The Dow: A Risk Assessment (After GE, What's Next?)

Many shall be restored that are now fallen, and many shall fall that are now in honor.

Source: Horace’s Ars Poetica, as quoted in the inscription to Graham & Dodd’s classic investment book, Security Analysis

In business, few companies stand the test of time; in a dynamic, rapidly evolving economy, few competitive advantages persist. As a consumer, that’s a good thing. Companies innovate and compete on cost in the process of offering us an endless selection of goods and services. As an investor, though, it’s problematic. A study by Eric Crittenden and Cole Wilcox of the BlackStar Funds found that from 1983 to 2006, 75% of stocks either broke even or generated a loss for shareholders.

18.5% of stocks lost at least 75% of their value 39% of stocks had a negative lifetime total return A small minority, 494 (6.1%), of stocks outperformed the Russell 3000 by 500% or more in the period. The average annualized return for all stocks is negative 1.06%.

(Sources: Seeking Alpha article, The Capitalism Distribution: Fat Tails in Motion, and Michael Clovel’s book, Trend Following)

The Dow (Jones Industrial Average) too has its share of losers, despite its blue-chip selection criteria (major companies with dominant or leading market positions). At the time of its launch in 1896, Dow Jones Industrial Average consisted of twelve companies:

American Cotton Oil – predecessor of Best Foods, now part of Unilever. American Sugar – became Amstar in 1970 and subsequently Domino Foods. American Tobacco – broke into separate businesses in 1911, expanded beyond tobacco and renamed itself American Brands; now Fortune Brands. Chicago Gas – absorbed by Peoples Gas, which replaced it in the Dow in 1898. Now part of Integrys Energy. Distilling & Cattle Feeding – after a series of deals became National Distillers. Sold liquor

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