Posted on November 27, 2012
As noted in my last post, I originally read “Adam Smith’s” The Money Game at the peak of a speculative market in 1968. Since then there have been a least three additional frightening collapses: (1) Junk-Bond Takeover Bust of the late 1980s, (2) Dot-Com Bubble at the turn of the century, and (3) Great 2008 Recession. Investors who experienced those events no doubt remember the losses as massive. Yet despite three debacles, the Dow Jones Industrial Average increased nearly 1,400 percent since 1968 providing a compound annual rate of return of almost 6%. Moreover, academic research normally uses the Dow -or similar – index as a proxy for overall stock market performance.
I question whether the six percent figure is valid.
The reason I doubt it is because the Dow Jones appears to be a “rigged” Index. Furthermore, all indexes seem to be similarly “rigged” for two reasons.
Frist, many of the most popular stocks during a speculative boom that later go bust, never get into the applicable index. Two examples are National Student Marketing and MP3.Com each of which once traded at over $100 per share. Both were popular with “performance” mutual funds, which means a great many investors were indirect shareholders. The endowment funds of the University of Chicago, Harvard and Cornell held stock in National Student Marketing as did Morgan Guaranty, Bankers Trust, Northern Trust, and General Electric Pension. Read more…