This is the biggest investing lesson I have ever learnt

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My favourite brand motto’s is the Nike ‘ Just do it”. I love it because it says all you need to know to keep moving ahead in this world. I love it because it puts a rocket under me when sometimes I procrastinate when in fact right in front of my eyes is a clear ‘just do it’ signal.

Often in financial markets that unique ‘signal’ can occur in very ‘dark’ times when perhaps prices have spiralled down amid a cacophony of bad news. This causes our reticence, understandable but…….

It is one of the great lessons I have learnt during my career trading futures, options, and stocks. Don’t procrastinate, just do it.

Often I attend various financial association meetings and as a person who has their own stock market website and can be classed as a trader who ‘knows’ I attract the traders who want to profess their trading status and acknowledge the great trades – they missed – so I can then acknowledge their ‘almost’ prowess. Yes I know confusing but it happens.

It might be News Corp from the ‘70’s or more recently Facebook or Amazon, gold through 2009-11. Who bought BHP at $15.00, or BSL when it triggered a beautiful reversal above $4.00 in 2016? The list can be long and varied taking all sorts of different shapes and sizes. But, money ‘ left on the table’ leaves a nasty taste in your mouth. Don’t you hate it? Let’s not die wondering and talking about what could have been. Frankly I’ve heard it too many times.

I feel like grabbing the procrastinator and shaking them out of their ‘head in the sand’ state and asking them why not? It a story all to often told. You have designed and built rules and signals for a reason – because they work.

I have learnt to love the ‘dark times’ because I know it’s where the best signals and opportunities lie. This is to some degree a learned ‘state’ as it is hard for many of us so fight the crowd even when we know it’s the ‘right thing to do”. But if we’re in the investing game we need to be able to do it, not just the easy way of buying when everyone else is. A few good successes can ‘get your mind right’ and help to understand how to buy the fear and sell the greed when the right signal appears on your radar.

Don’t wait for everyone to say yes, because it just won’t happen. Don’t wait for crowd confirmation, because the major portion of the move will have passed. Whatever your trading style or time frame it is vital we act on our signals as they come up.

The answer is to have a ‘call to action’ motto like ‘just do it’ because then you’ll never die wondering, or feel the need to profess your ‘almost ‘ wisdom that helps put you in the popular group of winning traders, why, because you ‘ll already be there.

Have you ever wondered why most of the media focuses on the Dow Jones Industrial Index?

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Have you ever wondered why most of the media focuses on the Dow Jones Industrial Index?  Some would say it isn’t a good measure of the overall market, maybe?  Yet, it does a reasonable job of representing the overall market.  The same goes for the S&P 500 Index and there is the Stockradar Index.

Let’s examine the three different indices weighting types.

1. Dow Industrials – Records show that Charles Henry Dow began the series on July 3, 1884.  While Charles Dow began publishing his series in 1897, he maintained the data from 1885.  Following the introduction of the 12-stock industrial average in the spring of 1896, Dow, in the autumn of that year, dropped the last non-railroad stocks in his original index, making it the 20-stock railroad average.  Initially the data was known only as the Dow Jones Average.  In 1916, the industrial average expanded to 20 stocks; the number was raised again, in 1928, to 30, where it remains today.


The Dow Industrials is a price-weighted index.  To calculate the Industrials, the sum of the prices of all 30 stocks is divided by a divisor, the Dow Divisor. The divisor is adjusted in case of stock splits, spinoffs or similar structural changes, to ensure that such events do not in themselves alter the numerical value of the Industrials.  The current value of the Dow Divisor is 0.14602128057775 as of March 11, 2016.  This means that every $1 change in price in a particular stock within the average, equates to a 6.85 (or 1 ÷ 0.14602128057775) point movement.  A big criticism of using price-weighted is that it gives higher-priced stocks more influence over the average than their lower-priced counterparts, but also takes no account of the relative industry size or market capitalization of the components.


2. S&P 500 – From the beginning until March 3, 1957 it was the S&P 90.

The S&P 500 is a cap-weighted index.  Cap-weighting uses a stock’s market price and the number of outstanding shares to determine the percentage weighting of the stock’s inclusion in the index. The larger the components, the larger that stock will be weighted (allocated assets) in the portfolio.  This can be a big negative and it is a committee who chooses the S&P 500 components and they have a tendency to overweight it when a sector is doing well.  As an example, in the late 1990s they over weighted the index with technology just prior to the bear market that began in 2000.

3. There is another type of index weighting that has become popular in the last couple of decades.  Equal weighting distributes the same investment amount into each company stock in the same pro-rata amount. All companies, regardless of their capital size, will thus be represented equally in the index.  Chart A shows the performance of the Dow Industrials, S&P 500, and S&P 500 Equal Weight since the beginning of the bull market.  It is obvious that the equal weight (red) performed better.  I realize comparing the Industrials with the S&P isn’t too valid but I could not find a price-based series for the S&P.  Carl Swenlin summed it up nicely – individual’s portfolios are not cap-weighted

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So, what is the message with these ramblings on capitalization.  The movement of the market is best measured with something other than cap-weighted or price-weighted indices.  Most indices are cap-weighted.  I read some years ago that that the top 10 stocks in the Nasdaq 100 index based upon capitalization accounted for 46% of the movement of the index. Which is a bit like our ASX/200 and its leader based domination.

The indices weighting types in summary:

  1. The Dow Industrials is a price-weighted index. This index calculation gives higher-priced stocks more influence over the average than their lower-priced counterparts, but takes no account of the relative industry size or market capitalization of the components.
  1. The S&P 500 is a cap-weighted index.  Cap-weighting uses a stock’s market price and the number of outstanding shares to determine the percentage weighting of the stock’s inclusion in the index. The larger the components, the larger that stock will be weighted (allocated assets) in the portfolio.
  1. All companies regardless of their capital are represented equally in the index. Stockradar qualifies stocks on a trend basis and uses the equal weighting format for the Stockradar Index.