WEBVTT 00:00:00.000 --> 00:00:03.259 Picture this, you're making dinner, the evening 00:00:03.259 --> 00:00:05.759 news is playing in the background, or maybe you're 00:00:05.759 --> 00:00:07.679 just glancing at a push notification on your 00:00:07.679 --> 00:00:10.279 phone. Right, happens every single day. Exactly. 00:00:10.740 --> 00:00:14.179 And a voice confidently announces, the Dow closed 00:00:14.179 --> 00:00:17.480 up 400 points today. You hear it all the time. 00:00:17.940 --> 00:00:20.460 It is essentially the background noise of the 00:00:20.460 --> 00:00:22.920 American economy. Yeah. We all just kind of nod 00:00:22.920 --> 00:00:25.800 along. We do. We feel a vague sense of relief 00:00:25.800 --> 00:00:29.640 if the number is green or a pang of anxiety if 00:00:29.640 --> 00:00:32.259 the number is red. But if you actually stop and 00:00:32.259 --> 00:00:34.520 think about it for a second, what does that number 00:00:34.520 --> 00:00:36.859 even mean? Well, most people don't think about 00:00:36.859 --> 00:00:38.700 it. They just assume it means something good. 00:00:38.939 --> 00:00:42.520 Right. But what exactly went up 400 points? We 00:00:42.520 --> 00:00:45.340 treat that daily number Like a thermometer for 00:00:45.340 --> 00:00:47.460 our collective financial health. We really do. 00:00:47.500 --> 00:00:49.380 The assumption is that it represents the entire 00:00:49.380 --> 00:00:51.859 economy just moving upward or downward in unison. 00:00:52.200 --> 00:00:54.700 But the actual machinery operating underneath 00:00:54.700 --> 00:00:57.799 that daily point swing is entirely bizarre. I 00:00:57.799 --> 00:01:00.659 mean it operates on logic that defies almost 00:01:00.659 --> 00:01:03.280 every modern rule of finance. Bizarre is definitely 00:01:03.280 --> 00:01:05.799 the right word for it. It is a very strange system. 00:01:06.140 --> 00:01:08.439 Which is why we are pulling the whole machine 00:01:08.439 --> 00:01:11.359 apart today. For this deep dive, we are digging 00:01:11.359 --> 00:01:14.040 into a massive pile of research. We've got a 00:01:14.040 --> 00:01:16.780 lot of comprehensive documentation and historical 00:01:16.780 --> 00:01:18.900 data to get through. Yeah, specifically looking 00:01:18.900 --> 00:01:21.599 at a very detailed Wikipedia article covering 00:01:21.599 --> 00:01:25.280 the mechanics, the deeply weird history, and 00:01:25.280 --> 00:01:28.439 the loud persistent criticisms of the Dow Jones 00:01:28.439 --> 00:01:32.260 Industrial Average, or the DJIA. It is definitely 00:01:32.260 --> 00:01:35.120 a deeply weird history. Our mission today is 00:01:35.120 --> 00:01:37.980 to demystify this financial monolith. We're going 00:01:37.980 --> 00:01:40.819 to decode its hidden math, look at the ghosts 00:01:40.819 --> 00:01:42.939 of the companies that built it, and figure out 00:01:42.939 --> 00:01:45.560 if it is actually a reliable indicator of the 00:01:45.560 --> 00:01:47.959 modern economy. Or if it's just, you know, an 00:01:47.959 --> 00:01:50.359 archaic mathematical quirk that we simply cannot 00:01:50.359 --> 00:01:52.680 seem to let go of. Exactly. OK, let's unpack 00:01:52.680 --> 00:01:55.099 this. Where do we even begin with the true anatomy 00:01:55.099 --> 00:01:57.349 of the Dow? Well, to understand what the DAO 00:01:57.349 --> 00:01:58.909 is doing on your phone screen today, we first 00:01:58.909 --> 00:02:01.890 have to look at how uniquely and somewhat frustratingly 00:02:01.890 --> 00:02:04.650 it is constructed compared to almost every other 00:02:04.650 --> 00:02:08.189 modern index. Frustrating how? So the very first 00:02:08.189 --> 00:02:10.909 illusion we need to break is the scope. The Dow 00:02:10.909 --> 00:02:13.610 is not the entire stock market. It is not even 00:02:13.610 --> 00:02:15.469 close. Right, because people hear it and think 00:02:15.469 --> 00:02:17.810 it's everything. Exactly. Out of the thousands 00:02:17.810 --> 00:02:20.610 of publicly traded companies out there, the Dow 00:02:20.610 --> 00:02:24.250 is composed of just 30 prominent large cap U 00:02:24.250 --> 00:02:28.360 .S. companies. Just 30. Wow. 30 companies representing 00:02:28.360 --> 00:02:31.360 the entire American economic engine. That already 00:02:31.360 --> 00:02:33.759 feels wild. It really is, especially when you 00:02:33.759 --> 00:02:36.680 consider how vast and decentralized modern business 00:02:36.680 --> 00:02:39.479 is. But the small headcount isn't even the strangest 00:02:39.479 --> 00:02:42.159 part of the anatomy, is it? Like, it's how those 00:02:42.159 --> 00:02:44.460 30 companies are measured against one another. 00:02:44.580 --> 00:02:46.759 You hit the nail on the head. The measurement 00:02:46.759 --> 00:02:49.479 is the fundamental quirk of the entire system. 00:02:49.680 --> 00:02:51.879 If you look at modern indices that investors 00:02:51.879 --> 00:02:55.060 rely on today, like the S &P 500 or the NASDAQ, 00:02:55.199 --> 00:02:58.129 they are weighted by market capitalization. Market 00:02:58.129 --> 00:03:00.330 capitalization. So that means a company's influence 00:03:00.330 --> 00:03:03.349 on the index is based on its total market value. 00:03:03.530 --> 00:03:05.729 Exactly. How much the entire company is worth 00:03:05.729 --> 00:03:07.830 in dollars. The bigger the company, the bigger 00:03:07.830 --> 00:03:09.750 its footprint in the index. That makes logical 00:03:09.750 --> 00:03:12.370 sense, right? Right. Totally. But the Dow doesn't 00:03:12.370 --> 00:03:15.750 do that. No, the Dow actively ignores that logic. 