In this podcast, Motley Fool senior analyst Jim Gillies discusses:
- Why the Dow Jones Industrial Average is “the dumbest index.”
- Where investors can find ballast for their portfolios.
Motley Fool analyst Dylan Lewis and Motley Fool producer Ricky Mulvey take a closer look at what actually happened with the collapse of FTX.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
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This video was recorded on Nov. 30, 2022.
Chris Hill: It’s time to talk about crypto. Motley Fool Money starts now.
[music]
I’m Chris Hill. Joining me today: Motley Fool Senior Analyst Jim Gillies. Thanks for being here.
Jim Gillies: Thanks for inviting me.
Chris Hill: Before we get to the collapse of FTX, today is the last day of November. The Dow Jones Industrial Average is on pace to finish up 3% for the month, which is not a lot. But if we could do that every month, that’d be pretty great. Barring a collapse, the Dow is going to finish well ahead of the S&P 500 for the year and even further ahead of the Nasdaq — which, Jim, is leading some of the people in financial media to pound the table. There’s a little bit of “see, I told you so” going on and pointing to the Nasdaq and saying, “that’s why I’ve always said you got to stay away from these” and pointing to the Dow and saying, “and that’s why you got to get behind companies that we just see in the Dow Jones Industrial Average.”
I understand why someone in that position might take a little bit of a victory lap or even pound the table a little bit. However, I’m curious what you think of all this, because when I think about you and your investing style, you strike me as someone who is certainly open and embracing of the idea of ballast in a portfolio of sure, yeah, have some growth in there, but particularly as you get older, have some ballast. I’m wondering, do the pro-Dow Jones Industrial Average people hold any sway over you?
Jim Gillies: Well, as someone as well who looks at quite often at a lot of the companies in the Nasdaq could say, see I told you so. I’ve done that once or twice or 3,000 times. Yeah, I suppose I’m the natural guy to come along and a couple, pull one of those, but I’m not going to. I have some thoughts on how you can get some growth into your portfolio.
As you mentioned, I am very much someone who likes ballast. But we are Fools, and one of the tenets of Foolish investing is we think long-term. Yes, the Dow is going to win the month. Well, that’s lovely, and I don’t care. You are right again, they are probably … “they.” I feel like we’re attacking a straw man we’ve just constructed, but why not? It’s the construct for the show.
Chris Hill: I’m going to defend myself. I don’t think this is a straw man. I look at financial media every day, and I think that part of what we deal with as investors is yes, we want to be focused on the businesses, but we also live in an environment where there is all this news swirling around us and the news has narratives. I feel confident in this prediction. This is absolutely going to be a narrative in the month of December as people start their year-end, they’ll look back and it’s like, look, boy, this was the year you wanted to, you should have been in the Dow.
Jim Gillies: Yeah, well, so let’s talk about the outperformance of the Dow then in this year, 3% in the month. Whoop-de-doo. Chris, the Dow is in fact leading the charge for the major American indices in 2022. The Nasdaq, as of last night’s close, is down 29.8% for the year; the S&P 500, as of last night’s close, is down 17% for the year. Note I’m not including dividends, I’m just going straight numbers. The Dow leading the charge down only 6.8%. It’s still down. How is this me winning?
But again, we want to talk total return. I shouldn’t really call it total return because I’ve not bothered to grab the dividend numbers, but the absolute numbers over the past decade. Of course, as Fools, we like to talk about we expect to hold a minimum of five years. We encourage you to buy at least 25 stocks. Several multiples of those numbers myself.
As far as the length of time, I’ve got several stock holdings that are older than both of my children. I’ve got one child in university which should tell you how old I am.
But over the past decade, the leader of the pack, and it’s not close with a 265% total return, that is 13.8% annualized is — drum roll — the Nasdaq. The thing that you’re supposed to avoid. If you bought, held, didn’t worry about it, then shut up. You are beating the Dow with it’s 160% total return, which is roughly 10% annualized. The S&P lands in the middle at 180% total return, 10.8% annualized. Buying and holding, dollar-cost averaging.
