Think Different

Last week, we heard rumors that Apple was close to introducing a new version of the wildly popular iPad.  While that may or may not be true, there is no dispute that the company has enjoyed an amazing run of commercial success and the stock (AAPL) is trading at all-time highs (crossing over $500 per share today).

This success recently caused the guys at Bespoke Investment Group to play a little “what-if” game.  They remembered that back in June of 2009, the keepers of the Dow Jones Industrial Average (DJIA) were searching for a new company to replace General Motors (GM) which was being removed due to bankruptcy.  At the time, there was some speculation that Apple would be chosen since its products are so ubiquitous to American culture.  Just as there used to be a General Motors vehicle in most every driveway, now there is at least one Apple device under most every roof.  In the end, it was Cisco Systems (CSCO) that was added to the famous benchmark and CSCO responded to this honor by doing…not much.  The shares are only slightly higher since the announcement back in June 2009.

So, where would the DJIA be trading today if Apple had been picked over Cisco?  First, the company could not even be considered for inclusion today because it would account for over 20% of the index.  Last year, Apple made up more than 20% of the Nasdaq 100 before the index was rebalanced to reduce its impact.  Even today, Apple still makes up about 16% of the index and has been a significant factor in helping the Nasdaq reach new all-time highs.

The chart below shows how the DJIA would look today if Apple had been chosen instead of Cisco.  The “Apple Dow” (red line) is significantly more attractive than the “Cisco Dow” (blue line).  While the actual DJIA (the “Cisco Dow”) closed today at 12,874 (still 12% shy of an all-time high), the “Apple Dow” would have closed above 14,640 (about 5% above the all-time high).  How do you think that would impact investor sentiment?!?

While this may be a cute little exercise in trivia, it is also a warning to us as investors that numbers can be deceiving.  Benchmarks can be useful tools to gauge performance, but the more important question is, “How am I doing in relation to my goals?”  A good financial advisor will help you answer that question and assist you in making whatever changes are necessary to achieve your goals.