00:03:16.270 --> 00:03:18.569 The Dow is what we call price weighted. Wait. 00:03:19.169 --> 00:03:21.770 Meaning the actual literal price of a single 00:03:21.770 --> 00:03:23.969 share of stock is the only thing that matters. 00:03:24.169 --> 00:03:27.030 That is exactly what it means. A single stock's 00:03:27.030 --> 00:03:29.490 share price determines its relative importance, 00:03:29.770 --> 00:03:32.349 regardless of how massive or influential the 00:03:32.349 --> 00:03:35.129 underlying corporation actually is. That is so 00:03:35.129 --> 00:03:37.250 counterintuitive. Why would anyone build a system 00:03:37.250 --> 00:03:39.669 like that? To understand why something so strange 00:03:39.669 --> 00:03:41.870 exists, you have to remember that this index 00:03:41.870 --> 00:03:45.310 was created by Charles Dow back in 1896. OK, 00:03:45.310 --> 00:03:48.389 so a very long time ago. Right. He did not have 00:03:48.389 --> 00:03:51.110 supercomputers or sophisticated algorithms. He 00:03:51.110 --> 00:03:54.069 had a pencil, some paper, and the fundamental 00:03:54.069 --> 00:03:56.259 need to measure the market's daily movement. 00:03:56.539 --> 00:03:59.319 So he just did the simplest math possible. Precisely. 00:03:59.599 --> 00:04:01.900 The only mathematically feasible way to do that 00:04:01.900 --> 00:04:04.199 in the late 19th century was to literally add 00:04:04.199 --> 00:04:06.379 up the individual share prices of a few companies 00:04:06.379 --> 00:04:08.419 and divide by the number of companies. So we 00:04:08.419 --> 00:04:10.520 are still running our daily economic thermometer 00:04:10.520 --> 00:04:13.819 on 1890s pencil and paper logic. We absolutely 00:04:13.819 --> 00:04:16.339 are, and the distortion it creates today is just 00:04:16.339 --> 00:04:19.100 staggering. Let's look at a glaring paradox from 00:04:19.100 --> 00:04:21.120 the source material to illustrate this. Okay, 00:04:21.199 --> 00:04:23.180 let's hear it. Let's pull the data from March 00:04:23.180 --> 00:04:27.730 2025. At that specific moment... Goldman Sachs 00:04:27.730 --> 00:04:30.069 represented the single largest component of the 00:04:30.069 --> 00:04:33.089 entire Dow index. Meaning it had the most influence 00:04:33.089 --> 00:04:35.430 over whether the Dow went up or down. Exactly. 00:04:35.569 --> 00:04:38.170 And that was purely because its individual share 00:04:38.170 --> 00:04:40.870 price was very high. However, Goldman Sachs' 00:04:41.069 --> 00:04:43.730 total market capitalization, its actual value 00:04:43.730 --> 00:04:47.649 as a company, was about $167 billion. I mean, 00:04:47.689 --> 00:04:50.490 $167 billion is obviously a massive amount of 00:04:50.490 --> 00:04:53.470 wealth. It is, sure. But in the realm of global 00:04:53.470 --> 00:04:55.610 corporate titans, it is not even close to the 00:04:55.610 --> 00:04:57.300 top of the mountain. Not even close, because 00:04:57.300 --> 00:05:00.560 at that exact same time, in March 2025, Apple 00:05:00.560 --> 00:05:04.040 had a market capitalization of roughly $3 .3 00:05:04.040 --> 00:05:07.660 trillion. Trillion with a T. Yes. It was fundamentally 00:05:07.660 --> 00:05:10.800 vastly larger, more profitable, and arguably 00:05:10.800 --> 00:05:13.300 more economically influential than Goldman Sachs. 00:05:13.439 --> 00:05:16.379 But let me guess. Because Apple's individual 00:05:16.379 --> 00:05:18.379 share price happened to be a lower dollar amount 00:05:18.379 --> 00:05:20.579 than Goldman Sachs' share price, it didn't matter. 00:05:20.800 --> 00:05:23.920 You got it. Apple fell completely outside the 00:05:23.920 --> 00:05:27.519 top 10 components of the Dow index. Wait, so 00:05:27.519 --> 00:05:30.120 grading the economy this way is like judging 00:05:30.120 --> 00:05:32.920 a basketball team's talent. Not by who scores 00:05:32.920 --> 00:05:35.420 the most points, but by who is wearing the most 00:05:35.420 --> 00:05:38.149 expensive sneakers. That is a hilarious way to 00:05:38.149 --> 00:05:40.230 put it, but yeah, that's exactly what it's like. 00:05:40.350 --> 00:05:42.589 That seems totally backward. I mean, if you only 00:05:42.589 --> 00:05:45.250 have 30 companies and the ones with the priciest 00:05:45.250 --> 00:05:47.310 shares hold all the power regardless of their 00:05:47.310 --> 00:05:49.889 actual corporate size, doesn't that inherently 00:05:49.889 --> 00:05:52.509 heighten the risk? It definitely creates an intense 00:05:52.509 --> 00:05:54.910 concentration of influence. Because that kind 00:05:54.910 --> 00:05:57.990 of stock concentration seems incredibly dangerous. 00:05:58.290 --> 00:06:00.850 Well, critics point out that a $1 move in the 00:06:00.850 --> 00:06:03.569 smallest least valuable company in the Dow has 00:06:03.569 --> 00:06:07.220 the exact same mathematical effect as a $1 move 00:06:07.220 --> 00:06:10.060 in a multi -trillion dollar behemoth. That makes 00:06:10.060 --> 00:06:13.019 no sense. Mathematically, no. But we have to 00:06:13.019 --> 00:06:15.000 look at the other side of the argument. While 00:06:15.000 --> 00:06:16.959 the priced weighting structure concentrates risk 00:06:16.959 --> 00:06:19.660 among a few high -priced stocks, some institutional 00:06:19.660 --> 00:06:21.920 investors argue that the Dow is actually less 00:06:21.920 --> 00:06:24.819 volatile during rapid market shifts. Less volatile. 