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Author: samdavies Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 6186  
Subject: Foolish 4 in Oz Date: 11/13/1998 7:13 PM
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I don't feel I'm the right person to answer PWillis's query (#259). Possibly Wanganeen or illy- whacker could make a better fist of it but here goes anyway.
As I understand it, the 30 stocks making up the Dow are assumed to be so large and diversified as to border on immortality. As such, if they get into trouble - lose focus, become tainted by an Exxon Valdez, are sued for tobacco-related injuries etc - eventually new management will turn them around, and their share price will recover to make way for other shares falling out of favour. The Dogs eventually come good and the contracyclical punters pocket their winnings, and go on to repeat the process.
Now, it's suggested that Australia doesn't have sufficient companies big enough or diversified enough to make up the equivalent of the 30 shares of the Dow. Furthermore, the Australian heavyweights are loaded with resource stocks whose fortunes and share price are largely the result of commodity prices not management skill. Therefore the Dow Dividend theory would not work here. I'm not at all sure this is true. However, we don't yet have a Dow or its equivalent. We have 20 Leaders and 50 Leaders and even 100 Leaders but no-one has yet constructed a Dow Index to try and represent the market as a whole.
I believe we could construct a meaningful index of 30 shares which excludes purely resource stocks. This would then give us a base for the other thing we need to do - back testing. Of course, we won't all agree on the correct 30 shares. There's still plenty of controversy in the States every time the Dow is altered (as it will be next Tuesday) but most of the argument will, like sports teams, be about numbers 27 to 30 and not the first 25 or 26.
I would welcome the suggestions of Wanganeen and other Fools on what should make up our Foolish 30. Once we iron this out, I've no doubt we'll get a few of our 'computer numerates' who can backtest the theory even if only back to the 1970s.

SamD.




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