The Wild World of Unusual Indexes

September 13, 2005

When I think of indexing, I think of the S&P 500, the Dow Jones Industrial Average and other financial stalwarts. But there are indexes out there for everything, from the price of fine wine to the likelihood of the Apocalypse.

 

When I think of indexing, I think of the S&P 500, the Dow Jones Industrial Average and the Russell 2000. I think of men and women in pin-stripes suits, crunching numbers and extolling the virtues of passive investments.  I think of Jack Bogle.

But the indexing world covers more than just stocks and bonds; it covers everything from the price of fine wine to the likelihood of the Apocalypse.  There are indexes out there for everything - the unique, the fun, and the just plain weird.  As an indexing aficionado,  I collect these "oddball" indexes in a file on my computer.  Here are some of my favorites..

(Got a good oddball index of your own?  Send it to [email protected].  If I get some good ones, I'll post them to the site in a future article.)

The Fine Wine Index

The idea of investing in wine is nothing new.  We all hear stories about the 1961 Cheval Blanc bought en primeur forty years ago for a dollar, which now fetches $950/bottle at Dee Vine Wines in San Francisco.  That's a 16.86 percent compound annual growth rate, for those of you keeping track.

But these exciting stories of drinkable multi-baggers tell only half the tale.  It's one thing to says that the 1961 Cheval Blanc was a good investment - but what if that was just the Microsoft of its era?  How does "wine" writ large perform?

That's where indexes come in.  An Australian wine and auction house called Langton's, a has been tracking the price of fine Australian wines since 2002.  Their Langton's Fine Wine Index (LFWI)  tracks repeat auction sales for 28 popular "ultra fine" Australian wines chosen from the best five vintages in recent Austrailian history.  The index reminds me a great deal of another auction-price index, the Mei-Moses Fine Art Index, which applied a similar approach to the world of art investing.

The LFWI is production and sales weighted - that is, wine styles are held in proportion to their importance in the Australian market. Currently, the varietal composition is 39% Shiraz, 32% Cabernet, 14% Chardonnay, 7% Cabernet-Shiraz, 4% Pinot Noir and 4% Riesling. Individual wines are equal-weighted, and rebalanced yearly.

After peaking in 2000 during the dot.com boom, the index has traded flat for the past five years. Investors searching for quaffable returns would have been better off tracking Langton's 1990 Shiraz Index, which tracks the price of eight bottles from that legendary vintage, and is up almost 70 percent over the same timeframe. 

Footballing Index

One of the reasons I love the fine wine index is that, well, I love wine (fine or not).  Another thing I love is football - or soccer, as we call it here in the States.

Fortunately, I can get my indexing fix for footballing, too, thanks to the Dow Jones STOXX Football Index, which tracks the performance of all the publicly-traded football clubs in Europe.  The index includes twenty-nine clubs from eighteen European countries (including Turkey), ranging from massive clubs like Juventus (Milan, Italy) to relative small caps like the beloved Hearts of Midlothian (Edinburgh, Scotland).  The index is free-float weighted, with component weights capped at ten percent. 

One thing I know from being a soccer fan is that watching the sport can be heartbreaking; I still think the U.S. were the better team in the 2004 World Cup quarterfinals.  But as it turns out, investing in soccer is even worse.  Over the past five years, the Dow Jones STOXX Football Index has posted annualized losses of 19.71 percent/year.  Now you know why you never hear of David Becknam negotiating for more stock options.

For investors with a value bent, the terrible performance of the football index presents an opportunity.  Based on current figures, the index trades at a stingy price-to-sales ratio of just 0.69, and even offers a dividend yield of 1.69 percent.  Still, with negative net average earnings and a price/book ratio of 1.72, your probably better off punting your money on the next big game at Ladbroke's.

Alternatives to the GDP

GDP, or gross domestic product, is one of the most closely watched of all economic statistics - and one of the most important "indexes" that exists. But the figure has come under attack over the past decade from a number of critics who argue that it is a mis-measure of economic progress. 

The movement got started in 1995 when three researchers penned a seminal article in the Atlantic Monthly entitled "If The Economy's Up, Why Is America Down?"  According to the researchers, the GDP fails to measure real economic progress by counting things as "productive" that are really detrimental to daily life.  A parent who stays at home with their child contributes nothing to GDP, for instance, while one who works a 10-hour day is a boon because they have to pay for day care. A person who smokes (buys cigarettes), contracts lung cancer (rings up huge hospital bills), divorces his wife (legal bills) and dies (funeral bills) is an economic hero; a healthy married man who runs and eats his broccoli is a big zero.  You get the point.

That article sparked a drive progressives to come up with a better index of economic progress; here are some of the alternatives.

Genuine Progress Index

The alternative proposed in the Atlantic Monthly article is was the Genuine Progress Index (GPI), which is now maintained and calculated by a group known as Redefining Progress.  The GPI takes the basic accounting framework of the old-school GDP but corrects for the old deficiencies: It adds in the economic benefit of household and volunteer work, subtracts the externalities caused by pollution, crime and family breakdowns, and adjusts for income inequality, resource depletion, shrinking vacations, etc.  It also counts "defensive" spending - like car repairs and medical bills - as costs, not as benefits.

