John Prestbo, editor and executive director of Dow Jones Indexes, spoke with JLN’s Jim Kharouf about his start in journalism with The Wall Street Journal, his experience with Dow Jones Indexes and his hobby, painting.
Q: You’ve been around the markets for more than 30 years, what would say have been the biggest changes in the markets during that time?
A: Electronic trading would have to be at the top of the list. Trading happens a lot faster and a lot cleaner than it used to. Commissions are a lot lower. That’s another way of saying that competition has increased considerably. It’s a much leveler playing field than it was – not completely level just yet – but much more so than in 1964 when I graduated from Northwestern University and went to work for the Wall Street Journal in Chicago.
And generally speaking there is a big change for individual investors, who now have a much bigger role in the market. They’ve come to realize that they need to take care of their own retirements, college tuitions and big payment issues themselves. And they cannot borrow their way to prosperity, so they have to invest. So it has shifted from strictly institutional to a duopoly of investors.
Q: The flow of information has changed as well with the Internet, 24-hour news and business news networks…
A: It’s a gusher. That’s what it looks like information-wise these days. But the choices put an even bigger burden on the recipient to discern which is reliable and trustworthy. There are so many choices now that if you don’t pay attention to the source of your information, you’ll get burned.
But there is also far more disclosure on the part of corporations these days than back in my youth. One of the big cases back then was the SEC v. Texas Gulf Sulfur Co. (in 1968) when they found a large deposit but didn’t disclose it. But insiders were aware of it and were carefully buying up the stock. So that case led to greater regulatory demands for disclosure, which has benefited everybody. So there is a lot more “official” information for investors to sift through.
Q: You started as a reporter in 1964 covering food, agriculture and commodities in Chicago. What is your view on financial journalism and markets coverage today?
A: It’s gotten a lot more sophisticated as the markets have gotten more sophisticated. The Wall Street Journal took a more generalist approach, explaining things such as Fed Funds, when we used the term. We had to assume that people reading us were intelligent, but were not necessarily specialists.
But the New York Times and Washington Post have become more sophisticated as well in writing for that generalist audience. So news and commentary has risen in that sphere. That’s been one of the factors leading to more investor participation.
Q: Of course, indexes have become increasingly important and integrated into markets and investments over the years. What has been the result of the rise of indexes over the past several decades and where is it going?
A: It’s been quite a ride. Indexes have always been around but were generally used for general trends. Now we have a proliferation of investment vehicles based on indexes that attempt to duplicate the performance of indexes. So there has been a great increase in the role of indexes in the investment measurement, selection and decision making. Am I glad for that? You bet. Our little outfit grew to become quite a sizable operation.
I see it growing even bigger because I think we’re entering, after the dot com bubble and credit crisis, a period of belt tightening on an economic level but not on an investment level. We’re making choices with far more appreciation for potential risk.
Q: What types of indexes do you see gaining the most popularity going forward?
A: Let’s distinguish between growth and use. The broad benchmarks are pretty well established. The growth areas are going to be more specialized. We’ve already seen that trend start and progress. We’ll see a lot of so-called strategy indexes, which track a specific style or approach to investing. We’ve seen a few of those already and we’ll see more of that.
We’ll also see, much more slowly but more significantly, new asset classes coming in. We’ve already seen a bit of that with the residential housing index, which S&P has. But that depends on data and other infrastructure that needs to be built. But the investment menu is going to grow.
Q: Dow Jones Indexes has been in the process of looking for a buyer. Can you give us an update on where things stand with that?
A: Negotiations are underway. I don’t participate in them.
Q: For someone who has devoted so much of his career to Dow Jones, what does a potential sale mean to you personally?
A: On the one hand, it’s disappointing that it probably won’t continue as part of Dow Jones. Although, it’s possible there won’t be a sale too. On the other hand, the new ownership of Dow Jones is focused more on The Wall Street Journal and their publications. Therefore, we’d have to fight along on our own.
So maybe being part of a company with indexing closer to its core business makes sense. In that regard, it kind of opens up new opportunities.
Q: When you think about an index, what is the first thing that goes into starting one?
A: The very first question is, what is it for? What is it supposed to do? You’d be surprised how many index ideas are tossed our way that don’t seem to have any purpose other than to make their creators money, they hope. But an index has to have an investment purpose.
And then the next question is, is that a legitimate investment purpose? Some indexes have sliced the baloney pretty thin. You have indexes tracking companies that might have cancer cures someday. I don’t think that’s a legitimate investment purpose, so we didn’t do that.
After that, it boils down to technical and mathematical things. What are you going to measure? That is stock prices usually. So then how do you select the stocks? And how do you weight the stocks? Those are really the only two moving parts in an index.
Q: You paint as a hobby. What do you paint and do you see any correlation between painting and creating indexes?
A: I’m taking oil painting classes now, but I’ve painted in water color, pastel and colored pencil. So I’ve tried a variety of mediums and would like to become adept at all of them because certain subjects are more readily achieved through this medium or that one. I do landscapes, teddy bears, all types of stuff. I’ve been painting since 1975.
Any correlations? Well, yes. Some things are worth painting and some things aren’t, just like indexes. You start as the same basic level. It becomes instinctual after awhile. At the beginning, you start with, what is this and what do we do with it?