Here’s one of those “real content” posts.
With the election approaching in America, the hot issue being our economy, and recent Wall Street turmoil, Americans are seeking news and media to inform them about our economy. Today I’m going to explain one small indicator in our economy and then give you a tool to see how reliable your news sources are.
Since you are all interested in the economy and want to learn a little about finance, I wont shy away from the details. First, let’s talk about stock indexes. When we talk about the wealth of an economy (the US economy, the world economy, …) we need a way to quantify this wealth. The most realistic way to do this is to look the aggregate wealth in a certain market. This stems from the financial theory that individual investors make decisions with their money, and the sum of this money reflects the aggregate wealth, and the aggregate wisdom of everyone involved.
An index is a financial measurement that takes some average of stock prices (or other things) to determine our relative progress in a market.
Putting this all together, the astute reader would realize that a useful index describing the wealth of an economy, or stock market, would be one that is based on the total value of its parts. In other words, if the total value of stocks goes up one percent, your index goes up one percent. We have just invented a capitalization-weighted index. This is S&P 500, and the NASDAQ Composite indexes.
This is sound financial theory, that has been taught for decades in school, and has no current work discrediting it.
Okay. Logically, it would follow: any index that does not work this way is sub-optimal. The Dow Jones Industrial Average is one such suboptimal index.
All finance people know that the DJIA is not the way to measure our economy. So why do you hear about it so much? Well, the DJIA was created by Charles Dow, and is a part of Dow Jones & Company, which is owned by News Corporation.
So here’s the conclusion: if you watch or read the news and you keep hearing about the DOW and how the DOW went up and how it went down, then you are hearing too much media produced or influenced by News Corporation… or you’re getting finance news from people that don’t know about finance.
The solution: diversify your news intake.
Appendix
List of Newspapers, TV stations, Publishers, etc., owned by News Corporation
Excerpts:
- Fox
- Turner
- National Geographic
- The Wall Street Journal
- New York Post
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