Grant, I put this up on the IPMCF thread in response to a question by Ellis - maybe it would be useful here too.
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Ellis,
The mechanism of how the index is calculated is straightforward --- its significance is a
different matter.
The index is similar to the Dow Utility Index, for example, that looks at companies in a
given industry and creates an index that reflects the composite of the moves of the
different companies that comprise the index. If all the companies move in sync, the
index can really soar (or plummet); if some companies are up and others down, the
index can be relatively constant.
What I did for the "Desert Dirt Indices" was to select the five companies who were
most active in the area, and which were most forthcoming with information, and
combine their share prices in different ways. The easiest to understand is the "Dollar"
version where an equal amount of money was invested in each company as of the end
of 1996, say $200 into each. Then I tracked how that investment would have changed
with time, eg the $1000 declined to $980 by Friday Jan 3, but then rallied since and is
now worth $1419. This was largely due to the increase in the share price of MXAM,
which went from $0.16 to $0.50. IPMCF and GPGI also had some growth over this
time while CHIP and NAXOF declined.
The other indices are similar, except that rather than starting with an equal investment in
each stock, the initial investment is based either on the relative market cap (Number of
shares times share price of each) or using the $1000 to buy an equal number of shares
in each of the five companies. These are the "CAP" and "SHR" indices, respectively.
As to the meaning of the indices, I don't think one can attach too much meaning to any
of them - they are mostly an adjunct to watching the prices of the individual shares
themselves and provide some element of "excitement" or "disappointment" when they
change dramatically. Similarly, what does it mean, in reality, when the Dow goes up
significantly (or down) on a given day? It might be one company dominating the index
or it might be all of them moving in sync in response to some news that affects all of
them, eg an economic report or a move by the Fed to change interest rates.
Don't get too hung up on the "meaning" of the indices, lets just observe and cheer them
on when they show a good increase !! ("Two more weeks" as the Naxos folks say.
<VBG>)
Thanks for your interest, Al |
