
The Meaninglessness of the Stock Market Index in a Digital World - collapse
https://www.theatlantic.com/technology/archive/2018/06/the-meaningless-of-the-stock-market-index-in-a-digital-world/563345/
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ScottBurson
There's a lot of failure to appreciate a simple fact: _" 1 share" is not a
consistent, well-defined unit_. It's just some arbitrary fraction of the value
of a company, that fraction varying not only between companies but also over
time, because of splits, secondary offerings, and buybacks. This seems like an
obvious, straightforward fact that everybody knows, and yet historically,
there has been a tendency to ignore it and to think the price of "a share"
means something. Companies whose share prices are above $50 or so have been
viewed as "blue chip"; those below $10 have been viewed as "speculative".
There is thus a psychological component to the perception of share prices that
is not justified by the mathematics of the situation; and much of this is a
matter of convention. Even today, I believe that to continue to be listed on
the NYSE or even NASDAQ, a company must not let its share price fall much
under $1. The only effect of AMZN trading at $1730 is to make it difficult for
small traders to trade the stock, since exchanges don't deal in fractional
shares (they could, I suppose, but they don't).

We see this error in the way that Charles Dow and Edward Jones defined their
index back in 1896 [0]. Averaging prices of shares in different companies is
mathematically meaningless. But the author of this piece, having commented on
this error, goes on to make it again: _For example, for fiscal year 2017,
Costco had earnings per share of $6.08. Amazon had earnings per share of
$6.15. Costco’s market value is $91 billion; Amazon’s is $844 billion._ EPS
numbers aren't directly comparable any more than share prices are directly
comparable. COST is trading around $209, less than 1/8 AMZN. Instead of EPS,
we should be talking about earnings _per dollar of market cap_ , which would
be independent of the size of a share. On that measure, COST is outperforming
AMZN by a factor of more than 8. (Along with juxtaposing EPS numbers from two
different companies, the author seems to be committing a second error by
suggesting that earnings and market cap should be related; they are not, at
least not in any simple way.)

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guntars
What’s the value of the company if not assets + all future earnings?

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xkjkls
I mean, that's the theoretical value that you should pay for it, but markets
don't always exactly match theory.

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tanderson92
The Dow Jones index being a poor index (as well as being a price index) does
not mean the idea of a stock market index is a poor one; the title of the
article especially was poorly chosen by the editor. The S&P500 Index is
another stock market index and is far from meaningless -- its level reflects
expectations about the future profits of the largest 80% of American
companies. The S&P500 has its own weaknesses because it does not fully capture
the stock market (use something like the CRSP Total Stock Market Index or the
Dow Jones U.S. Total Market Index) and because it is a price index (compare to
the German DAX which is total return-based).

The article overreaches in its conclusions.

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adim86
I think what the author is trying to point out here is that in the world we
live in today the stock market indexes are less valuable. Stocks used to be
able to be bought using technicals like the P/E ratio and other financial
tools. As companies like facebook and snapchat and the likes. Companies whose
values cannot really be calculated by the assets they hold (land, machines and
factories etc). Their value is in their Brand, their IP and other subjective
articles. But they are listed in the stock market and they dominate the stock
market today. It generally makes these tools weaker in calculating the value
of the market using stocks which was created for an industrial age

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JumpCrisscross
> _Companies whose values cannot really be calculated by the assets they hold_

Assets have value for the cash flows they promise. Facebook is a dead simple
valuation exercise on a PEG basis.

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harry8
Once upon a time I got an undergrad degree in economics and accounting. I then
later was awarded the CFA charter. Having cleared my throat with such wanton
credential-ism, when kinds of articles come up I want to recommend strongly:

"A Random Walk Down Wall St" by Burton Malkiel [1]

Anyone wanting to have any kind of understanding of investing should have read
it. Even if you already know it all from extensive study elsewhere it is
important to see it all in one place, well written and explained. I say read
it! Really!

You have a startup and you need to understand investing in your business -
this is a flying start. I can think of no better.

