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Wednesday, December 30, 2015

Charles's Angels

Charles Dow that is. Famously, he created the first ever index of 12 industrial companies in 1896.
Cotton, tobacco and leather where big businesses of the day. Energy and materials are just as important now, as at the dawn of 20th Century. GE is still here, thou hardly the same as Edison's GE - a merger of Edison Electric Light Co with bunch of others, financed by Drexel and JPMorgan ... ha-ha-ha...

120 years later, Dow Jones Industrial Average has 30 stocks, but only 5 of them (16%) are really industrial.
Machinery GE and MMM, aerospace/defense BA and UTX, and big CAT. That's it.
This is what DJIA has now:


 Definition of word 'industry':
    1. economic activity concerned with the processing of raw materials and manufacture of goods in factories.
Goldman Sachs (GS) don't make shit, and the only thing 'raw' about United Health (UNH) is my ass...
However some other stocks make a lot of sense as 'industrial': XOM is a producer of important raw material and DD is a huge chemical factory. JNJ does everything in consumer goods, drugs and medical devices, while AAPL makes popular trinkets everybody buys. Lest we forget an all-American auto industry (F), huge company that owns all the things worth having (BRK) and biggest food manufacturer on a face of (american) earth (GIS)... and VOILA! - we have...
iBergamot Industrial Average (IBIA), expressed as 12 stocks... just what Papa Dow ordered...

I don't know if IBIA will outperform any of popular averages, but it is not a point of this exercise. For the first time ever, I will be able to see a true price performance of industrial sector - in an index not polluted by unrelated issues (DIS is not a factory - its a doggone la-la land!), not manipulated by market cap size (AAPL is the biggest by a mile, but imnsho the least important one of all), not continuously changing composition in an interest of chasing latest fad. Having said that, I might change some companies in IBIA if I decide they no longer serve as best representatives of important industries. Its my index. Fuck off...

Other part of Dow Theory is a transportation average - originally mostly rails, now has 20 components including Delta airline and Avis car rental. I still give more credence to ol' Charles, who viewed transportation as a vital link in an economy, the means to move raw materials to factories and finished goods to consumers... not as Florida travel accommodations for fat people... Unfortunately good transport index is hard to make, because rails don't have such huge importance anymore, air doesn't move as much stuff as it could and most of biggest shippers are either private or don't trade in US.
Following is my guess of iBergamot Transportation Average (IBTA):

I would be remiss not to mention Utilities average, although not part of original Dow Theory, I see utility industry as solid money making enterprise, vitally important to economy, people's every day life and progress off all humanity broadly speaking. Popular index XLU offers a pretty good representation of stocks involved. Utility portfolio strategy outlined in FMSUP article (link) can be mistakenly classified as 'index', as it has some of the traits of modern structured investing solutions, but I rather see it as a mutual fund of sorts. High position concentration and periodic re-balancing (performance drivers) designed to create an upward equity slope, leading to out-performance of FMSUP vs. industry on average (I hope) and most other mut fund managers (betting on it).
I don't think that my own indexing approach will offer any additional insight, but here it is nevertheless -
4 electric, 3 diversified, 3 gas, 2 water - iBergamot Utilities Average (IBUA):

I will be setting up these as Motifs for easy tracking, starting on a first trading day of the new year.

Programming note: this method is labeled 'IBIA'

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