Six months ago, one of the most powerful and exclusive clubs in modern history revised its membership, with consequences that effect more or less every human being on the face of the Earth.

On Feb. 19, 2008, the Dow Jones Industrial Average was reconstituted so that a slightly different roster of 30 stocks was used to populate the world’s most famous, and arguably most influential, investment index. It sounds a lot less impressive to say that the Dow Jones Industrial Average kicked out the Altria Group and Honeywell and replaced them with Chevron (who had been there before, but was kicked out in 1999) and Bank of America.

How could this possibly affect every human being, everywhere? Simple: The Dow is the most watched barometer of the most influential market segment of the most powerful national economy in the world. What happens to the Dow affects investor and consumer confidence pretty much everywhere, which in turn sends ripples through every economic system on the planet.

Now, whether 30 rather arbitrarily chosen stocks weirdly averaged together should have a profound impact on the world economy is another issue. There’s probably a rather cogent argument to be made that the Dow shouldn’t be as important as it is and that most of the Dow’s influence comes from its notoriety and longevity, rather than its objective fiscal relevance.

The Dow Jones Industrial Average was originally just that — an average of the value of a dozen influential stocks chosen for the edification of the readers of Dow Jones & Company’s Customer’s Afternoon Letter. The average was first published on May 26, 1896 (the stocks and their average values obviously existed before the actual first calculation of the Dow Jones Industrial Average). Of those original dozen indexed stocks, only General Electric — in a vastly different and diversified form — is still a component of the Dow. The Dow is also no longer just an average, as an adjusted divisor was added to its formula to compensate for stock splits and other market vagaries.

Yet, for all its faults, the original Dow and its component stocks were and are a study in long-term value and viability. Of the original 12 Dow component companies, only one — the United States Leather Company — has gone out of business, and that didn’t happen until more than 50 years after the first publication of the Dow Jones Industrial Average. Moreover, as it spanned the entire 20th century, the Dow Jones Industrial Average offers an intriguing look at the economic growth of that period in history, especially when you consider the average annual interest rate the Dow’s component stocks offered over those rather pivotal 100 years.


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What was the average annual interest rate delivered by the Dow Jones Industrial Average stocks during the 20th century, a rate of return so consistently positive that it all but defines the massive economic expansion that took place over the past 100 years?

From Jan. 1, 1901 to Dec. 31, 2000, the Dow Jones Industrial Average stocks offered a compound annual interest rate of 5.3 percent. If that doesn’t seem particularly impressive, think of it like this. If the 21st century were to produce the same rate of return as the 20th century, the Dow would close on Dec. 31, 2100 with a point value of roughly 2,000,000, rather than the 11,500 or so it’s hovering around these days. Put still another way, the Dow offered a centennial (not annual) interest rate of 17,491.9 percent, or about 175 times the original value. That’s a pretty solid investment, provided you can wait out a hundred years before you cash in.

Of course, patience isn’t the only virtue necessary for a Dow Jones investor. A strong stomach probably wouldn’t hurt, either. For example, one of the largest one-day percentage drops in the Dow — 22.61 percent — occurred on Black Monday, Oct. 19, 1987. One of the largest one-day percentage gains in the Dow — 10.15 percent — occurred just two days later, Oct. 21, 1987. (The Dow also closed above 12,000 for the first time on Oct. 19, 2006, the 19th anniversary of Black Monday. No fair blaming the date for bad luck.)

Still, for every rule about the Dow Jones, there is an exception. For most of its history, the stocks indexed by the Dow have been traded on the New York Stock Exchange. That status quo was disrupted on Nov. 1, 1999, when Microsoft and Intel were added despite the fact that both stocks trade on the NASDAQ.

Since 1928, the Dow has been composed of 30 stocks, except for a period when it was indirectly composed of 44. For a few years, one-thirtieth of the Dow Jones Industrial Average was the Dow Jones Utility Average, which itself was made up of 15 key utility companies stocks. The Dow Jones Utility Average was created when the Dow Jones Industrial Average banned the direct indexing of utility stocks — and replaced them with an average of 15 utility stocks. The Dow Jones Utility Average has since been removed but that doesn’t make the Dow any more comprehensible or predictable.

Face it, the Dow Jones Industrial Average isn’t just a magnificent monetary macguffin, it’s a finely finagled fiduciary form of Geek Trivia.

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