Why Google and Berkshire Will Never Join the Dow

Did you ever wonder why Berkshire Hathaway (NYSE: BRK-B  ) isn't a part of the Dow Jones Industrials? I mean, how do you keep Warren Buffett's baby out of perhaps the most visible of all the market barometers?

I can hear some of you giggling out there, because you know the answer: the Dow is a deeply flawed index that could stand a major makeover.

OK, let me show you what I mean. Now that General Motors (NYSE: GM  ) is teetering on the edge of financial oblivion, it's easy to imagine that stock dropping off the Dow. Stick Berkshire's A shares in its place, and Buffett would stand for about 99% of the average's value. The Dow is a dollar-weighted average, so Berkshire's stock price of $91,300 per share would throw the whole calculation off kilter. The B shares would have a 74% weight under the same circumstances. Would you really want the Dow to become a simple proxy for Berkshire Hathaway?

That's also why Google (Nasdaq: GOOG  ) will never be one of the Magnificent 30. A stern refusal to split its shares in good times or bad leaves Google with 28% of the responsibility for an imagined Googly Dow index, dwarfing the six next most heavily weighted components combined. That includes the market's biggest caps: ExxonMobil (NYSE: XOM  ) at $335 billion and Wal-Mart's (NYSE: WMT  ) $195 billion market cap make Google's measly $128 billion look positively piddling.

That's far from the most obnoxious addition to the index imaginable, though. Agriculture and transportation phenom Seaboard carries a market worth of just $1.3 billion -- but this small-cap goes for $1,035 per share. The other 29 share prices add up to $1,048 as I write this. Now, that's what I call overweighted!

In an ideal world, the Dow would be weighted by more reasonable metrics like market cap or revenue. In the second-best of all possible worlds, Google and Berkshire would stop being stubborn and split their shares once in a blue moon. But this is the third-best universe imaginable, at best. We're stuck with what we've got here.

If GM and a couple of other weaklings get booted off the Dow, I'm rooting for Cisco Systems (Nasdaq: CSCO  ) or Apple (Nasdaq: AAPL  ) to make the grade. With an 11.3% weight, Apple would be the most expensive stock on the board -- but not by such a ridiculous amount. Cisco's 1.7% heft would fall somewhere in the middle of the pack. Both companies have distinguished operating histories and tons of cash, and the technology sector seems underrepresented in the Dow to me.

The larger lesson today is simple: don't stare yourself blind at the Dow Industrials. It doesn't tell the whole story.

Further Foolishness:

Google is a Motley Fool Rule Breakers pick. Apple and Berkshire Hathaway are Motley Fool Stock Advisor recommendations. Berkshire Hathaway and Wal-Mart Stores are Motley Fool Inside Value picks. The Fool owns shares of Berkshire Hathaway. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Anders Bylund owns shares in Google, but he holds no other position in any of the companies discussed here. You can check out Anders' holdings or a concise bio if you like, and The Motley Fool is investors writing for investors.


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  • Report this Comment On June 05, 2009, at 3:02 PM, starbucks4ever wrote:

    Makes sense. But what's the reason that BRKA is not part of S&P? It's supposed to be market cap -weighted, is it not?

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