Not surprisingly, these criteria paint a different picture of progress in the United States.  The chart below shows that the GPI has stagnated for the past 30 years even as GDP soared.

 

The GPI is appealing in many ways, but the chart points out a core problem with the data.  How do the folks at Redifining Progress explain that "progress" peaked back in the mid-1970s, a time of confusion and economic distress in this country?  They didn't set "Happy Days" in the disco era.

Gross Domestic Happiness (GDH)

Redefining Progress wasn't the first group to propose an alternative to the GDP.  That award goes to King Jigme Singye Wangchuck of the Royal Kingdom of Bhutan, who famously declared in 1972 that "Gross Domestic Happiness is more important than Gross Domestic Product." 

Ever since, the forward-thinking king has ruled his tiny kingdom with happiness in mind.  For Bhutan, that means limiting the number of tourists who can access Bhutan's incredible hiking trails each year, protecting Bhutan's spiritual heritage, offering free education and healthcare for all, etc.  Bhutan's become something of a totem for the sustainable development community.  I can't find a chart of Bhutan's GDH over the years, but I hope they're enjoying a massive bull market in grins.

Human Development Index

The pursuit of an alternative to GDP entered the mainstream in 1990, when the UN began calculating the Human Development Index (HDI)  for all of the countries around the world. Although it sounds positively Orwellian, HDI is a simple measure of quality of life.  It looks at three factors:

·        Life-expectancy at birth;

·        Knowledge, defined as the adult literacy rate plus the combined enrollment ratio in primary, secondary and tertiary schools; and

·        Standard of living (measured by GDP per capita in US dollars).

Each year, the UN publishes a report called the "Human Development Report" which shows what countries provide the best place to live a full, happy life. According to the 2005 report, Norway, Iceland and Australia top the list, with the U.S. coming in a distant tenth; at the bottom of the barrel are Burkina Faso, Sierra Leone and Niger. 

Bhutan, in case you're wondering, comes in 134, just below Lao and a shade above Pakistan.  Clearly, happiness doesn't enter into the U.N.'s equation.  The full list is available here.

HDI Top Ten

Norway

Iceland

Australia

Luxembourg

Canada

Sweden

Switzerland

Ireland

Belgium

United States

The Misery Index

On the flip side of the equation, let's set aside human development and focus on good, old-fashioned misery.  After all, we have an index for that, too. Created in the mid-1970s by University of Chicago economist Richard Barro, the misery index combines the unemployment rate and the rate of inflation to measure ... misery.  The index was created to capture the impact of the "stagflation," which sapped the American economy in the 1970s even as GDP (and GPI!) were rising.

Largely forgotten in today's era of low inflation and lower unemployment, the misery index resurfaced during the 2004 Presidential elections, when Kerry accused Bush of having "the lowest rating of all time."  That sounded pretty damning, until a number of commentators noted that Kerry had monkeyed with the index: Rather than using the traditional misery index, Kerry nailed Bush for something called the "Middle Class Misery Index."   This nouveau misery index was composed of criteria hand-picked to make Bush look bad: median family income, college tuition, health costs, gasoline costs, bankruptcies, the home-ownership rate, and private-sector job growth. 

Now, I both voted and worked for Kerry, but I didn't like him monkeying with this index. The truth is, Bush II scored fairly well on the traditional misery index: worse than Clinton, but better by far than Bush 1, Reagan or Carter.

The Rapture Index

If this next index is right, we're about to get rid of misery once and for all.  Rapture Ready, an evangelical Christian Web site, has created a "Rapture Index" to measure the coming of Apocalypse.  When the index rises, it means the end is near; as it falls, the Apocalypse slips away.

"You could say the Rapture index is a Dow Jones Industrial Average of end time activity," says the Web site.  "But I think it would be better if you viewed it as prophetic speedometer."

The index is made up of forty-five equal-weighted components, covering all the events that are supposed to presage the end of the world.  They range from floods to volcanoes to the appearance of false Christs to declining moral standards to arms proliferation.  The full list is available here.

Each category is assigned a score of one to five, depending on global events.  The index combines those scores into a single number that presages end-time activity. The index breaks down scores into four categories:

85 and Below: Slow prophetic activity
85 to 110: Moderate prophetic activity
110 to 145: Heavy prophetic activity
Above 145: Fasten your seat belts

In the most recent update, Hurricane Katrina drove an increasing score on "Floods" to push the index to a new, multi-year high.  Unrelated to Katrina, we're also seeing high scores for Plague (4), Global Turmoil (5), Ecumenism (5) and Apostasy (5); Supernatural Events (1), Crime Rates (1) and Liberalism (1) are all weighing on the index. 

Remember, send me your favorite odd-ball indexes. I'll collect them and possibly post an update later this month.

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