The Dow Jones Industrial Average (INDEXDJX:.DJI) styles itself as “a clear, straightforward view of the stock market and, by extension, the U.S. economy.” The 30 components are members of an extremely elite club — arguably the best of the best.
The market’s premier index will get a serious makeover next Monday, when three stocks wave farewell due to their low share prices and are replaced by three fresh tickers. But the Dow Jones Industrial Average (INDEXDJX:.DJI) left the three most obvious choices on the outside looking in.
This chart will tell much of the story that’s keeping Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) out of the Dow Jones Industrial Average (INDEXDJX:.DJI). Explaining Berkshire Hathaway Inc. (NYSE:BRK.A)‘s exclusion will require some additional insight:
Judging by market caps alone, all three of these non-Dow stocks should have been shoo-ins for this radical makeover. They are the three largest stocks on the market, not counting current Dow Jones Industrial Average (INDEXDJX:.DJI) members. And Apple Inc. (NASDAQ:AAPL) holds the title for biggest market cap in the world, for crying out loud! Apple Inc. (NASDAQ:AAPL)’s $422 billion valuation puts even Dow leader ExxonMobil to shame.
But it ain’t that easy, Jack. The share price data throws a bucket of ice water all over Apple’s and Google Inc (NASDAQ:GOOG)’s arguably well-deserved Dow ambitions.
Because the Dow index is weighted by share prices and not market caps, adding these stocks would wreak havoc on the Dow’s fundamental structure. IBM’s currently gargantuan 9% influence on the Dow Jones Industrial Average (INDEXDJX:.DJI) would evaporate into almost nothing. Combined, Apple Inc. (NASDAQ:AAPL) and Google Inc (NASDAQ:GOOG) would account for about 40% of the index’s weight, leaving 60% of the total Dow value to be divided between the other 28 members.
Of course, Berkshire Hathaway Inc. (NYSE:BRK.A)’s “A” shares would turn the Dow Jones Industrial Average (INDEXDJX:.DJI) into a close proxy for buying Berkshire alone. That stock class has never, ever split, even as investing guru Warren Buffett delivered decades of market-crushing gains. That’s why the stock trades at more than $172,000 per share today.
The odd man out
But what about Berkshire Hathaway Inc. (NYSE:BRK.B)’s class “B” shares, then? This batch of stock certificates always traded at a serious sticker-shock discount compared to the “A” shares, and it actually split 50-for-1 in 2010. Berkshire Hathaway Inc. (NYSE:BRK.B) would sport an above-average heft on the Dow, but not outrageously so.
But then, you won’t find any other dual-class stocks on the index today. In fact, I can’t find any evidence that dual-class stocks have ever held a Dow seat. Please use the comments box below to correct me if I’m wrong. This seems like an unspoken but unbroken rule that will keep Berkshire — and Google, for that matter, which will soon be a triple-class stock — out of the Dow.