of Greenspan utterances. ("Further, we have unearthed evidence of a peculiar cult surrounding a folkloric figure, said to have possessed prophetic powers. . . .")
Would you hire one of these managers to manage your future? Are you sure you haven't already done so?
So we got all excited and all depressed and distressed and millions of people sold stocks. Then they started buying them again, with good reason, because some awfully famous companies were being sold at reduced prices. (It was in May that IBM--which hit the low 90s last week--was near that level; Coke hasn't seen the 40s since 1996; Intel went to its July level.)
But by Friday the 22nd, the market was roughly back where it was the night before the trouble started on the 15th.
What a week the Dastardly Dow gave us. At the close Friday, Oct. 15, the Dow was at 10,019.71.
It closed this Friday at 10,470.25. Basically, nothing happened.
With much sound and fury, it was the week that wasn't.
Barbash is the business editor of The Washington Post. His e-mail address is firstname.lastname@example.org.