The Power of One Stock

Here’s a good lesson on what one stock can do to your portfolio.

In 1939, IBM was taken out of the Dow Jones Industrial Average. It was put back 40 years later, in 1979. Over those four decades, IBM was an outstanding stock. It gained over 220 fold!

So what if IBM had stayed in the Dow? Bryan Taylor at Global Financial Data ran the numbers. First we assume that IBM replaced AT&T. Technically, two stocks left in 1939 (IBM and Nash Motors) and two came in (AT&T and United Aircraft).

The DJIA stood at 151.1 on March 14, 1939 and 841.98 on June 29, 1979. Since the DJIA is price weighted, you can remove the impact of AT&T on the DJIA by subtracting out the price of AT&T allowing for the splits, and replacing this amount with the value of IBM stock, allowing for the splits in IBM. If you do this, you would find that the DJIA would have been at 23,582 in June 1979, not 841.98. In other words, IBM would have added 22,740 points to the DJIA had it never been removed.

(Update: Now that I’ve looked this over, I’m not sure the math is correct. I think IBM’s price needs to be adjusted for the Dow’s divisor. I’m not positive, but it’s a strong suspicion. Still, the larger point stands that one huge long-term winner can do wonders for a portfolio.)

(Update to the previous update: Dividend Investor passes along two articles (here and here) which suggest I’m correct.)

Posted by on November 7th, 2016 at 2:11 pm


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