[1] My affiliate wikipedia link
[https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street](https://en.wikipedia.org/wiki/A_Random_Walk_Down_Wall_Street)

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pembrook
It seems like this author doesn't quite understand what they're trying to
communicate here. I'm surprised this was published by the Atlantic which I
generally regard as a competent media property. There's some fundamental
misunderstandings of how finance works and what the DOW is vs. other indexes.

For example, he doesn't seem to understand that a company's valuation (his
Amazon reference) is a function of its discounted _future_ cash flows, not
present value.

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vpribish
The Atlantic has really dropped in quality over the last few years - while
also showing up more often in the social media echo-chambers. I ignore it now

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skybrian
Judging by publication name means you're missing out on some great authors. Ed
Yong for science writing, for example.

The best way to do it is to subscribe to authors you think are good via RSS.

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21
All the professionals use the S&P 500 index.

The Dow Jones index is used only by the popular non-financial press.

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repsilat
The Wall Street Journal refers to the DJIA more often than the S&P 500, and
they have a reasonable business section. They mostly do it because they're
tied up with it, though.

No great loss to them, TFA notes that they're well correlated (and gossip
about GE sells papers on slow news days.)

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bob_theslob646
Would be curious to see a word frequency count of both in the WSJ.

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baldfat
Seems like Warren Buffet won his bet just investing in the index (S&P 500 not
Dow) over a hedge fund.

"Buffett made the bet in December 2007, arguing that a fund holding the same
stocks as found in the Standard & Poor's 500 index could beat the combined
performance of a group of hedge funds over the following 10 years."

[https://www.usatoday.com/story/money/markets/2018/03/07/warr...](https://www.usatoday.com/story/money/markets/2018/03/07/warren-
buffett-made-10-year-bet-his-market-strategy-heres-how-he-won/402823002/)

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anoncoward111
That's questionable. 1998 - 2008 was a catastrophic investment period for the
SAP500 (0.8x return or so). 2008 - 2018 was quite good (2-3x)

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baldfat
Warren bet that the S&P 500 would out perform a managed Hedge Fund.

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anoncoward111
And he would have been wrong 1998-2008, provided that the managed hedge fund
literally just kept all their money in cash.

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icebraining
But did hedge funds keep their money in cash? Warren's point is exactly that
the funds' decisions are not worth the cost.

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xkjkls
It was a broad fund of hedge funds, the HFRI, if I remember correctly.

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rossdavidh
And yet, despite all the errors in the article and the title, the basic
premise, that stock market indices should not be used to talk about the
economy as it is experienced by anyone other than those invested in stocks, is
sound. Also, old news. I learned this in 1987.

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ta1234567890
Most of the stock market is nothing but speculation. Sure, "informed"
speculation, but unless you have enough ownership in a company to have some
kind of power in their decision making process (or have some other advantage
like insider info), then you are just guessing what the future will be.

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bob_theslob646
Haha, your comment actually made me laugh out loud.

I would be careful with choosing your words especially when in a marketplace,
there are buyers or sellers whose entire goal is to speculate .

>It is controversial whether the presence of speculators increases or
decreases short-term volatility in a market. Their provision of capital and
information may help stabilize prices closer to their true values. On the
other hand, crowd behavior and positive feedback loops in market participants
may also increase volatility.

[[https://en.m.wikipedia.org/wiki/Speculation](https://en.m.wikipedia.org/wiki/Speculation)]

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ta1234567890
Your comment made me scratch my head trying to figure out what you mean.

Anyways, it seems you are actually confirming the statement above about
speculation in the stock market.

>> It is controversial...

Which means, it is not proven and maybe it can't be proven, hence any
assertion about the point is just speculation about which side is right or
wrong

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tamaharbor
There are a LOT more than 3500 publicly listed corporations.

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lotsofpulp
Bloomberg says 3600:

[https://www.bloomberg.com/view/articles/2018-04-09/where-
hav...](https://www.bloomberg.com/view/articles/2018-04-09/where-have-all-the-
u-s-public-companies-gone)

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tamaharbor
There are a lot more than 3500 publicly listed corporations.

