Ask HN: Why is the stock market so high? • Hacker News Board

Re: Ask HN: Why is the stock market so high?

#11

Post by brudgers » Thu, Mar 02, 2017, 5:44 PM UTC

mrits wrote: post #8

brudgers wrote: post #5

One feature of the Dow Jones Industrial Average is that when a company is doing poorly, it is removed from the average and replaced by one that is doing well. [1] If AIG, Honeywell, Eastman Kodak, Sears Roebuck, etc. were still in the basket, the average would look different. If a person could just swap out losing stocks for winners without realizing losses, everyone's investment could be above average too. [1]: http…

If this was a new rule change your point would be valid. It's fair to consider that but you'd need to adjust all the previous data points to reflect those swaps as well.Why not just compare a larger market pool?

Since the first time one company replaced the next, it has always been the case that the performance of the Dow Jones Industrial Average cannot be replicated by an individual investor. While it may be a useful model, it is actively engineered to keep going higher.

Re: Ask HN: Why is the stock market so high?

#12

Post by poikniok » Thu, Mar 02, 2017, 7:19 PM UTC

brudgers wrote: post #11

mrits wrote: post #8

Earlier quoted context omitted.

If this was a new rule change your point would be valid. It's fair to consider that but you'd need to adjust all the previous data points to reflect those swaps as well.Why not just compare a larger market pool?

Since the first time one company replaced the next, it has always been the case that the performance of the Dow Jones Industrial Average cannot be replicated by an individual investor. While it may be a useful model, it is actively engineered to keep going higher.

I think you are wrong, replicating its performance is very easy, you just hold the exact same thing it does.

Re: Ask HN: Why is the stock market so high?

#13

Post by ptype » Thu, Mar 02, 2017, 7:20 PM UTC

brudgers wrote: post #10

ptype wrote: post #9

Earlier quoted context omitted.

This is the case of most market cap indices. There is no problem with that unless the history is revised. You could replicate the same performance in your own stock account. (Not sure what you mean by "without realising losses"?)

Dow Jones 'performance' is based on a price-weighted average. If a $2 per share stock goes to $1, $200 per share stock going to $201 offsets the loss. If $400 were allocated equally among the two stocks, an actual investor would lose 25% ($100) while the Dow showed no movement.

Yes, so you should not allocate the $400 equally across the shares to match the performance of the index. You should buy an equal number of shares of each stock. It may not be a greatly constructed index by modern standards but to my understanding you can in theory get the same performance yourself.

Re: Ask HN: Why is the stock market so high?

#14

Post by dllthomas » Thu, Mar 02, 2017, 7:23 PM UTC

poikniok wrote: post #12

brudgers wrote: post #11

Earlier quoted context omitted.

Since the first time one company replaced the next, it has always been the case that the performance of the Dow Jones Industrial Average cannot be replicated by an individual investor. While it may be a useful model, it is actively engineered to keep going higher.

I think you are wrong, replicating its performance is very easy, you just hold the exact same thing it does.

The point being raised is that to "hold the exact same thing it does" actively costs money on an ongoing basis (even before transaction costs!) as you need to sell cheaper stocks to buy more expensive ones.

Re: Ask HN: Why is the stock market so high?

#15

Post by larrykubin » Thu, Mar 02, 2017, 7:31 PM UTC

The NASDAQ is over 5,000 now, but it was 5,000 17 years ago in the year 2000. Think about what has changed between now and then. Google barely existed, Facebook didn't exist, Amazon was an online bookstore. Apple was struggling and the iPhone and iPod did not exist. Now these are the largest companies in the world. We got people working on self driving cars and going to Mars. These companies are making real money now. If anything, stocks should be higher.

Re: Ask HN: Why is the stock market so high?

#16

Post by ptype » Thu, Mar 02, 2017, 7:33 PM UTC

dllthomas wrote: post #14

poikniok wrote: post #12

Earlier quoted context omitted.

I think you are wrong, replicating its performance is very easy, you just hold the exact same thing it does.

The point being raised is that to "hold the exact same thing it does" actively costs money on an ongoing basis (even before transaction costs!) as you need to sell cheaper stocks to buy more expensive ones.

Surely this is (ignoring transaction costs) reflected in the index performance already. If you sell and buy at the time (and price) of the index you will match the performance. This is not unique to DJIA by the way.

Re: Ask HN: Why is the stock market so high?

#17

Post by taway_1212 » Thu, Mar 02, 2017, 8:32 PM UTC

My bearish instincts (not strongly founded in anything, I'm not a full time trader):

All the money printed in QE needs to be parked somewhere. There aren't that many ways to invest money now, and the stock market offers some protection against the dollar crashing (not as good as gold, but gold does not yield divideds).

Re: Ask HN: Why is the stock market so high?

#18

Post by brudgers » Thu, Mar 02, 2017, 10:50 PM UTC

ptype wrote: post #13

brudgers wrote: post #10

Earlier quoted context omitted.

Dow Jones 'performance' is based on a price-weighted average. If a $2 per share stock goes to $1, $200 per share stock going to $201 offsets the loss. If $400 were allocated equally among the two stocks, an actual investor would lose 25% ($100) while the Dow showed no movement.

Yes, so you should not allocate the $400 equally across the shares to match the performance of the index. You should buy an equal number of shares of each stock. It may not be a greatly constructed index by modern standards but to my understanding you can in theory get the same performance yourself.

Buying an equal number of shares does not track the DJIA either. Apple closed at 126.6 the day it replaced ATT. ATT closed at 33.48.

Re: Ask HN: Why is the stock market so high?

#19

Post by brudgers » Thu, Mar 02, 2017, 10:51 PM UTC

ptype wrote: post #16

dllthomas wrote: post #14

Earlier quoted context omitted.

The point being raised is that to "hold the exact same thing it does" actively costs money on an ongoing basis (even before transaction costs!) as you need to sell cheaper stocks to buy more expensive ones.

Surely this is (ignoring transaction costs) reflected in the index performance already. If you sell and buy at the time (and price) of the index you will match the performance. This is not unique to DJIA by the way.

There are indexes that can be matched. DJIA is not one of them.

Re: Ask HN: Why is the stock market so high?

#20

Post by csense » Fri, Mar 03, 2017, 2:10 AM UTC

Much has been made of inequality recently. If a rich person makes N times as much a poor person but doesn't consume N times as much, they'll tend to park their excess income in financial assets. So if money's trickling up to the rich faster than new investment opportunities arise, then the rich people will have more money to bid against each other for assets like stocks. It's easier than ever to trade stocks and there's more and more information about it, meaning more and more people are investing in businesses. The US trade deficit means there's more foreign capital inflow, which is propping up asset values as well, not just stocks but real estate too.

I suspect QE might play some role in stock market prices too, the Fed's been printing an awful lot of money (although a lot of it's been used to shore up bank balance sheets rather than being used to buy stocks). Also, interest rates have been low for a long time. Meaning money that used to buy bonds is buying stocks instead, which pushes up the price of stocks. And now that the Fed's thinking about raising rates, there may be something of a rush to get out of bonds before it happens.