Four New Stocks Give the Dow High-Tech Makeover.

NEW! Improved! Fast Acting!

That's what we would be reading if the Dow Jones Industrial Average were a laundry detergent or dishwasher soap.

But it isn't. The Dow is the figure we hear on radio and TV to give us a general notion of how the stock market is doing. Comprised of 30 major industrial stocks, it was once a key indicator for the performance of our economy.

Now four "old economy" stocks -- Chevron, Goodyear, Sears and Union Carbide -- have been removed and four major "new economy" stocks have been added -- Home Depot, Intel, Microsoft and SBC Communications.

You can see the nature of the change by comparing the growth and return statistics for the four companies. While Chevron, the best performing of the old stocks, grew its earnings at a 12.6 percent annual rate over the last three years, Microsoft grew its earnings at 48.9 percent a year -- four times as fast. Even Intel, the "worst" performing of the new stocks for which earnings growth can be calculated, grew its earnings at nearly 20 percent a year.

As earnings go, so go the market returns. While SBC Communications, the "worse' performing of the new stocks, provided a total return (price appreciation plus dividends) of 23.38 percent a year, the best of the old stocks provided a return of 19.12 percent. Investors in both Sears and Goodyear would have done better in a five-year Treasury note -- their returns were under 6 percent.

The fading of the old industrial economy is even more visible when you compare total market value for the eight stocks. Those that have left are worth a mere $85.1 billion while those entering are worth nearly a trillion dollars -- $946.7 billion. All four of the new stocks are among the 25 most valuable companies in America. Goodyear, on the other hand, is way down the list. It's $6.4 billion market capitalization ranks 343rd. Venerable Sears ranks 212th,

while Chevron, the most valuable of the old economy stocks, ranks 50th.

What has the shifting accomplished?

With these changes the Dow will be more broadly representative of the working economy. One indication comes from the Leuthold Group, which compared the sector compositions of the old Dow and new Dow with the Standard and Poor's 500 Index in their November communication with clients. While the old Dow was only 13.6 percent technology and telecommunications, the new Dow is 23.3 percent. It still trails the 32.8 percent concentration of the S&P 500 index.

The Dow Industrial Average is still a limited list compared to the much broader S&P 500. While many warn that the S&P 500 is no longer representative of an economy with more than 6,000 traded issues, and that its value is highly concentrated in a handful of the largest stocks, the warnings miss a fundamental fact of life.

Concentration is a virtual certainty. Indeed, economist Vilfredo Pareto observed just over a century ago that income and wealth are concentrated as if by nature. Basically, the top 20 percent tend to control 80 percent of sales, income, wealth -- you name it -- while the bottom 80 percent fight over the remaining 20 percent of the same measure. That's the way it is.

Significantly, the 600 most valuable stocks account for 85 percent of the total market value of the largest 3,000 stocks.

Bottom line: the Standard and Poor's 500 Index remains a good measure of market performance and a convenient tool for the passive investor.

Why? The S&P 500 Index captures most of the value creation capability in America.

New Trends

There are two great but polar trends in investing.

One is investing in index funds because they have so regularly done better than professionally managed funds. Whether you are measuring the last three-,five-, 10- or 15-year periods, the Vanguard Index 500 fund has beaten about nine out of 10 professionally managed domestic stock funds.

The superiority of low-cost index investing is so stunning that it makes the task of selecting managed funds look ridiculous.

There is, however, another trend: competing with professional managers. The same failure of professional managers has also given rise to self-management. As Jon Markman, managing editor for the Microsoft Investor Web site and author of "Online Investing" (Microsoft Press, $24.99), puts it:

"The digital age has improved and simplified few spins of the life cycle more than the task of investing. I'd argue that human relationships aren't better on the Net, and neither are sports, art or religion. Yet finding and rapidly assimilating financial acumen is the kind of computational endeavor that is actually better accomplished on the Internet than on paper, on the telephone or in person."

The only question is, how do you learn enough to become your own portfolio manager? The answer is simple: Buy his book and read it. It will cost you less than one commission at a major online brokerage firm.

The last year has seen a flood of books on day trading, investing in technology, and investing in the Internet. We've also had about two years of "guides to investing on the Internet." Most of these books are clumsy, ill-conceived grab bags -- the kind of dimwitted catalogs that make me wonder whether the book publishing industry deserves to live.

Markman's book is different. While it provides a virtual encyclopedia of Web sites, it starts with the models he uses for creating the portfolios that are tracked on the Microsoft Investor Web site. From screening and selecting 10 stocks for a year, to changing the portfolio on a monthly basis, his results will get your attention. (Recently, his high-turnover monthly portfolio had provided a gross appreciation of 588 percent -- for this year. With appreciation like that, you can afford tax inefficiency.)

From there he branches out and leads you through every aspect of gathering information on investments.

Read the book -- treating it like an easy textbook -- and you have an at-your-side guide to finding and using investment information. Read it alone, and you can learn before you go to the computer. Then keep it next to your computer as a guide.

I'm willing to bet that a lot of people may want to manage their own portfolios, and that the Internet has made the economics of managing your own money compelling.

So you ought to learn how.

Scott Burns is a syndicated financial columnist. Jane Bryant Quinn is on vacation.