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Does the Dow Jones Industrial Average Need a Makeover or a Grave?


If the Dow Jones Industrial Average (^DJI) were the subject of a roast, and I was emcee, how could I not start by poking fun at its parentage?

I mean, this fabled 110-year-old index was so loved and admired by investors the world over that its founders saw the need to sell it to the Chicago Mercantile Exchange (CME) two years ago.

But seriously folks, IBM (IBM) alone is to the Dow what Apple (AAPL), Exxon (XOM), Microsoft (MSFT), and Chevron (CVX) are to the S&P 500 (i.e. about 12% of the index). Talk about a weight problem.

Of course Alcoa (AA) stands out on the other end of the spectrum of Dow's arbitrary collection of 30 stocks. Its mere inclusion infers mounds of unworthy praise upon a small and shrinking business that is largely overlooked in the S&P 500 as it tucks in at the 290th position.

"Every professional investor that I know looks at the S&P and not the Dow," says Stephen Weiss, author of The Big Win, in the attached video. "It's 30-minus stocks; it's hard to argue for the relevance."

But that is exactly what Barron's is doing. Their weekend story, "Shake Up the Dow!" lays out what many investors have privately been thinking for years.

They even go as far as to name names, correctly suggesting that more modern bellwethers like Apple and Google (GOOG) are far more influential and should be considered in place of smaller names like Alcoa or Hewlett-Packard (HPQ).

There are other flaws with the Dow Industrials, as we know it, including the fact that it is tabulated on a share price basis (the higher the stock price, the higher the weighting) instead of the more democratically derived market cap methodology.

"You do need a measurement to see how the market did," Weiss says, adding that investors should "take it for what it is, purely on face value—nothing deeper."