🗞️The Wrap: Weighted
The devil is in the Dow, check out what’s new on the platform, prepare for Powell’s “speech of the century”. Have a great week.
We tend to stay away from opinions in the Wrap but it’s about time I spoke up! The Dow Jones is to the financial news industry what the Cleveland Browns are to the NFL; historically useless.
It’s something I touched on a few weeks ago. As you might recall the Dow Jones is price-weighted. Let’s break this down a little further.
While the S&P500 is fairly market-cap-weighted so that the proportion of each stock held in the index is determined by the valuation of the stock. That’s why Apple makes up about 7% of the S&P500; if the value of all 500 companies is added, $AAPL accounts for 7% of that final figure.
The Dow is simply a function of the price of a stock. For years Boeing dominated the Dow’s movements as the stock hovered around $400 despite having a relatively smaller valuation. As we mentioned in regard to Apple’s stock split, it’s weighting will now fall from over 12% to 3% even though the value of the company hasn’t changed and it is still multiple times the size of current #2 UnitedHealth Group. So when the morning news reports that the Dow climbed 1.2% remember it’s the equivalent of sorting intelligence by height. Notice how you never hear any investment pros comparing their returns to the DJI?
This isn’t to say market cap weighting is far better, given how the biggest tech stocks dominate the indices, market breadth is evaporating. Let’s just say “all indices are equal, but some indices are more equal than others”.
And for those seeking just that, as always in finance, there’s some ETF out there for you! Equal weighting variations of each index does exist and are tradable through ETFs. So $QQQE, for instance, assigns each Nasdaq 100 stock a 1% weighting. Out of interest, QQQ is up 54% in the last year while QQQE is up 34%.
New on Stake
Rocket Companies (RKT)
In a world of billion-dollar unicorns which aren’t even as old as your iPhone, $RKT is a rarity. Founded in 1985, this conglomerate specialising in mortgage origination has taken a while to go public.
With over US$120b in mortgage originations in H1 2020 and $6.4b in revenue, it’s not quite like these no-revenue, forward-looking stocks. And that’s reflected in the valuation. A word of warning, while financial information tools may report a $2b market cap, a vast majority of shares are held by insiders pushing the market cap above US$50b.
Li Auto (LI)
Here we go again. Electric cars, China, hype; it has Wall Street Bets written all over it. Li Auto produces hybrid cars (half petrol, half electric) and has already passed a US$15b valuation.
Nio, Li and Tesla are all making strides in China but the space is getting busier. Xpeng is an EV manufacturer expected to go public in the near future.
What We’re Listening To | We Study Billionaires – Macro Mastermind
We have shared We Study Billionaires podcasts in the past but this one, in particular, is worth listening to.
With Jerome Powell set to speak on how the Fed plans to induce inflation, in what has been dubbed a “profoundly consequential” affair, this episode is perfect listening to better understand the money supply, national debts, the US Dollar and more in 100 minutes of gold.
Detailed yet digestible macroeconomics analysis is hard to come by. This is a great start.
Listen on Spotify here.
Four people arrive at a river with a narrow bridge that can only hold two people at a time. It’s night time and they have one torch that has to be used when crossing the bridge. Dave can cross the bridge in one minute, Warren in two minutes, Jim in five minutes, and Elizabeth in eight minutes. When two people cross the bridge together, they must move at the slower person’s pace. How can they all get across the bridge in 15 minutes or less?
Best Buy | NIO
Nio is in the best buy every month it seems. A steady gainer for this trader who showed patient hands.
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