The Hindu Business Line : Is the Sensex in the same league as the Dow?

How was our index then? "BSE 30 stocks sensitive index (Sensex) decelerated from 3892.75 as on March 31, 1998 to 3739.96 as on March 31, 1999, recording a decrease of 152.79 points or 3.92 per cent," noted SEBI's annual report (www.sebi.gov.in).

Strangely, in the timeline on www.djindexes.com, the site of Dow Jones Indexes, April 1, 1999 chronicles "the inaugural issue of INDEXES: The Journal of Index Issues is published." No March, but there's February 23, 1999, "Cash options on the Dow Jones Internet Index begin trading on the CBOE."

It is educative to read the media reaction to Dow crossing the 10K mark. "NYSE chairman Richard Grasso, New York Mayor Rudolph Giuliani and John Prestbo, index editor for Dow Jones & Co., banged the gavel symbolising the close of the trading day and then began tossing baseball caps with `Dow 10,000' embroidered on the front," reported www.canoe.ca, using an Associated Press story about the 103-year-old index on March 29, 1999. The milestone was achieved, one learns, `after four failed attempts' earlier that month.

"The stock exchange had nothing to do with Dow 10,000. It had to do with the huge number of participants in the marketplace. I want to send thank-yous to the 70 million Americans who participate directly in equities and another 130 million who participate indirectly," is a piece of Grasso-speak captured in the report. The situation here seems different, with not many retail investors participating in the sharp vault.

Editorial on www.atimes.com (March 24, 1999) had been wishful, saying: `Dow 10,000 is fine; Nikkei 20,000 would be better.' Dale Wettlaufer had written, `How Now 10K Dow?' on March 12 in Lunchtime News. "Remember, the Dow Jones Industrial Average is a publicity thing. It's not necessarily the best index of what is going on in the stock market or corporate America. Like the QWERTY keyboard, though, it's the standard index of market activity that is quoted by almost all news outlets," he commented. On a defiant note, again, "What's in a number, really?" asked Rick Aristotle Munarriz. "Did you ever have a car whose odometer hit 100,000?"

Dan Ascani's question on March 22, 1999 (www.gold-eagle.com) was, `The New Math: Does Dow 10k/Y2K Equal Dow 5K?' He said, "Seemingly all of the media are prepared for special broadcasts if the Dow hits 10,000. "The bigger problem in March and April 1999, then, appears to be the Dow 10K problem, not Y2K. While Y2K will contribute to problems of some degree, the Dow at 10K is massively overvalued and has helped mask what is happening in the underlying market since April 1998: Declining stock prices."

Post-event, David Epp, writing on April 5, 1999 (www.gold-eagle.com) had a series of questions: "Finally, Dow 10,000. Now, can we finally get back to the business at hand? So what is the market really worth? And how long will Dow 10,000 last? And how much higher will it go? These are the questions pressing on most investors' minds now. Do we cheer... or fear?" No different closer home, right now.

Dow had taken four months to move from 6,000 to 7,000, but within about a month of 10K, it reached 11,000.

"Even by the compressed standards of the modern computerised stock market, the latest 1,000 points in the Dow average came with breathtaking speed," alerted www.canoe.ca.

In a story titled `Dow 10,000 — in 2005', dated May 17, 1999, Martin Sosnoff recounted on www.forbes.com how the Dow had pierced 1000 "back in 1972 during a comparable frothy interlude". It was followed by `the horrendous recession of 1973-74 (OPEC induced)'. Obviously worried, he wrote, "The tortuous verbiage of Internet analysts rings hollow."

Bill Fleckenstein declared `Dow 10,000 is irrelevant' on http://moneycentral.msn.com. "The index tells very little about stocks and not nearly enough about value. Dow stocks and stocks in general are priced for a perfect world — in a world that's far from perfect," he wrote in `Contrarian Chronicles'. Investing is about buying value and building a margin of safety, he said, and added, "The Dow at 10,000 offers neither."

Tracing the story of Dow, you'd learn that the average added another 1,700 points before peaking at 11,722.98 in January 2000, as MSN Money noted. "And we all know what happened after that." What happened? "The behaviour repeats itself whenever the Dow crosses big milestones. As Vic Niederhoffer and Laurel Kenner noted in `Dow 10,000: Careful what you wish for,' the average fell the next day in 13 of 17 times after it crossed a level ending in three zeros."

Numbers seem to have a mind of their own! "Round numbers somehow push whole rows of buttons in human psychology. They are the financial counterparts of the vivid events that psychologists say set off a "flashlight effect" in our brains," wrote the pair, Niederhoffer and Kenner, in November 2003. "Unfortunately, big milestones in the market are like other big achievements in life — they tend to be acmes. Post-high complacency is all too common."

In the May 17, 2004 edition of The Christian Science Monitor is Thomas Watterson's article titled, `Why Dow 10000 smells no sweeter than, say, 9999.' In the five years since the Dow first crossed that threshold in 1999, the closely followed index seems to have had trouble going very far above that level, wrote the author.

He cites Mark Sellers, a senior analyst at Morningstar Inc, thus: "I think it's probably ridiculous to think that anybody with any experience in the market focuses on a number such as 10000. I can see where a lot of people might focus on it, but I think they tend to be the dumb money, not the smart money."

One learns from a report dated Dec 13, 2005 by David Roeder of Chicago Sun-Times that Roger Ibbotson, teaching at the University of Chicago, had predicted in 1974 that the Dow (then around 850) would pass 10,000 in November 1999. "Ibbotson is on record as predicting a Dow at 1,00,000 in 2024. That's based on a forecast that large capitalisation stocks will post annual averages of 10 percent gains in price appreciation and a 1.6 per cent dividend yield."

Ominously, however, Watterson cites, Irrational Exuberance, a book by Robert Shiller, an economics professor at Yale University. In April of 2000, he'd predicted that the Dow would still be hovering around 10,000 in the year 2020!

Dow Jones may not agree. An October 2002 research report by Sheldon Gao, on www.djindexes.com, titled `The Dow you should know' observes: "The strong relative performance of the Dow since 1999 comes from the combination of superior stock selection skills and a unique weighting approach."

While a capitalisation-weighted index is driven by the market values of component stocks, "a price-weighted index tends to be performance-driven, particularly in a down market," notes Gao.

"While a cap-weighted methodology has some advantages, the Dow's unique price-weighted methodology, with its adjustments for stock splits, allows the average to function as a largestock index without large-cap bias, a benchmark index without high-tech dominance, and a blue-chip index without style concentration," explains the report.

Returning to the original premise, is the Sensex in the same league as the Dow? Numerically, probably, yes. On February 6, 2006, at the time of writing this, Dow stood at 10798.27.

The core is, however, different. For, in contrast to the price-weighted methodology that helps the Dow prevent "a pronounced skewing to the very largest stocks", which would exist had it been cap-weighted, the Sensex is a free-float cap index.

Is that a cause of concern, or should we look for the next milestone? Is the Sensex as beleaguered as the Dow?

ZeroBase@TheHindu.co.in

D. Murali

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