Missing the Point on GM and the Global Dow

Jim Wiandt is missing the point on GM.

I wasn't suggesting that Prestbo and company eliminate GM because it might drag down the performance of the index. For all I know, GM could be a great investment at $3/share. Maybe that's why you continue to hold it in your retirement portfolio!

But however GM's stock performs, one thing is clear: It is no longer a leading blue-chip company. It's a troubled automaker with aging plants and legacy pension costs that might well go bankrupt in the next six months.

You mentioned the irony that the two most-referred-to indexes in the world (the DJIA and the S&P 500) are hand-selected. Investors put up with it because these indexes have established track records. We know and trust them, and they've proven their worth over time. The DJIA's price-weighting methodology is archaic, but it works, because if the Dow is up 200 points, I instinctively know what that means.

But none of that says that the Global Dow needs to have all of the components of the DJIA. The comparison of the S&P 500 and the S&P 1500 is a false one. The Global Dow and the DJIA are completely different indexes. They don't even share a methodology: the Global Dow is equal-weighted, the DJIA is price-weighted.

What's lost in all this is that the Global Dow is a great new index. I'd probably nominate it for index of the year. It captures the leading blue-chip companies in the world by tapping into the editorial expertise of Dow Jones staff. Smart folks, good index. Moreover, I see the index as part of the bigger movement to break down the walls between U.S. and ex-U.S. allocations, which I see as a big positive on balance.

But including GM? And weighting it on par with Exxon-Mobil (XOM)?

Puhlease!

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2008 Nov 15 08:10 AM