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The Dow 30 is the greatest of all Ponzi schemes

By Wim Grommen and Lorimer Wilson - posted Friday, 23 August 2013


The Dow Jones Industrial Average (DJIA) Index – the oldest stock exchange in the U.S. and most influential in the world – consists of 30 companies and has an extremely interesting and distressing history regarding its beginnings, transformation and structural development which has all the trappings of what is commonly referred to as pyramid or Ponzi scheme.

The Dow Index was first published in 1896 when it consisted of just 12 constituents and was a simple price average index in which the sum total value of the shares of the 12 constituents were simply divided by 12. As such those shares with the highest prices had the greatest influence on the movements of the index as a whole. In 1916 the Dow 12 became the Dow 20 with four companies being removed from the original twelve and twelve new companies being added. In October, 1928 the Dow 20 became the Dow 30 but the calculation of the index was changed to be the sum of the value of the shares of the 30 constituents divided by what is known as the Dow Divisor.

While the inclusion of the Dow Divisor may have seemed totally straightforward it was – and still is – anything but! Why so? Because every time the number of, or specific constituent, companies change in the index any comparison of the new index value with the old index value is impossible to make with any validity whatsoever. It is like comparing the taste of a cocktail of fruits when the number of different fruits and their distinctive flavours – keep changing. Let me explain the aforementioned as it relates to the Dow.

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Companies Go Through 5 Transition Phases

On one hand, generally speaking, the companies that are removed from the index are in either the stabilization or degeneration transition phases of which there are five, namely:

1. the pre-development phase in which the present status does not visibly change.

2. the take-off phase in which the process of change starts because of changes to the system

3. the acceleration phase in which visible structural changes – social, cultural, economical, ecological, institutional – influence each other

4. the stabilization phase in which the speed of sociological change slows down and a new dynamic is achieved through learning.

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5. the degeneration phase in which costs rise because of over-capacity leading to the producing company finally withdrawing from the market.

The Dow Index is a Pyramid Scheme

On the other hand, companies in the take-off or acceleration phase are added to the index. This greatly increases the chances that the index will always continue to advance rather than decline. In fact, the manner in which the Dow index is maintained actually creates a kind of pyramid scheme! All goes well as long as companies are added that are in their take-off or acceleration phase in place of companies in their stabilization or degeneration phase.

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About the Authors

Wim Grommen was teacher in mathematics and physics for ten years at secondary schools. The last twenty years he trained programmers in Oracle-software. He worked almost five years as trainer for Oracle and the last 17 years as trainer for Transfer Solutions in the Netherlands. The last 15 years he has studied transitions, social transformation processes, the S-curve and transitions in relation to market indices. Articles about these topics have been published in various magazines and sites in The Netherlands and Belgium.

Lorimer Wilson is the Editor of FinancialArticleSummariesToday.com and munKNEE.com.

Other articles by these Authors

All articles by Wim Grommen
All articles by Lorimer Wilson

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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