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Originally published Saturday, June 28, 2014 at 8:00 PM

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The Motley Fool: Every Sunday, useful tips on investing


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Q: How is the “the Dow’s” daily value calculated?

A: 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 spinoffs 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).

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. Before 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.

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.



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