Periodic Reminder That the Dow Jones Industrial Average Is Moronic

Lu Wang and Vildana Hajric, reporting for Bloomberg:

Apple Inc.’s planned stock split will diminish its influence on the Dow Jones Industrial Average after the iPhone maker’s 100% surge since March lows nearly dragged the price-weighted measure back to an all-time high.

At its current price of $452 a share, Apple has the biggest weighting in the index at 11%. A 4-to-1 split now would drop its price tag to about $113 and send its ranking in the Dow Average down to 16th. Apple has rallied almost 55% in 2020, adding more than 1,100 points to a stock measure that’s fallen about 2% during that time. The split is scheduled to take effect Aug. 31. […]

The split, however, won’t affect Apple’s No. 1 position in the S&P 500, an index that’s weighted by market capitalization, rather than stock prices.

Bloomberg reports this as though the difference in how the DJIA and S&P 500 are weighted is equivalent. The S&P 500 makes sense: it values companies by what the companies are worth. The Dow makes no goddamn sense at all: it values companies by their share price.

A high-profile stock split like Apple’s should make the entire finance world snap out of its delusion and just abolish the Dow. A 4-for-1 stock split is exactly the same in principle as exchanging a dollar bill for 4 quarters. You still have one dollar. But according to the Dow, you go from 100 (the dollar bill) to 25 (the value of a single one of the post-split quarters).

The Dow Jones Industrial Average is that stupid.

Update: See this classic 2013 episode of NPR’s Planet Money for more:

It’s no secret that we here at Planet Money think the Dow is a terrible economic indicator. We don’t like that it only looks at thirty companies. We don’t like the way it does its math. We think it does a bad job reflecting the overall economy. Honestly, we’re not sure why everyone is still talking about it.

★ Thursday, 13 August 2020