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Tony Crowell
Tony Crowell

Dow Reverses Year’s Gains

This week, the Dow Jones Industrial Average went negative for 2018. In contrast, the broader S&P 500 is currently up 3% and the NASDAQ 100 12%. Although becoming less representative of the U.S. economy, the “Dow” is the most popular market index and its action the usual reply to asking how the market is doing.

The Dow owes its prime time image from its founding back in 1896. This week, General Electric was dropped from the Dow to be replaced by Walgreens Boots, the largest retail pharmacy. This removes another manufacturer from the “Industrials,” which now include Goldman Sachs, Home Depot, McDonald’s, Travelers and Walt Disney. These five are among the twelve trading over $100 that move the Dow, as it alone is an arithmetic average, giving higher weight to higher priced stocks.

Since 1896, the divisor into the total value of its 30 components has been adjusted to maintain continuity for stock splits or substitutions. This has taken the current divisor down to around 0.145, meaning that every dollar move in any of its 30 stocks moves the Dow average by almost 7 points. This sometimes exaggerates the behavior of the Dow as in March this year when Boeing dropped $24 in a week, taking 167 points off the Dow.

The Dow’s lagging the more newly created indices reflects the leading dynamism of companies like Apple (AAPL-$185), Amazon (AMZN-$1,735), Amgen (AMGN-$185), Nvidia ($257) and Visa (V-$134). Only Apple and Visa are members of the Dow 30 while these are the five largest positions in the portfolios I manage.

This quintet each illustrates the value of increasing earnings with strong leadership and solid finances. Even these will suffer occasional dips and investors must realize that uncertainties will always pervade investments, as they do in most fields of endeavors.

The Economist recently used poker as an illustration. In the final hand of last year’s World Series of Poker, the two finalists had bet all their chips after the first two cards were dealt. With five cards yet to be dealt, one player held Ace-Eight and the other Ace-Deuce. After four more cards, neither had improved and only a deuce could save the Ace-Deuce player. With three deuces still among 44 cards, his chances had narrowed to 7%.

To reach the finals, each player had dealt with a variety of uncertainties that they had approached with carefully honed strategies. They had doubtlessly kept to these despite inevitable emotional stresses that could induce folding a winning hand from fear of loss to an aggressive bluff by or calling with a weak hand through greed for a big pot.

Investors face similar challenges. Rising stock prices inevitably bring in greedy buyers while down markets cause the fearful to fold good stocks while ignoring the opportunities to build quality stock portfolios. Mr. Warren Buffett, a bridge champion, says to be “fearful when others are greedy and greedy when others are fearful.”

Bad luck is part of the game. Investors must persist in making the right decisions given inevitable uncertainties. The dealer turned over the final card in the poker final and it was a deuce. The 7% chance came through. Investors should remember that surprises will always be with us and to include such uncertainties in their strategies rather than surrendering to emotions.

Market dips should be used to augment positions in stocks like those mentioned earlier. Other timely buys include Lilly (LLY-$85), Thermo Fisher (TMO-$206) and Kforce (KFRC-$34). The U.S. economy continues to provide a powerful base for stock market investment. Its industrial base has changed since 1896 when GE was part of the original Dow Industrial Average while its growth since then has sent the Dow up over 50,000%.

Tony Crowell manages stock portfolios for individuals and their trust and retirement accounts with CROWELL•ROBERTS Investment Counsel, a registered investment advisor in Laguna Beach since 1995. [email protected] 949.494.1376/800.697.2622

www.crowellroberts.com

 

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