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TOOLS OF THE TRADE

THE "DOW THEORY" CON PART 1














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Charles Dow never had a Dow Theory! Charles Dow never wrote a book, or a pamphlet.

Charles Dow’s entire collection of market observations appeared as editorials in his publication from the Dow, Jones, & Company.

This series will accumulate the historical evidence from many reliable sources that will prove that the " DOW THEORY" is a con. Our sources include the people who definitely know the history of the Dow Jones numbers, and Charles Dow’s work.

We will present the evidence and you, the readers (our trusty jury) will determine the verdict. You will find that the time and effort you spend reading this series will be profitable for you! You will also be introduced to a number of brilliant analysts that the modern salesman/broker/financial writer would rather that you never knew about!

Let us begin PART 1 of this series.

Who was Charles Dow?

Charles Henry Dow was typical of the individuals who created the original financial markets of the US.

Independent of thought, confident of their ability to formulate correct conclusions from their observations of the world, generally from working class families, most being recipients of only a rudimentary education at best, and all seemingly oblivious to their inferior education, status, and lack of advantages. This was the American of the 1850-1920’s!

"Charles Dow was born November 6, 1851, on a farm near Sterling, Connecticut. His father died when he was six, and his mother saw to it that he attended the one-room schoolhouse to gain a basic education. At age 16, he set out on his journalism career, beginning at a weekly newspaper and moving up to dailies in Springfield, Massachusetts, and Providence, Rhode Island. His reporting reflected an interest in history and economics, which attracted the attention of a group of financiers that were interested in the silver rush at Leadville, Colorado, in the late 1870s."

 

This is origin of the man who did the "key" research for what would later come to be called "The Dow Theory" by unscrupulous stock promoters who wanted to make their sales pitch appear legitimate.

Charles Dow’s professional career!

"Thus did "Charlie" Dow become fascinated with business, finance and investment. Not surprisingly, when he headed back east after the mine trip he went to New York rather than returning to Providence. After a stint on the New York Mail and Express, he joined the Kiernan News Agency, which gathered news on Wall Street and distributed it by means of handwritten bulletins on thin paper known as "flimsies," which messenger boys scurried to deliver to clients throughout the day. He persuaded John Kiernan to hire a journalist friend from Providence, Eddie Jones, and before long the two were talking about starting their own news company. They did so in 1882, in large part with the financial help of a frugal Pennsylvania Dutchman named Charles Bergstresser, who also worked at Kiernan. Mr. Bergstresser was content to be a "silent partner" as well as a working journalist at the new Dow, Jones & Company.


While Jones and Bergstresser handled the "hard," breaking news, the professorial Dow began writing analytical pieces that were a new contribution to the Wall Street scene. He had two basic topics, the economy and the market, and he tended to view any other subject such as politics through those prisms. These pieces became more substantive as Dow Jones evolved from a bulletined news service into a newspaper publisher, first of the Customer’s Afternoon Letter in 1883 (basically a compilation of the day’s "flimsies") and then of The Wall Street Journal, beginning in 1889." By John Prestbo

"One further indication of Dow’s intimate familiarity with the Stock Exchange and the financial matters related to it is at least partially evidenced by the fact that for several years he personally was a member of that exclusive institution. The exhaustive research undertaken by Dr. George W. Bishop, Jr., in his effort to uncover every possible shred of information available regarding Charles H. Dow and the "Theory" which bears his name, reveals that, "on Christmas Eve, 1885, Dow became a member of the New York Stock Exchange and remained one until April 30, 1891, when the firm dissolved. Dow is not listed as a partner in the successor firm, Robert L. Goodbody & Company." "by Perry Greiner, 1963

 

Charles Dow hones his skills !

Charles Dow was a keen student of market behavior, and utilized his position as a financial journalist, and floor broker on the NYSE to observe successful traders, and to determine what they did to become winners in a game that most lose.

