Who Will Dow Jones Select to Replace AIG in DJIA Index?

Come hell or high water, American International Group (AIG) will have to be exorcised from the Dow Jones Industrial Index [DJIA]. This leaves News Corp (NWS) which owns Dow Jones to insert a new company into the grand old index.

Of course my preference, and one which I have publicly recommended, is to expand the DJIA to 100 stocks from its historical basket of 30 stocks. If Wrigley Field can host night games for the Cubs then the DJIA can join the modern times and expand to at least 100 stocks.

So, let’s speculate, which stock should and which will join the DJIA in AIG's place (assuming the old 30 stock membership). Looking at the S&P 500 (SPX), the company with the largest capitalization that is not included in the DJIA is Apple (AAPL). I doubt that NWS would put APPL into the DJIA which already has Microsoft (MSFT), IBM (IBM) and Hewlett Packard (HPQ). Logically one could argue that a financial would be the replacement for AIG. However, Bank of America (BAC) was added in February of 2008.

Here is a novel thought - add Berkshire Hathaway (BRK.A), (BRK.B) or BRK collectively). Realize that I am really pushing the concept of creativity at Dow Jones with this blog’s suggestions. BRK has nearly $200 billion in market capitalization.  That is not exactly as much as Exxon Mobil’s (XOM) near $400 billion market cap but it is also no small potatoes.

BRK has a large insurance component which makes for a nice offset to the loss of AIG. There is no investor alive (or maybe even dead) who would not welcome BRK (along with Warren Buffett and Charlie Munger) to the index. Perhaps if Dow Jones insists on keeping 30 stocks in the index, the BRK addition would inject some vitality to the index, although AAPL would be a sexier stock for the DJIA.

Update (9/17/08): Change the index to capitalization weighted from price weighted.  Unlike 100 or more years ago we now have calculators and computers which make cap weighting much easier. 

 At the time of this Blog entry Scott Rothbort, his family and or clients of LakeView Asset Management, LLC was long shares of AAPL --- although positions can change at any time.

Comments

[bobby_h:]

Wouldn't it create a problem, since the Dow is calculated on stock prices and not market cap? Since BRK.A is a $100,000 stock, this would dwarf the others.
Still, a way should be found to get BRK.A in though, I agree..

2008 Sep 17 04:07 AM

[CrossProfit:]

Over the next several years, once the loan has been repaid, the Treasury will be selling back shares of AIG to the public, mutual funds and institutional investors. By leaving 20% in the hands of the public, there is no need for the immediate replacement. Total market cap (including the 79.9% shareholder's holding) is an issue though.

The proceeds should be used to shore up social security, but this will probably never happen.

CrossProfit

2008 Sep 17 04:15 AM

[CrossProfit:]

bobby_h,
You are correct in stating that the way the index is calculated, neither BRK, AAPL or GOOG can be added to the index without a serious split prior to the event. Currently IBM has the biggest influence on the index.

CrossProfit

2008 Sep 17 04:19 AM

[vanderghast:]

Scott, berkshire is not a good idea because of liquidity issues. The dow components need to have a large free float and high trading volumes because all the futures, options and index players use the Dow as a market proxy and constantly buy and sell the entire basked.

Berkshire's trading volume is minimal compared to its size because of the large ticket size and because many investors hold Berkshire as a long term investment.

There is no technical problem with adding Bershire to index as the divisor on the average would just be adjusted such that the value of the index before the addition and after the addition would be equal. And the divisor is constantly updated anyway for splits and the like so it is not an onerous process.

2008 Sep 17 04:36 AM

[sieraromero:]

Another novel idea is to add CAF- the china index fund. They are buying us out anyway and will own the country in a relitively short period of time anyway. GOOD LUCK to you all!!

2008 Sep 17 12:30 PM

[Nick Dorset:]

Speaking as a British owner of BRK-A, it seems to me that Berkshire's inclusion in the DOW would add a dash of something that appears to be currently absent- common sense.

2008 Sep 17 01:12 PM