ASK THE FOOL
Not your average average
How is the "the Dow's" daily value calculated?
C.J., Kalamazoo, Mich.
The Dow Jones Industrial Average (DJIA), launched in 1896, is one of the oldest U.S. market indexes. It's essentially the average stock price of 30 companies, including General Electric, Intel, Boeing, Visa, McDonald's, Coca-Cola, IBM, The Home Depot, Procter & Gamble and Verizon Communications. It doesn't look like an average, however, as it has recently been hovering around 17,000, and none of its component stocks is selling for anywhere near $17,000 per share.
Here's the catch, though: The shares, on average, actually would trade in the neighborhood of $17,000 -- if they'd never been split, issued dividends, or undergone major changes such as spin-offs or mergers during their tenure in the index.
Thus, to arrive at the index number, the stock prices of the 30 component stocks are added together, and then divided by the "divisor" (which is adjusted frequently and was 0.15571590501117 last time we checked). To understand how each stock affects the average, know that if, say, McDonald's falls by 2 points, you can just divide 2 by the divisor and learn that the DJIA will fall by 12.84 points (2 divided by 0.15571590501117 equals 12.84).
If I buy shares of a stock after its "date of record" for a stock split, but before the actual split, will I get the additional shares?
A.P., Norwich, Connecticut
Yes. The person who gets the benefit of the split shares is one who owns those shares on the day of the actual split, the pay date. As long as you're holding the stock when it splits, you'll get your due. The record date is mainly for accounting purposes.
I trace my roots back to a London shopkeeper in 1833, and my full name reflects a 1907 merger. As of last year, I employed about 92,000 people and produced more than 3 million barrels of oil equivalent daily. I have interests in about 30 refineries, 1,500 storage tanks and 150 distribution facilities, and my market value recently topped $250 billion. I'm busy in upstream and downstream activities, including deepwater drilling and fracking. I have a mollusk for a logo and am headquartered in a country known more for tulips than oil and natural gas. Who am I?
Last week’s trivia answer: Republic Airways
MY DUMBEST INVESTMENT
Choppy international waters
I invested in two Chinese companies, and it turned out that both cooked their books, producing phony financials, before stopping all communications. I found the Chinese securities-oversight agencies totally useless in policing these companies, leaving American investors helpless when it comes to protecting their investments. I am now, and will always be, wary of Chinese investments.
John B., online
The Fool responds: It's good to diversify your investment portfolio geographically, but you need to do extra due diligence with foreign companies. Few countries have financial reporting standards as robust as the United States, where publicly traded companies must file quarterly reports with the Securities and Exchange Commission (SEC). That doesn't prevent all wrongdoing, but it helps.
One way around some of these issues is to invest in American companies that generate much of their revenue abroad -- or to stick to internationally focused mutual funds. Some good news: A set of International Financial Reporting Standards is being adopted by more and more countries, making investing in their companies a bit less risky.
American economic history
Books about American economic history might not be high on your summer reading list, but many are fascinating, offering insights into how America became the powerhouse that it is. Here are a few to consider:
• "Alexander Hamilton" by Ron Chernow (Penguin, $20): Thomas Jefferson and Alexander Hamilton offered competing visions for America's economic future. Jefferson envisioned a nation of decentralized communities with the independent farmer as the ideal. Hamilton foresaw a rapidly growing nation based on modern industries and a strong central government. Hamilton's vision won out in the end. This biography is a fascinating and readable account of the underappreciated founding father.
• "The Peculiar Institution: Slavery in the Ante-Bellum South" by Kenneth Stampp (Vintage, $17): Published in 1956, this work has been described as one of the most influential books in modern history. Prior to Stampp, the conventional view of slavery suggested that it was a somewhat benign institution that might not have been all that profitable. Stampp, however, showed that the "peculiar institution" was actually quite harsh and extremely profitable.
• "The Frontier in American History" by Frederick Jackson Turner (Digireads, $10): Frederick Turner declared in 1893: "Up to our own day American history has been in a large degree the history of the colonization of the Great West. The existence of an area of free land, its continuous recession, and the advance of American settlement westward, explain American development." This was a highly original idea at the time, and the "Turner thesis" has been very influential over the years. Anyone interested in American history should become familiar with his ideas.
Next week we'll offer a few additional titles, focusing on more recent years.
THE FOOL TAKE
A stock for risk-takers
Some stocks almost always seem overvalued, and yet they keep beating expectations and rising further. So far in its short life, Facebook (Nasdaq: FB) has been one of those stocks. Its future is far more uncertain than that of familiar blue-chip companies such as carmakers and banks, but at recent prices, Facebook shares are intriguing for long-term investors who can stomach some risk.
The company's price-to-earnings (P/E) ratio seems steep at 81, but its P/E based on next year's expected earnings is a more reasonable 37. That's still steep, but less so when you consider that Facebook is growing like gangbusters, with its revenue for 2014's first quarter up 72 percent year-over-year (to $2.5 billion) and earnings nearly tripling. Its net profit margin tops 20 percent, it generates more than $3 billion in free cash flow annually, and it boasts more than $12 billion in cash, with no long-term debt.
The PC market has been weak in recent years, while the mobile arena is exploding, and Facebook is changing with the times, recently generating more revenue from mobile visits than desktop ones. (It sports a billion monthly mobile users!) It still has risks, though, such as falling out of favor with users, or initiatives such as video advertising proving ineffective. It has some deep-pocketed competitors, too. (The Motley Fool has recommended Facebook and owns shares of it.)
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