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Secrets of the Dow Jones Industrials

Published: May 25, 2016 3:00 p.m. ET  By

JOHNA. PRESTBO
John Prestbo writes the Indexed Investor column for MarketWatch. He is editor and executive director of Dow Jones Indexes. He has responsibility for the exploration of new index ideas for Dow Jones & Co., as well as marketing, public relations and analytical research. He also is chairman of the Dow Jones index oversight committee. Prestbo has co-authored or edited several books. The most recent was “The Market’s Measure: An Illustrated History of America Told Through the Dow Jones Industrial Average.”

‘Keeper’ of the Dow Jones Industrial Average tells what he learned, and why Steve Jobs rang his phone

Charles Dow and Edward Jones co-founded the Dow Jones & Company in 1882, a Wall Street financial news service that became The Wall Street Journal in 1889.

The Dow Jones Industrial Average turns 120 years old this month, on May 26.

For 20 of those years it was my privilege to be “keeper of the Dow” — the staff person who watched over the globally famous index to make sure it kept on ticking. Not that I alone made the decisions about putting companies in or taking them out, but I had a vote. And sometimes I called the huddle to take such actions.

Along the way, I learned some interesting things that many others don’t know about this icon of the investment world. Here are my top 10:

1. The DJIA isn’t the longest-running index in the world. That distinction belongs to the Dow Jones Transportation Average. Charles Dow, founding editor of The Wall Street Journal who created these indexes, began with a railroad index in 1884, 12 years before the industrial average launched in 1896.

Railroads were the biggest U.S. companies in Dow’s day, so a railroad average was appropriate. But after World War II, the rails began consolidating to a very few, while trucking and air transport grew. The index was renamed the Dow Jones Transportation Average in 1970.

2. No stock has been in the Dow the whole time, not even General Electric Co.The Dow started with just 12 stocks of early industrial companies. Of that dozen, only GE GE, +0.80% is in today’s 30-stock index. But it missed some years along the way: It was taken out in 1898, restored in 1899, removed again in 1901 and reinstated in 1907, this time for good. We don’t know why the early changes were made because no explanations were published.

3. The Dow really isn’t an average anymore. In the beginning, it was. Dow totaled the stocks’ prices and divided by the number of stocks. Over time that arithmetic became complicated by stock splits, which reduced the price of each share. By 1916, when the Dow was expanded to 20 stocks from 12, GE’s stock price, for example, had to be multiplied by four to correct for prior splits before being “averaged.”

4. Averaging was abandoned in 1928, when the DJIA expanded to 30 stocks. The sum of prices thereafter was divided by a divisor that was adjusted every time a component split its shares, to keep the Dow at the same level as before the split.

Stock splits over the years steadily shrank the divisor. On May 27, 1986, the divisor slipped below 1, where it remains. When dividing by a number less than 1, the divisor becomes a multiplier. That’s why the 30 stock prices today add up to nearly $2,600 while the Dow’s index value fluctuates just below 18000. And it is why a $1 move by any Dow stock moves the average 6.85 points.

5. Tech-stock fans didn’t always agree with us — including Steve Jobs. When selecting stocks for the Dow, we Journal editors simply tried to reflect the market in just 30 stocks (minus transportations and utilities). But we never moved fast enough for the “hot stock” crowd. Boosters lobbied us to add Microsoft Corp. MSFT, +1.03%and Intel Corp. INTC, +1.06% for years before we did in 1999. We were roundly chastised for waiting so long.

More recently, Apple Inc. AAPL, -0.10% was another stock people wanted in the Dow. So did Apple. One Friday afternoon Steve Jobs telephoned to ask why we didn’t add his company. I explained that the price of Apple’s stock had risen so high (over $600 a share) that it would dominate and distort the index. After his death, Apple split its stock, and it was installed in 2015.

6. The DJIA has risen for 78 of its 120 years, but it bombed in its first year. From 40.94, its first average price, the Dow sank 30% to 28.48 by August 1896 because the heated presidential race (William McKinley vs. William Jennings Bryan) made investors nervous. That was the Dow’s lowest close.

7. The Depression was so bad, the Dow industrials almost started over. On July 8, 1932, the index closed at 41.22, just 0.7% above where it began 36 years earlier.

8. The DJIA is slightly less volatile than other broad market indexes, but it has an advantage. So far in this century, the standard deviation from the industrials’ average daily move is 0.91% versus the S&P 500’s 0.98%. One might think that a 30-stock index would be more volatile than a broader index. But it is also true that smaller stocks — which the S&P 500 has but the Dow does not — are more volatile.

9. Each point move of the Dow industrials means less than it used to. As the index rises, each point is easier to attain on a percentage basis. By points, the big yearly wins and losses are all fairly recent because the Dow is at high levels: The best year was 2013 with a gain of 3,472.52 points, and the worst year was 2008 with a loss of 4,488.43.

By percentage, the leader and laggard happened decades ago, and within two years of each other. (Talk about volatility!) A 66.7% jump puts 1933 in first place, and a 52.7% drop leaves 1931 in last. As for the 21st century, 2013 ranks 19th with 26.5% and 2008 is 117th (minus 33.8%).

Oct. 13, 2008, had the largest one-day point gain at 936.42, while Sept. 29, 2008, was the biggest decline of 777.68. The daily percentage champ is a jump of 15.3% on March 15, 1933, and the greatest loss was 23.5% on Oct. 19, 1987 (followed by the two-day crash of October 1929).

10. The Dow is no longer part of News Corp ’s NWSA, +1.86% Dow Jones & Co., publisher of The Wall Street Journal. Since 2012 it has been in the stable of S&P Dow Jones Indices, a unit of S&P Global Inc., SPGI, -0.37% and Dow Jones has no ownership stake. Journal editors still participate in selecting companies for addition and deletion, however.

John A. Prestbo, a former Wall Street Journal and Dow Jones Indexes editor, is an adviser to MarketGrader Capital, which chooses components of the Barron’s 400 Index. He can be reached at reports@wsj.com.

The article “Secrets of the Dow Jones Industrials” first appeared on WSJ.com.