"After the founding the Dow, Jones, and Company, "the professorial Dow began writing analytical pieces that were a new contribution to the Wall Street scene. He had two basic topics, the economy and the market, and he tended to view any other subject such as politics through those prisms. These pieces became more substantive as Dow Jones evolved from a bulletined news service into a newspaper publisher, first of the Customer’s Afternoon Letter in 1883 (basically a compilation of the day’s "flimsies") and then of The Wall Street Journal, beginning in 1889."

"Dow needed something to represent the stock market in his analytical dissections of the economy and investor behavior. His simple solution was selecting several actively traded stocks and averaging their closing prices from time to time. He first used this device in the Customer’s Afternoon Letter of July 3, 1884, citing the average of eleven stocks, nine of which were railroads. Readers didn’t quarrel with Dow’s methodology, but they complained that he didn’t include enough stocks in his average, grumbling that echoes through the decades to today. Over the next three years he experimented with averages consisting of twenty and then thirty stocks. Then he noticed that however many stocks he was tracking, his averages all portrayed the important advances and declines in the market. The key wasn’t the number of stocks but selecting truly representative ones, which is equally true now."

"Though railroads were the mammoth corporations of the day, and thus dominated Dow’s early averages, he had his eye on a new, budding segment of the market: industrial companies. He observed, as he had in Leadville, the combining of smaller, proprietor-owned and family-run businesses into sizable corporate entities that sooner or later offered shares to public investors. He understood that this trend in time would create an industrial sector big enough to be the primary engine of US economic growth in the fast-approaching Twentieth Century. In the meantime, however, he couldn’t find more than two or three industrial stocks that attracted investor interest of the magnitude the railroads commanded."

We must realize that the railroads were the "market" in the late 1800’s, To talk of the Dow Transports confirming the Dow Industrials would have been absurd, as the Railroads were the market! Charles Dow couldn’t find enough industrials to put in an average! Later the Industrials gained prominence over the Railroads as the economy evolved (changed).

"The probable activity and possible investment value of US Steel will attract new attention to industrial properties," Dow wrote on the eve of adding the new giant’s stock to his industrial average. In time, he prophesized, "trading in railroad stocks will decrease and the industrial market will become the great market in Wall Street"

Charles Dow had already prophesized that trading in the railroad stocks would wane! Charles Dow knew that a company’s significance for inclusion into his average was its contribution to the economic machine!

Imagine Charles Dow’s shock to discover that a hamburger slinger (McDonalds), a big soda fountain franchise (Coke), some retailers, a big movie producer, and a bunch of golf course hustlers (insurance salesmen) are in the Dow Industrial Average. Despite this obvious reality, the Dow Theorists continue to demand confirmation by the Dow Transports.

They might be better off using student loans approved for the Apollo Group (APOL) customers, the new customer bookings at the Corrections Corporation of America (CCA), and the weekly sales at Starbucks, Krispy Kreme and Blockbuster Video. This group must be confirmed by the weekly lap dances produced report, the take at the local casinos, and the weekly Lotto sales report.

The great Charles Dow could foresee a time when the Industrials would supplant the Railroads, but his alleged students can’t see the lap dance in front of their noses! They seem adamant that the Transports must confirm the Industrials for a move to be valid.

 

"There is always a disposition in people’s minds to think the existing conditions will be permanent. When the market is down and dull, it is hard to make people believe that this is the prelude to a period of activity and advance. When prices are up and the country is prosperous, it is always said that while preceding booms have not lasted, there are circumstances connected with this one, which make it unlike its predecessors and give assurance of permanency. The one fact pertaining to all conditions is that they will change." Charles Henry Dow

 

We are deeply indebted to John Prestbo for the information about Charles Henry Dow’s history.

 

 

 

Wayne N. Krautkramer onlypill@cox.net http://onlypill.tripod.com/toolsofthetrade/id36.html

 

 


















"THE THING THAT HATH BEEN, IT IS THAT WHICH SHALL BE; AND THE THING THAT IS DONE, IS THAT WHICH SHALL BE DONE; AND THERE IS NO NEW THING UNDER THE SUN"

The basic tool for the manipulation of reality is the manipulation of words. If you can control the meaning of words, you can control the people who must use the words. Philip K. Dick