00:06:25.220 --> 00:06:28.579 How? If a few high -priced stocks control the 00:06:28.579 --> 00:06:30.699 wheel, a bad day for two of them should send 00:06:30.699 --> 00:06:32.939 the whole thing into a ditch. Why would it act 00:06:32.939 --> 00:06:35.430 as a shock absorber? The stability comes from 00:06:35.430 --> 00:06:37.730 the curation of those 30 specific companies. 00:06:38.089 --> 00:06:41.009 They are highly established, mature blue chip 00:06:41.009 --> 00:06:43.129 companies. Oh, I see. So they aren't just picking 00:06:43.129 --> 00:06:45.990 at random. Right. They have massive fortified 00:06:45.990 --> 00:06:48.370 cash reserves, global footprints and diverse 00:06:48.370 --> 00:06:51.269 revenue streams. They are not volatile tech startups 00:06:51.269 --> 00:06:54.269 prone to wild speculative swings. So they are 00:06:54.269 --> 00:06:57.730 huge steady ships. Exactly. The argument is that 00:06:57.730 --> 00:07:00.350 this specific handpicked collection of industry 00:07:00.350 --> 00:07:03.449 titans provides a natural ballast. When the broader 00:07:03.470 --> 00:07:05.990 market is rapidly rising or violently falling, 00:07:06.550 --> 00:07:09.069 these 30 massive ships tend to weather the storm 00:07:09.069 --> 00:07:11.949 more smoothly than a broad index containing hundreds 00:07:11.949 --> 00:07:14.829 of smaller, riskier companies. OK, the blue chip 00:07:14.829 --> 00:07:16.970 curation provides a buffer. I can see the logic 00:07:16.970 --> 00:07:19.410 there. But this entire price weighting system 00:07:19.410 --> 00:07:21.870 naturally leads us into a massive mathematical 00:07:21.870 --> 00:07:24.129 puzzle. Oh, the math gets very weird from here. 00:07:24.269 --> 00:07:26.850 Right. If the index is purely based on the face 00:07:26.850 --> 00:07:29.329 value of a share price, what happens when a company 00:07:29.329 --> 00:07:32.529 decides to split its stock? That is the big question. 00:07:32.790 --> 00:07:35.870 Because let's say one of these 30 companies has 00:07:35.870 --> 00:07:38.850 a stock trading at $100, and they do a standard 00:07:38.850 --> 00:07:41.389 two -for -one split. Now, there are twice as 00:07:41.389 --> 00:07:43.329 many shares out in the world, but they trade 00:07:43.329 --> 00:07:46.370 at $50 each. Right. Their piece of the pie just 00:07:46.370 --> 00:07:49.490 got cut in half. But the company's overall value 00:07:49.490 --> 00:07:52.910 hasn't changed a single cent. The CEO didn't 00:07:52.910 --> 00:07:56.129 lose half their business. But if the Dow is just 00:07:56.129 --> 00:07:58.709 adding up those raw share prices, wouldn't that 00:07:58.709 --> 00:08:02.250 artificial $50 drop cause the entire index to 00:08:02.250 --> 00:08:05.170 instantly crash? You have just stumbled onto 00:08:05.170 --> 00:08:07.509 the hidden trapdoor of the Dow and the secret 00:08:07.509 --> 00:08:09.970 sauce that keeps it from collapsing. Okay, lay 00:08:09.970 --> 00:08:12.750 it on me. If the Dow were still a simple arithmetic 00:08:12.750 --> 00:08:15.509 average, just adding up the 30 prices and dividing 00:08:15.509 --> 00:08:18.370 by 30 like Charles Dow did with his pencil, a 00:08:18.370 --> 00:08:20.649 stock split would absolutely destroy the index's 00:08:20.649 --> 00:08:22.529 value overnight. It would trigger a national 00:08:22.529 --> 00:08:24.490 panic over a purely administrative corporate 00:08:24.490 --> 00:08:27.389 action. It would. But the Dow is no longer a 00:08:27.389 --> 00:08:30.069 simple average. It survives today by relying 00:08:30.069 --> 00:08:32.750 on a mechanism called the Dow divisor. The Dow 00:08:32.750 --> 00:08:35.210 divisor. Let's break this down carefully because 00:08:35.210 --> 00:08:37.950 this sounds like the point where the 19th century 00:08:37.950 --> 00:08:40.600 math starts breaking a sweat. Think of it as 00:08:40.600 --> 00:08:43.440 mathematical duct tape holding the entire historical 00:08:43.440 --> 00:08:45.860 structure together. The index is still the sum 00:08:45.860 --> 00:08:48.639 of the prices of all 30 stocks, but it is no 00:08:48.639 --> 00:08:50.879 longer divided by the number 30. What is it divided 00:08:50.879 --> 00:08:53.460 by? It is divided by a constantly adjusting factor, 00:08:53.620 --> 00:08:56.019 the divisor. Let's walk through a micro example 00:08:56.019 --> 00:08:57.740 to see how this patches the whole. Okay, I'm 00:08:57.740 --> 00:09:00.259 ready. Imagine you have a tiny index made of 00:09:00.259 --> 00:09:04.440 just three stocks. Stock A is $10, stock B is 00:09:04.440 --> 00:09:08.259 $20, and stock C is $30. Okay, so 10 plus 20 00:09:08.259 --> 00:09:10.980 plus 30. The total sum of the stock prices is 00:09:10.980 --> 00:09:13.840 $60. Right, and as a simple average, you divide 00:09:13.840 --> 00:09:17.059 that 60 by 3, giving your index a value of 20. 00:09:17.200 --> 00:09:19.899 That's simple enough. Now stock C decides to 00:09:19.899 --> 00:09:22.279 do a two -for -one split. Its price drops from 00:09:22.279 --> 00:09:26.080 $30 to $15 overnight. Your new sum is 10 plus 00:09:26.080 --> 00:09:30.179 20 plus 15. The total is now $45. And if I divide 00:09:30.179 --> 00:09:33.659 45 by 3, the index value drops to 15. The index 00:09:33.659 --> 00:09:36.299 just crashed 25%, but nobody actually lost any 00:09:36.299 --> 00:09:38.659 money. The economy is perfectly fine. Exactly. 