After the Dow Jones Industrial Average climbed over 13,000 recently, San Jose Mercury News columnist Mike Cassidy made an impassioned case for including Apple in the index, a position he buttressed in part by citing an analysis by Adam Nash of Greylock Partners.
No one, including Cassidy and Nash, believes that Apple‘s (NASDAQ: AAPL) inclusion will happen any time soon, if ever. However, it could have happened – at least hypothetically — back almost three years ago now when Cisco Systems (NASDAQ: CSCO) was chosen to replace General Motors in the Dow lineup of 30 companies.
Greylock’s Nash wrote last month on his personal blog: “The question I explored was simple – what would have happened if (Dow Jones) had replaced General Motors with Apple on June 8, 2009 (instead of with Cisco). After all, Apple was up over 80 per cent off its lows post-crash. The company had a large, but not overwhelming market capitalization. The index is already filled with ‘big iron’ tech stocks, like Intel, HP & IBM. Why add Cisco? Why not add a consumer tech name instead? In fact, there is no readily obvious justification for adding Cisco to the index in 2009 instead of Apple.”
What would have happened is that the Dow Jones Industrial Average – the most widely cited measure of stock market health and a major contributor to general public attitudes toward the economy – would have fared better by roughly the difference between Apple’s phenomenal performance and Cisco’s anemic one since that time.
Ah, but the idea of Apple (or Google, if you’re wondering) being included in the Dow is fanciful at best, as the Dow Jones Indexes’ Indexology blog attempted to explain in a Feb. 8 post: “Typically a company is added to The Dow only if (it) has an excellent reputation, demonstrates sustained growth and is of interest to a large number of investors. While it’s true that both Apple and Google would certainly seem to meet these criteria, this qualification doesn’t necessitate their inclusion in The Dow – nor does their sheer size, although it also weighs in their favor. The Dow’s methodology allows for subjectivity, and ultimately stock changes are made at the discretion of the Averages Committee.”
So what’s the problem? In a word: price. Apple and Google trade at such high prices that their inclusion would skew the Dow both today and historically.
Nash thinks little of that explanation – especially as it applied to Apple vs. Cisco circa. 2009 – but he reserves his greater scorn for something other than that discretionary decision: the Dow Jones Industrial Average itself: “Look, I’m just going to say it. The Dow Jones Industrial Average is ridiculous … a mathematical farce.”
Nevertheless, Nash did the math using the rules that Dow Jones uses. Had Apple instead of Cisco replaced GM in 2009, we wouldn’t be talking about the Dow and the 13,000 mark because it would be over 15,000 by now.
Remember two things:
A committee made that decision using “subjectivity” and “discretion.”
And in a presidential election year, nothing matters more than public perceptions about the economy.
That’s not to suggest that Dow Jones in any way, shape or form considered the political implications in choosing Cisco over Apple, rather only that there is certainly the potential for political implications whenever Dow Jones messes with the lineup.
