At Launch Fest 2013 earlier this month, Patrick Comer, CEO of New Orleans based Federated Sample, spoke about identifying the one metric that drives the growth of your business. His advice is critical for entrepreneurs, who are often laser focused on their product, brand, or client experience while losing track of what really matters; profits. Comer’s message is simple, metrics trigger emotions, and emotions profoundly affect behavior and decision-making. He gave great examples of metrics that trigger an emotional response; weight on the scale, reaching a milestone age, and one that we all react to together, the Dow Jones Industrial Average.
It’s the most commonly quoted stock market index, but what is the Dow Jones Industrial Average anyway? The Dow recently crossed 15,000 for the first time and continues to reach all-time highs. This makes us all feel good, but what does the level of the Dow Jones mean for your investment portfolio?
The Dow Jones Industrial Average, aka the Dow, is an index that tracks 30 large US publicly traded stocks. Since it’s creation in 1896, the stocks comprising the index have changed more than 100 times. There were 12 stocks in the first index, and of them, only General Electric remains, although it was removed temporarily and added back in 1907. Consider for a moment, that there are more than 8,000 publicly traded US stocks. These 30 stocks represent less than one-half of one percent of the number of US stocks. The DJIA has a market capitalization of $4.4T while the total US stock market’s capitalization was $18.6T in 2012 according to Worldbank data. The Dow market cap is roughly 24% of the total US stock market capitalization.
If the Dow represents the performance of only 30 stocks, then why are Americans, as Comer points out, so emotionally tied to the index? In short, Dow Jones & Company, the publisher of The Wall Street Journal, owned the index. (In 2007, News Corporation purchased the Dow Jones media business, and a subsidiary McGraw-Hill now owns the index) For years The Wall Street Journal was one of the few public sources of information about the stock market. It’s not surprising the media company chose to highlight and popularize its own index. Over time, the American public began to associate the Dow Jones with the US stock market, and the two became indistinguishable in the public realm.
What does the level of the Dow mean for your investment portfolio? The short answer is: probably nothing. At best, the Dow is a daily barometer for the general direction is the US stock market. So my advice; take all the time you spend thinking about the Dow Jones, and channel it into finding the one metric for your business.