With the market performing the way it has over the last 9 months, I wanted to take a few minutes to bring light to one of the biggest misconception about the “market’s performance”. Whether you get your news from the journal or the television or any other media source, many individual investors are misinformed every day about “the markets” performance because we are told every day that the Dow Jones Industrial Average is what we consider the market. This is just not true!
Although the Dow Jones Industrial Average is has the highest price or number (currently at 11,602) out of the indices that most people often track, it is only comprised of 30 stocks. That’s it, 30! I know that many people know this, but still fall into the trap of thinking that the Dow Jones is the Market. The “market” is comprised of many more stocks than just 30. You can find out more about the Dow Jones and its holdings by either clicking on the hyperlink above or clicking HERE.
The reason why this is crucial for everyone to understand at times like these is because when you hear theses newscasters saying that the market is down 20+ percent over the last several months yet are seeing the companies you own, blue chip or not, down dramatically more, you have to realize that you are not being singled out. The overall market is down far more than 20%. When you own companies like Merrill Lynch, Washington Mutual, Motorola, Sprint, Lennar, Ford, and many other major corporations that have just been crushed far more than the Dow Jones Industrial Average, yet make up some of the largest companies in the world, it’s very easy to get to the point of just giving up, selling everything and perhaps buying the “trend.” Bad and extreme decision!
Although I would have to say that the current market’s situation that we are in is far worse than the Dot Com Bubble Burst, or 9/11, or the 1987 crash it’s not quite as bad as the situation that the market was in during the Great Depression. The monetary policies, global policies and exchanges, global wealth growth, and overall world markets are in a much better and more structured format than they were back then. That type of catastrophe or reaction is not as tangible as it once was because of these specific facts and some others. It’s not out of the question, as I would never dare to say anything is, but it’s not very probable.
The new light on the Dow Jones Industrial Average not being the “market” is not going to make the current situation any less painful. That’s the obvious news. The bad news is that there will be dramatically more volatility ahead of us where you will see the Dow Jones Industrial finish the day up or down more than 1000 points for the first time within the next 2 or 3 years. I’m not predicting whether the 1000 point move is going to be up or down in one day, I just believe it will happen. This is not going to be the type of market for the faint of heart. This volatility is being created by the derivatives bubble, Uptick Rule Abolishment, elimination of the NYSE by the big houses on Wall Street, Hedge Fund Extreme Leverage & Trading, and several other issues that we’ll discuss at another time. The good news is that volatility, uncertainty, chaos, and extreme situation create extraordinary opportunities. I believe that this is the type of market where you can make extraordinary returns over the next few years without taking extraordinary risks. As Peter Lynch said: “Know what you own, and know why you own it.” To complete the quote, I would say that if you don’t know the why’s and what’s of what you own, then you are definitely making a mistake which you will only realize once it went wrong.