Today is a Reminder that the Dow Jones Industrial Average (DJIA) is a Stupid Market Index

(Base image generated using Nightcafe. Photo edits made using Paint 3D)

The stock market is interesting and boring depending on who you ask. I fall somewhere in between. I like aspects of the stock market, but enjoy the crypto revolution we are living through right now a lot more. Many people are too busy to see it but we are living through very interesting times.

You may have noticed Bitcoin saw a dip in its price today, a lot of this is probably driven by the historic assumption it is highly correlated to Nvidia's stock price as well as the NASDAQ Composite Index. Historic assumptions are interesting because they impact the behavior of people today. People look to the past to predict the future; to be fair it's way better than just guessing.

Well I did not write this post just to talk about Bitcoin; be careful I could go on for days when talking about Bitcoin! 😆

Today I really wanted to touch base on something that does happen from time to time which is the Dow Jones Industrial Average (DJIA) moved against the S&P 500 Index and NASDAQ Composite Index.

(screenshot from finance.yahoo.com)

This happens from time to time because the Dow (DJIA) is a price weighted index. This means it is based on the assumption that you bought 1 share of 30 stocks different stocks. Who picks what the stocks is kind of a long an story that is pretty boring so I am not going to go there. That being said, the original Dow Jones Index was made by a man named Charles Dow in 1896....yes this thing is that old. It was designed and is still designed to be an indicator of the stock market and US economy.

So that brings us to why the Dow (DJIA) is stupid. It is stupid because it is price weighted meaning it is weighted by the price of the stocks in the Index. This is stupid because a stock's price is mostly irrelevant, it is a this size or market cap of a stock that tells us its influence and importance.

Right now the 7 largest US companies by valuation are:
Apple - Market Cap $3.0 Trillion - Stock Price - $193.13
MSFT - Market Cap $2.6 Trillion - Stock Price - $346.87
Google - Market Cap $1.5 Trillion - Stock Price - $119.53
Amazon - Market Cap $1.3 Trillion - Stock Price - $129.96
Nvidia - Market Cap $1.1 Trillion - Stock Price - $455.20
Tesla - Market Cap $833 Billion - Stock Price - $262.90
Meta - Market Cap $779 Billion - Stock Price - $302.52

Out of that list only Apple and MSFT are actually in the Dow (DJIA).

Today was a bad day for the stock market, out of the top 7 firms in that list above, everyone single one of them saw a decline in its market cap and thus importance.

So why do we use the Dow (DJIA) today? Because it is what we are historically used to…and that’s about it. So if you read the US stock market news and see it was a good day because at least the Dow (DJIA) is up.....um no it wasn't 🤣 because the Dow (DJIA) is stupid!

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