00:09:38.799 --> 00:09:41.480 To prevent that fake crash, the committee overseeing 00:09:41.480 --> 00:09:44.039 the index steps in and permanently alters the 00:09:44.039 --> 00:09:47.350 denominator. Instead of dividing by 3, they figure 00:09:47.350 --> 00:09:50.090 out what new number they need to divide 45 by 00:09:50.090 --> 00:09:53.929 so that the final answer remains 20. In this 00:09:53.929 --> 00:09:56.809 case, they would change the divisor from 3 to 00:09:56.809 --> 00:10:00.350 2 .25. The index stays perfectly flat at 20, 00:10:00.610 --> 00:10:02.990 and the historical timeline remains completely 00:10:02.990 --> 00:10:05.370 intact. So they just change the math to make 00:10:05.370 --> 00:10:07.370 the answer fit. They do this every single time 00:10:07.370 --> 00:10:09.669 a constituent company undergoes a stock split, 00:10:10.070 --> 00:10:12.669 spins off a division, or when one company replaces 00:10:12.669 --> 00:10:15.750 another in the group of 30. So there is an actual 00:10:15.750 --> 00:10:18.230 committee constantly tweaking the math behind 00:10:18.230 --> 00:10:20.110 the scenes, patching the denominator to make 00:10:20.110 --> 00:10:22.990 sure the line on the graph stays perfectly smooth 00:10:22.990 --> 00:10:25.529 despite all these corporate changes. What's fascinating 00:10:25.529 --> 00:10:28.049 here is how this continuous patching preserves 00:10:28.049 --> 00:10:30.950 the index's historical continuity over more than 00:10:30.950 --> 00:10:32.809 a century. I guess you'd have to do that if you 00:10:32.809 --> 00:10:35.409 want to keep the historical record intact. Right. 00:10:36.090 --> 00:10:38.129 Without the divisor you simply could not compare 00:10:38.129 --> 00:10:41.210 the Dow of today to the Dow of 1980. But over 00:10:41.210 --> 00:10:43.610 decades of splits and swaps, that denominator 00:10:43.610 --> 00:10:46.230 has been whittled down significantly. Like how 00:10:46.230 --> 00:10:48.750 significantly? Let's look at the actual real 00:10:48.750 --> 00:10:51.970 -world math from the source material. As of late 00:10:51.970 --> 00:10:55.929 2025, specifically October 30th, the Dow divisor 00:10:55.929 --> 00:10:59.509 had been adjusted down to a highly specific microscopic 00:10:59.509 --> 00:11:01.970 decimal. I'm bracing myself. What was the number? 00:11:02.269 --> 00:11:07.990 It was 0 .16242563904928. Hold on, let me process 00:11:07.990 --> 00:11:10.320 that. You are taking the sum of the 30 stock 00:11:10.320 --> 00:11:13.259 prices and dividing it by 0 .16. Yes. When you 00:11:13.259 --> 00:11:15.320 divide a number by a fraction that is significantly 00:11:15.320 --> 00:11:17.740 less than one, you aren't dividing it all in 00:11:17.740 --> 00:11:19.860 any practical sense. Because the divisor is now 00:11:19.860 --> 00:11:22.139 a tiny fraction, it flips the whole equation 00:11:22.139 --> 00:11:23.919 on its head. Yeah. You're actually multiplying 00:11:23.919 --> 00:11:26.320 the sum of the stock prices. The math completely 00:11:26.320 --> 00:11:29.259 inverts. By dividing the sum by roughly 0 .16, 00:11:29.399 --> 00:11:31.639 the sum of those 30 stock prices is effectively 00:11:31.639 --> 00:11:34.860 multiplied by about 6 .15. That is wild. That 00:11:34.860 --> 00:11:36.840 hidden multiplier is the entire reason the Dow 00:11:36.840 --> 00:11:38.960 index value is sitting at 50 ,000 points, while 00:11:38.960 --> 00:11:40.799 the stocks themselves only cost a few hundred 00:11:40.799 --> 00:11:43.320 dollars a share. That makes so much sense now. 00:11:43.740 --> 00:11:46.379 Because of that highly specific divisor, every 00:11:46.379 --> 00:11:50.000 single $1 change in a constituent stock's price 00:11:50.000 --> 00:11:54.659 translates to a 6 .15 point movement in the overall 00:11:54.659 --> 00:11:57.379 Dow. It's called the Dow Jones Industrial Average. 00:11:58.059 --> 00:12:00.620 But mathematically, it stopped being a true average 00:12:00.620 --> 00:12:03.460 decades ago. It really did. It is an aggregate 00:12:03.460 --> 00:12:05.980 that has been run through a funhouse mirror and 00:12:05.980 --> 00:12:09.220 multiplied by 6. The machinery is entirely unique 00:12:09.220 --> 00:12:12.340 to this specific index. But to understand why 00:12:12.340 --> 00:12:14.940 the entire global financial system still relies 00:12:14.940 --> 00:12:18.419 on this heavily patched funhouse mere math, we 00:12:18.419 --> 00:12:20.779 have to look at the ghosts of its past. The history 00:12:20.779 --> 00:12:23.080 behind all of this. Yes. We have to look at how 00:12:23.080 --> 00:12:25.419 it became the only living continuous timeline 00:12:25.419 --> 00:12:27.840 of American industry. The source documentation 00:12:27.840 --> 00:12:30.779 details how this whole project began in 1884 00:12:30.779 --> 00:12:33.580 when Charles Dow composed his very first stock 00:12:33.580 --> 00:12:36.620 average for a daily financial bulletin. The customer's 00:12:36.620 --> 00:12:38.519 afternoon letter. Right. A publication that eventually 00:12:38.519 --> 00:12:40.480 morphed into the Wall Street Journal. But the 00:12:40.480 --> 00:12:42.539 truth True Dow Jones Industrial Average, the 00:12:42.539 --> 00:12:44.480 specific barometer we are tearing apart today, 00:12:44.980 --> 00:12:48.340 officially launched on May 26, 1896. Created 00:12:48.340 --> 00:12:50.899 by Charles Dow and his business associate Edward 00:12:50.899 --> 00:12:53.639 Jones. When they launched it, they didn't even 00:12:53.639 --> 00:12:56.080 have 30 companies. They started with just 12. 