Oooh boy. It’s been a wild week in the stock market. With the Dow Jones Industrial Average (the DJIA or the “Dow”) swinging madly up and down several hundred points at a day, 100 year old companies biting the dust and comparisons to 1929 in the wind, a number of family and friends around here grew a healthy crop of gray hair. So while everyone had the daily change in the Dow right on the tip of their tongue, it turns out almost nobody could actually describe what a change in that number really means.

People associate up moves on the Dow with healthy markets, a strong economy, sunny days, bumper farm crops, and who knows what else. Investors assume the Dow is a reliable market indicator, but in reality, the Dow is poorly constructed, tells little and should never be used as a benchmark. I haven’t used the Dow in decades […]. My advice to you is you will see markets better if you train yourself to ignore the Dow for the rest of your life as well.

- Ken Fisher, #271 on the Forbes 400, from his book The Only Three Questions That Count

As you might guess from Ken’s opinion, the Dow itself isn’t exactly a straightforward number, and even the components from which the big number is derived don’t match measure value the way people generally expect. To find out what a change in the Dow means in real dollar terms, you need to understand how it is calculated… And that will lead you directly to Ken Fisher’s conclusion that the Dow is pretty much useless.

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Part of the fun with math is just playing with numbers, but the numbers have to actually mean something to make it interesting. I call these “Math Riffs” as in many respects they’re just stream-of-consciousness runs of calculations, and while thought provoking, meant mostly for entertainment value. They’re the kind of things that I hope provoke a “Wow!” response from my kids, but sometimes I’m sure they’re thinking “Oh no… My Dad’s a geek!” or something similar.  Oh well.

Hurricane Ike from Space

There’s a lot of numbers in my professional field, but they’re nothing like playing with big scary government sized numbers… the National Debt, the Federal Budget, the Gross Domestic Product, the Annual Energy Consumption… What? Last one didn’t ring a bell? Okay, fine… Let’s play!

According to the Annual Energy Outlook, the United States used approximately 73 quadrillion BTU’s worth of energy in 2006.

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