Look, you can buy a Dow ETF, you can buy a Nasdaq and S&P ETF. But these are the types of returns that they have delivered and this includes the fact that the Nasdaq, on an annualized basis, has blown past the Dow by almost four percentage points. That’s after the 30% drop this year.
Where I come at the growthy growth names, it’s generally on a purely on a valuation basis. Paying 70 times sales for something, sorry, it’s dumb, shouldn’t do it, in my opinion. And I think my opinion is holding sway with what’s happened in the last year or so.
But buying at 10 times sales, say, we’ll call that company Shopify in 2016. When those sales are in fact going to the moon. Even when it dropped 75% in 2022, or whatever the number is, you’re still up 10-, 12-bagger territory. Growth absolutely has a place. Just don’t overdose on it.
But there’s a few other criticisms ahead for the Dow. Again, I like to get hate mail, so I’ll say it. The Dow is the dumbest index. I look at the Dow as almost worthless as an investing track. Anyone who is encouraging you, especially once the Nasdaq is down, encouraging you to get out of the Nasdaq Index or out of the growth names. We’re playing index games today, so we’ll stay away from individual stocks as investments. Going to mention a few.
Someone telling you to sell low effectively with the Nasdaq off 30% and buy the Dow for its relative success of only being down 7% year to date. They’re basically encouraging you to buy a flawed, idiotically constructed, and poorly managed index that is far less diverse. There’s by definition 30 names in it. The Dow Jones Industrial Average only has 30 names in it. The Nasdaq index, I believe there’s 100. The S&P 500 obviously has slightly more than 500. It’s poor on a returns basis, it’s poor on a diversification basis, and it’s constructed stupidly. But other than that, it’s fine.
Chris Hill: It does speak to the power of both nostalgia and inertia that the Dow Jones Industrial Average continues to get the attention that it does because it’s been around for so long. As you said, just if you were starting from scratch today, you wouldn’t build the Dow. You wouldn’t build an index of 30 stocks unless it was concentrated in a particular industry.
Jim Gillies: Exactly. It does a bad job of what it is supposed to do. The whole point of an index… By definition, the index is to supposedly attempt to measure the incredibly complex breadth of American business. I’m going with an American index.
But I mean, of course, so many of these companies are international, but then the largest company by market cap in the world is Apple, and the largest — at least in America. I’m not sure were Saudi Aramco sits today. Maybe I should say world unless I’m right and I’m [inaudible].
But Apple, largest company America. Apple sells one or two products outside the borders of your fine nation. I think there’s about 17 of them in this room. These are international companies. Coca-cola sells one or two beverages outside of America.
But the whole point of an index to try to capture and measure the health of publicly traded American business. The S&P 500 — which, again, is 500, it’s slightly more than 500 companies, but we’ll pay no attention to that. It’s the largest 500-ish companies in America, and what it does is it captures about between 70% to 80% of total market capitalization in America. Does a pretty good job.
What it doesn’t capture is a host of tiny little companies that are the thousands of this 2,000 largest companies by market cap. It’s pretty good job. If you go out and rank, go find the 10 largest companies by market size. Those 10 companies in America are, I’m going to run them down really quickly, Apple, Microsoft, [Alphabet‘s] Google, Amazon, Berkshire Hathaway, Tesla, UnitedHealth Group, Johnson & Johnson, ExxonMobil, and Visa. Those are the 10 largest-market-cap companies in America.
The first nine are also the top nine holdings of the S&P 500. Visa, the 10th-largest company, is actually 13th on the S&P 500, but you’re starting to get one and two digits after the decimal point. Of those 10 largest companies, without looking, Chris, how many of the 10 largest companies are actually in the Dow? Not just in the top 10 of the Dow, are actually in the Dow.
Chris Hill: I want to say four.
Jim Gillies: You missed it by one. Five. But then you get into, well, what’s the largest company by market cap in America? Apple is, oddly enough, market cap-wise, the largest weighting in the S&P 500. It’s the 19th-largest weighting in the Dow. It’s almost in the bottom third. Microsoft, the second-largest company in America, No. 2 in the S&P 500, is No….
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