00:12:56.259 --> 00:12:59.559 Just 12. And looking at the names of those original 00:12:59.559 --> 00:13:02.840 12 companies is like staring directly into the 00:13:02.840 --> 00:13:05.379 engine room of the American Industrial Revolution. 00:13:05.679 --> 00:13:07.299 I was reading through this list in the text and 00:13:07.299 --> 00:13:10.500 it paints such a vivid picture of what the 1890s 00:13:10.500 --> 00:13:13.580 economy actually smelled and sounded like. Very 00:13:13.580 --> 00:13:16.659 visceral. You had United States leather, American 00:13:16.659 --> 00:13:19.360 cotton oil, Chicago gas, the distilling and cattle 00:13:19.360 --> 00:13:21.700 feeding company. Which sounds absurd today, but 00:13:21.700 --> 00:13:24.240 was essentially a massive whiskey truss. Exactly. 00:13:24.340 --> 00:13:26.379 These were companies pulling raw materials out 00:13:26.379 --> 00:13:29.200 of the earth. slaughtering livestock and burning 00:13:29.200 --> 00:13:32.740 coal. Not exactly the sleek sterile tech campuses 00:13:32.740 --> 00:13:35.360 we see today. It was an economy built on heavy 00:13:35.360 --> 00:13:38.200 manufacturing, agriculture and raw commodities. 00:13:38.580 --> 00:13:40.679 And the most telling fact about the Dow's history 00:13:40.679 --> 00:13:43.080 is that none of those original 12 companies are 00:13:43.080 --> 00:13:45.440 left in the index today. None of them. Not a 00:13:45.440 --> 00:13:48.090 single one. Most of them went bankrupt. were 00:13:48.090 --> 00:13:50.909 broken up by antitrust laws, or simply faded 00:13:50.909 --> 00:13:54.049 into irrelevance as technology advanced. General 00:13:54.049 --> 00:13:56.409 Electric had the longest run by far. They were 00:13:56.409 --> 00:13:58.250 one of the originals, right? Yes, they were a 00:13:58.250 --> 00:14:01.029 foundational member in the original 1896 index, 00:14:01.110 --> 00:14:03.149 and they managed to cling to their spot until 00:14:03.149 --> 00:14:05.970 they were finally removed in 2018. Here's where 00:14:05.970 --> 00:14:08.190 it gets really interesting to me. The very name 00:14:08.190 --> 00:14:10.610 of the index is the Dow Jones Industrial Average. 00:14:10.879 --> 00:14:13.840 But looking at the modern evolution, that word 00:14:13.840 --> 00:14:16.980 industrial is basically a historical relic. It's 00:14:16.980 --> 00:14:19.320 totally outdated. When you look at the 30 companies 00:14:19.320 --> 00:14:22.399 dictating the index today, you are tracking information 00:14:22.399 --> 00:14:25.440 technology giants like Apple and Microsoft. You 00:14:25.440 --> 00:14:27.820 are tracking credit card networks like Visa and 00:14:27.820 --> 00:14:30.679 American Express and massive health care conglomerates 00:14:30.679 --> 00:14:33.100 like United Health Group. The term industrial 00:14:33.100 --> 00:14:35.740 is absolutely a relic, but the shift away from 00:14:35.740 --> 00:14:38.220 factories and railroads is entirely intentional. 00:14:38.539 --> 00:14:40.879 So they're doing it on purpose. Oh, yeah. The 00:14:40.879 --> 00:14:43.860 Dow operates as a curated museum exhibit of the 00:14:43.860 --> 00:14:46.860 U .S. economy, ruthlessly swapping out artifacts 00:14:46.860 --> 00:14:49.120 as the nation transitions from one era to the 00:14:49.120 --> 00:14:51.379 next. That makes sense. The committee that selects 00:14:51.379 --> 00:14:53.360 these companies, which includes representatives 00:14:53.360 --> 00:14:56.360 from S &P Dow Jones Indices and the Wall Street 00:14:56.360 --> 00:14:59.580 Journal, does not follow a strict, unfeeling, 00:14:59.799 --> 00:15:02.919 quantitative rulebook like the S &P 500 does. 00:15:03.179 --> 00:15:05.220 So they act more like bouncers at an exclusive 00:15:05.220 --> 00:15:07.919 club. They do. They look for companies that have 00:15:07.919 --> 00:15:10.139 an excellent reputation, demonstrate sustained 00:15:10.139 --> 00:15:12.960 growth and are heavily monitored by a large number 00:15:12.960 --> 00:15:15.799 of investors. So it's subjective. Highly subjective. 00:15:15.919 --> 00:15:18.139 They are actively trying to represent the broad 00:15:18.139 --> 00:15:21.100 market as it exists today, even if those companies 00:15:21.100 --> 00:15:24.279 don't manufacture physical goods anymore. The 00:15:24.279 --> 00:15:26.720 turnover tells the story of our economic transition 00:15:26.720 --> 00:15:29.139 perfectly. Do we have some recent examples from 00:15:29.139 --> 00:15:31.879 the source? Sure. Just looking at the year 2024 00:15:31.879 --> 00:15:34.860 alone, you had Amazon replacing Walgreens in 00:15:34.860 --> 00:15:37.379 February, representing the utter dominance of 00:15:37.379 --> 00:15:40.000 e -commerce. Wow, Amazon. Then, in November, 00:15:40.299 --> 00:15:43.080 Nvidia replaced Intel, signaling the total cultural 00:15:43.080 --> 00:15:45.559 and economic takeover of artificial intelligence 00:15:45.559 --> 00:15:48.320 and advanced microchips. And because it acts 00:15:48.320 --> 00:15:51.159 as this living mirror to human industry, the 00:15:51.159 --> 00:15:53.879 actual historical chart of the Dow serves as 00:15:53.879 --> 00:15:56.279 a heart monitor for the American psyche. It's 00:15:56.279 --> 00:15:57.820 a great way to think about it. It tracked our 00:15:57.820 --> 00:16:00.679 global panics, our world wars, and our periods 00:16:00.679 --> 00:16:04.090 of massive unchecked euphoria. Let's trace some 00:16:04.090 --> 00:16:06.210 of these massive psychological milestones from 00:16:06.210 --> 00:16:09.450 the source, because the scale of the swings is 00:16:09.450 --> 00:16:11.809 staggering. It really puts things in perspective. 00:16:12.169 --> 00:16:13.889 You have the buildup to the Great Depression, 00:16:14.370 --> 00:16:18.649 where the Dow peaked at 381 points in 1929, and 00:16:18.649 --> 00:16:22.789 then the floor falls out. By July 1932, the index 00:16:22.789 --> 00:16:26.029 had collapsed down to just 41 points. 41 points. 00:16:26.169 --> 00:16:28.970 It lost roughly 90 % of its total value. a nearly 00:16:28.970 --> 00:16:32.610 unfathomable destruction of wealth. Try to imagine 00:16:32.610 --> 00:16:35.549 90 % of the stock market's value simply vaporizing. 00:16:35.590 --> 00:16:38.169 It's terrifying. And the psychological scar of 00:16:38.169 --> 00:16:40.659 that crash was immense. In inflation adjusted 00:16:40.659 --> 00:16:44.279 numbers, that 1929 high of 381 points wasn't 00:16:44.279 --> 00:16:48.080 surpassed again until 1954. Wait, 1954? Yeah, 00:16:48.080 --> 00:16:50.399 it took a quarter of a century for a new generation 00:16:50.399 --> 00:16:52.919 of investors to finally recover that psychological 00:16:52.919 --> 00:16:55.139 high ground. Then you jump forward and the numbers 00:16:55.139 --> 00:16:57.539 start to accelerate as the economy modernizes. 00:16:57.960 --> 00:17:01.259 It finally breaks 1000 in November 1972. Another 00:17:01.259 --> 00:17:03.559 huge milestone. And then we hit one of the most 00:17:03.559 --> 00:17:06.460 iconic, vivid moments in modern financial history. 00:17:06.960 --> 00:17:10.990 March 29, 1999. The Dow crosses 10 ,000 for the 00:17:10.990 --> 00:17:13.190 first time and the source specifically notes 00:17:13.190 --> 00:17:15.430 that traders were literally wearing party hats 00:17:15.430 --> 00:17:17.849 on the floor of the New York Stock Exchange. 00:17:18.210 --> 00:17:20.069 The visual of professional traders wearing party 00:17:20.069 --> 00:17:22.650 hats perfectly captures the irrational exuberance 00:17:22.650 --> 00:17:25.109 of the late 90s dot -com bubble. It really does. 00:17:25.230 --> 00:17:28.880 It was pure euphoria quantified by the Dow. But 00:17:28.880 --> 00:17:31.200 the milestones certainly don't stop there, and 00:17:31.200 --> 00:17:33.440 the terrifying volatility hasn't either. Like 00:17:33.440 --> 00:17:36.079 what happened recently. Right. The source details 00:17:36.079 --> 00:17:38.519 the absolute freefall during the early days of 00:17:38.519 --> 00:17:41.079 the COVID -19 pandemic. In the first quarter 00:17:41.079 --> 00:17:43.619 of 2020, as the global economy simply turned 00:17:43.619 --> 00:17:48.880 the lights off, the DJIA fell 23%. 23 % in one 00:17:48.880 --> 00:17:50.720 quarter. It was the worst single quarter since 00:17:50.720 --> 00:17:53.640 the infamous Black Monday crash of 1987. But 00:17:53.640 --> 00:17:56.420 then the rebound defies all expectations. It 00:17:56.420 --> 00:17:58.980 goes on this relentless bull run driven by tech 00:17:58.980 --> 00:18:02.299 and massive government stimulus. It crosses 38 00:18:02.299 --> 00:18:05.599 ,000 in early 2024. Just massive growth. And 00:18:05.599 --> 00:18:08.539 then the massive historic milestone that brings 00:18:08.539 --> 00:18:12.009 us to today. Just last month, on February 6, 00:18:12.230 --> 00:18:15.950 2026, the index crossed 50 ,000 for the very 00:18:15.950 --> 00:18:18.970 first time. 50 ,000. From 41 points in the depths 00:18:18.970 --> 00:18:21.990 of the Great Depression to 50 ,000 points today. 00:18:22.589 --> 00:18:24.069 It's always hard to wrap your head around that 00:18:24.069 --> 00:18:26.490 trajectory. The overarching growth is phenomenal. 00:18:26.690 --> 00:18:28.869 But when you weaponize the Dow's bizarre math 00:18:28.869 --> 00:18:31.430 during one of those market panics, the results 00:18:31.430 --> 00:18:34.720 are completely unhinged. Unhinged how? If we 00:18:34.720 --> 00:18:36.359 connect this to the bigger picture of how the 00:18:36.359 --> 00:18:38.740 divisor functions, we have to look at what happens 00:18:38.740 --> 00:18:40.839 when a modern financial crisis collides with 00:18:40.839 --> 00:18:43.440 Charles Dow's 19th century price weighting flaw. 00:18:44.039 --> 00:18:46.940 Take the 2008 financial crisis and a specific 00:18:46.940 --> 00:18:49.700 insurance giant called AIG. Oh, this is where 00:18:49.700 --> 00:18:52.500 that 6 .15 multiplier effect turns from a quirky 00:18:52.500 --> 00:18:54.839 mathematical patch into a massive liability. 00:18:55.059 --> 00:18:57.619 Precisely. In September and October of 2008, 00:18:57.859 --> 00:19:00.059 AIG was still a component of the 30 -stock Dow. 00:19:00.220 --> 00:19:02.220 As the subprime mortgage crisis hit critical 00:19:02.220 --> 00:19:04.769 mass, AIG's reverse split -adjusted stock price 00:19:04.769 --> 00:19:08.670 went into freefall, collapsing from $22 .76 down 00:19:08.670 --> 00:19:12.450 to just $1 .35. That is a brutal drop. For the 00:19:12.450 --> 00:19:15.089 broader economy, an insurance giant collapsing 00:19:15.089 --> 00:19:18.549 was an absolute disaster. But for the Dow specifically, 00:19:18.869 --> 00:19:22.150 because of its unique divisor math, This single 00:19:22.150 --> 00:19:25.930 drop of roughly $21 in one company's share price 00:19:25.930 --> 00:19:28.529 was multiplied. Because of the tiny decimal divisor. 00:19:28.809 --> 00:19:32.049 Exactly. That single company's distress contributed 00:19:32.049 --> 00:19:35.150 to a massive drop of roughly 3 ,000 points in 00:19:35.150 --> 00:19:37.869 the overall index. Wait, one single company's 00:19:37.869 --> 00:19:41.069 stock price dropping by 21 bucks shaved 3 ,000 00:19:41.069 --> 00:19:43.990 points off the Dow. Yes. That completely distorts 00:19:43.990 --> 00:19:46.250 the reality of the broader market. It makes a 00:19:46.250 --> 00:19:48.170 targeted corporate failure look like the end 00:19:48.170 --> 00:19:50.910 of the world. It amplifies the panic. And the 00:19:50.910 --> 00:19:53.390 source material highlights a fascinating psychological 00:19:53.390 --> 00:19:55.829 study regarding how these 30 companies behave 00:19:55.829 --> 00:19:57.890 during those moments of crisis. What did the 00:19:57.890 --> 00:20:00.130 study find? It found that the correlation among 00:20:00.130 --> 00:20:03.130 these 30 distinct components is highest when 00:20:03.130 --> 00:20:05.390 stocks are actively declining. Meaning when times 00:20:05.390 --> 00:20:08.289 are good, Apple, Goldman Sachs and United Health 00:20:08.289 --> 00:20:10.490 all move to their own individual rhythms based 00:20:10.490 --> 00:20:13.049 on their own corporate success. Right. But when 00:20:13.049 --> 00:20:15.490 panic sets in on Wall Street, everybody panics 00:20:15.490 --> 00:20:19.329 together. The entire group of 30 drops as a synchronized 00:20:19.329 --> 00:20:22.250 unit. The psychology of fear is much more uniform 00:20:22.250 --> 00:20:24.470 and contagious than the psychology of growth. 00:20:24.930 --> 00:20:27.170 When investors panic, they don't discriminate 00:20:27.170 --> 00:20:29.390 between a tech company and a health care company. 00:20:29.710 --> 00:20:31.950 They just sell. Which brings us to the ultimate 00:20:31.950 --> 00:20:35.470 question for you listening right now. After uncovering 00:20:35.470 --> 00:20:38.750 all the hidden machinery, the wildly flawed price 00:20:38.750 --> 00:20:41.309 weighting, where a sneaker's price matters more 00:20:41.309 --> 00:20:44.490 than the actual game score, the manipulated denominator 00:20:44.490 --> 00:20:46.950 that multiplies every dollar by six. Right. All 00:20:46.950 --> 00:20:50.309 of it. The fact that a $21 drop can cause a 3 00:20:50.309 --> 00:20:53.009 ,000 point plunge and the reality that this whole 00:20:53.009 --> 00:20:55.430 thing only tracks 30 out of thousands of companies, 00:20:56.069 --> 00:20:58.509 why do we still care? Does the Dow actually matter 00:20:58.509 --> 00:21:01.190 to a modern investor? It is a debate that rages 00:21:01.190 --> 00:21:03.549 constantly in the financial world and the critics 00:21:03.549 --> 00:21:06.109 are incredibly vocal. Who are the critics? Well, 00:21:06.309 --> 00:21:08.230 prominent financial professionals like Rick Edelman 00:21:08.230 --> 00:21:11.509 argue forcefully that the Dow is an utterly inaccurate 00:21:11.509 --> 00:21:13.769 representation of overall market performance. 00:21:13.890 --> 00:21:15.839 What is his main argument? They point out the 00:21:15.839 --> 00:21:19.660 mathematical absurdity we discussed. A $1 increase 00:21:19.660 --> 00:21:22.539 in a relatively small Dow component can be completely 00:21:22.539 --> 00:21:25.799 neutralized by a $1 decrease in a massive company, 00:21:26.119 --> 00:21:28.259 regardless of the actual percentage changes in 00:21:28.259 --> 00:21:30.559 their corporate value. Because the divisor treats 00:21:30.559 --> 00:21:33.039 every dollar equally, No matter the size of the 00:21:33.039 --> 00:21:36.000 company. Exactly. Critics highly recommend that 00:21:36.000 --> 00:21:38.680 investors and media outlets abandon the Dow entirely 00:21:38.680 --> 00:21:42.140 and use the market cap weighted S &P 500 or the 00:21:42.140 --> 00:21:45.619 Wilshire 5000, which includes almost all publicly 00:21:45.619 --> 00:21:49.059 listed U .S. stocks. So on paper, those modern 00:21:49.059 --> 00:21:51.140 indexes are fundamentally better, more accurate 00:21:51.140 --> 00:21:53.359 rulers for measuring the actual size and health 00:21:53.359 --> 00:21:55.900 of the market. On paper, absolutely. But the 00:21:55.900 --> 00:21:58.480 source material throws a massive counterintuitive 00:21:58.480 --> 00:22:01.319 twist into this data. It really does. It compared 00:22:01.319 --> 00:22:04.099 the actual financial returns of the clunky 30 00:22:04.099 --> 00:22:07.039 company Dow Jones against the highly sophisticated 00:22:07.039 --> 00:22:11.779 500 company S &P 500 over a massive 43 year period, 00:22:12.180 --> 00:22:15.380 specifically between January 1980 and November 00:22:15.380 --> 00:22:18.779 2023. And you would expect the broader, objectively 00:22:18.779 --> 00:22:21.799 better designed index to perform vastly differently, 00:22:21.940 --> 00:22:24.880 right? Any rational person would. You have 30 00:22:24.880 --> 00:22:28.160 handpicked stocks weighed by an archaic formula 00:22:28.160 --> 00:22:31.339 versus 500 stocks weighed by actual market value. 00:22:31.380 --> 00:22:33.559 But the data reveals something incredible. What 00:22:33.559 --> 00:22:37.039 did it show? Over that 43 year span, the DJIA 00:22:37.039 --> 00:22:42.200 returned an annualized 8 .90%. The S &P 500 returned 00:22:42.200 --> 00:22:46.339 an annualized 8 .91%. Are you kidding me? A difference 00:22:46.339 --> 00:22:49.259 of one hundredth of a percent over four decades. 00:22:49.460 --> 00:22:51.799 Just one hundredth of a percent. Think about 00:22:51.799 --> 00:22:54.450 what that means for your wallet. If you had invested 00:22:54.450 --> 00:22:57.150 your retirement savings into the clunky 19th 00:22:57.150 --> 00:23:00.470 century Dow in 1980, or the hyper -modern S &P 00:23:00.470 --> 00:23:03.190 500, 40 years later your bank account would look 00:23:03.190 --> 00:23:05.930 exactly the same. It is genuinely unbelievable. 00:23:06.089 --> 00:23:09.049 So what does this all mean? If the S &P 500 is 00:23:09.049 --> 00:23:11.730 fundamentally a vastly superior ruler, but they 00:23:11.730 --> 00:23:13.589 both give you the exact same measurement over 00:23:13.589 --> 00:23:16.190 half a lifetime, why do we keep holding onto 00:23:16.190 --> 00:23:18.430 the Dow? It ultimately comes down to psychological 00:23:18.430 --> 00:23:20.829 comfort and historical inertia. We just like 00:23:20.829 --> 00:23:23.420 it because it's familiar. Pretty much. The Dow 00:23:23.420 --> 00:23:25.859 is the ultimate shorthand for market health because 00:23:25.859 --> 00:23:29.319 it has survived. Despite its clunky 19th century 00:23:29.319 --> 00:23:32.180 machinery, despite the weird math of the divisor, 00:23:32.400 --> 00:23:35.240 it remarkably arrives at the exact same destination 00:23:35.240 --> 00:23:38.380 as the highly sophisticated modern indexes. It 00:23:38.380 --> 00:23:41.559 actually works. It works. It has measured our 00:23:41.559 --> 00:23:44.000 economy through two world wars, through the Great 00:23:44.000 --> 00:23:47.339 Depression, through the dot com bubble, and a 00:23:47.339 --> 00:23:49.420 global pandemic. That is a lot of history. You 00:23:49.420 --> 00:23:52.259 simply cannot overstate the cultural value of 00:23:52.259 --> 00:23:54.640 a continuous unbroken data set that stretches 00:23:54.640 --> 00:23:58.339 all the way back to 1890. It is a shared financial 00:23:58.339 --> 00:24:00.960 language that every single generation understands. 00:24:02.319 --> 00:24:05.099 We started with a simple pencil and paper arithmetic 00:24:05.099 --> 00:24:07.940 average of 12 physical companies, places actively 00:24:07.940 --> 00:24:10.200 making leather, refining sugar, and pulling gas 00:24:10.200 --> 00:24:12.539 out of the ground. Very literal physical industry. 00:24:12.779 --> 00:24:14.839 And through more than a century of economic upheaval, 00:24:15.119 --> 00:24:17.480 corporate bank crises, stock splits, market crashes, 00:24:17.599 --> 00:24:20.279 and some truly bizarre math, it has evolved into 00:24:20.279 --> 00:24:23.400 a 50 ,000 -point barometer that tracks silicon 00:24:23.400 --> 00:24:26.460 chips, cloud computing, and massive e -commerce 00:24:26.460 --> 00:24:29.579 networks. It is the raw story of American industry 00:24:29.579 --> 00:24:32.579 and innovation, quantified daily. But looking 00:24:32.579 --> 00:24:34.500 at that history leaves me with one final thought, 00:24:34.740 --> 00:24:37.559 something to really chew on that isn't even explicitly 00:24:37.559 --> 00:24:39.539 covered in the Wikipedia article. Oh, let's hear 00:24:39.539 --> 00:24:42.539 it. If the Dow has evolved so drastically from 00:24:42.539 --> 00:24:45.940 12 physical manufacturing companies in the 1890s 00:24:45.940 --> 00:24:49.859 to a digital heavy index in the 2020s, what happens 00:24:49.859 --> 00:24:52.660 next? That is a great question. What happens 00:24:52.660 --> 00:24:55.019 when artificial intelligence fundamentally changes 00:24:55.019 --> 00:24:58.640 how corporations operate? or when fully decentralized 00:24:58.640 --> 00:25:01.759 digital currencies reach a market scale where 00:25:01.759 --> 00:25:04.240 they simply cannot be ignored by the selection 00:25:04.240 --> 00:25:07.099 committee? Will the world's most famous inductorial 00:25:07.099 --> 00:25:09.400 average eventually find itself tracking assets 00:25:09.400 --> 00:25:11.819 that don't physically exist anywhere on earth? 00:25:12.099 --> 00:25:14.099 Given its history of ruthless adaptation, it 00:25:14.099 --> 00:25:17.140 is a very real possibility. Swapping heavy manufacturing 00:25:17.140 --> 00:25:20.000 for purely digital assets would be the ultimate 00:25:20.000 --> 00:25:22.920 test of the Dow's 19th century machinery. It 00:25:22.920 --> 00:25:24.859 really would. So the next time you're making 00:25:24.859 --> 00:25:28.180 dinner, and that anchor on the evening news excitedly 00:25:28.180 --> 00:25:31.279 announces a 400 -point jump in the Dow. What 00:25:31.279 --> 00:25:32.779 do you think about that? It's more than just 00:25:32.779 --> 00:25:35.099 a number. You aren't just hearing a random number. 00:25:35.700 --> 00:25:38.140 You are hearing the final result of a 130 -year 00:25:38.140 --> 00:25:40.940 -old mathematical machine, balanced precariously 00:25:40.940 --> 00:25:43.980 on a decimal point, tracking the ghosts of 19th 00:25:43.980 --> 00:25:46.160 century letter companies right alongside the 00:25:46.160 --> 00:25:48.779 artificial intelligence of tomorrow. You now 00:25:48.779 --> 00:25:50.539 know the hidden mechanics operating behind the 00:25:50.539 --> 00:25:50.720 curtain.