THE "DOW THEORY" CON! PART 1 presented the professional history of Charles Henry Dow
Readers, Traders, Investors, lend me your eyes; I write to resurrect Charles Henry Dow, and to bury those
who have taken the name of Charles Henry Dow in vain!
Welcome to 2nd Part of THE "DOW THEORY" CON! Series
"Among history’s interesting ironies is that of the journalist who is famous for his numbers, not his
words. Charles Henry Dow, founder and first editor of The Wall Street Journal, invented the Dow Jones Industrial Average.
It became the most widely quoted indicator of the US stock market and not just within the United States but around the world.
This chapter relates how it became a global icon of equity investing long before it was permitted to be the basis of indexed
investment vehicles. " John Prestbo
Who is John Presbo, and what makes him an absolute authority on Charles Dow, and the articles that Charles
Dow wrote for the Wall Street Journal?
John Prestbo is editor of the Dow Jones Global Indexes and has responsibility for the development of new indexes
for Dow Jones & Company. He is also markets editor of The Wall Street Journal. Since joining the Journal in 1964 as a
reporter in the Chicago bureau, Mr. Prestbo has held various positions including, commodity news editor in New York and assistant
managing editor and bureau chief in Cleveland. He was appointed vice president/editorial director of Dow Jones Radio 2 in
1981.
He returned to the Journal as markets editor in 1983. He worked on the January 1993 launch of the Dow Jones
World Stock Index and in April 1993 became its editor. In July 1996, the World Stock Index group was renamed Dow Jones Indexes.
Mr. Prestbo has co-authored numerous books, including News and the Market; Barron’s Guide to Making Investment Decisions
and The Wall Street Journal Book of International Investing. In 1999, he edited The Market’s Measure, an Illustrated
History of America Told Through the Dow Jones Industrial Average, published by Dow Jones Indexes. Mr. Prestbo received a bachelor’s
and master’s degree from Northwestern University.
"Charles Dow is one of Wall Street’s most significant legends for two very significant reasons- he created
our financial bible, The Wall Street Journal (WSJ), as well as our first market barometer, the Dow Jones Averages. He is also
the father of technical analysis. Ironically, Dow went relatively unnoticed for his achievements and died quietly at the age
of 51 in his modest Brooklyn apartment in 1902---years before he was credited with revolutionizing the way we now talk about
the stock market."
The Dow Theory Project
Charles Dow’s observations about stocks, and stock averages!
"Dow used his averages to study the markets, and he wrote about his findings in a series of editorials that
began in 1899. He found cycles in market behavior, just as he had in the economy. For these observations alone Dow is sometimes
identified as the "father" of technical market analysis, which focuses on price movements and trading volume to discern patterns
that more or less repeat themselves. But he was equally attentive to "fundamentals" such as dividends and, for railroads,
car-loading statistics, which provided insight into the economic and financial trends that the market was reacting to. His
writing style was stiff by contemporary standards, but occasionally he transcended the particulars and set down vivid metaphors
of how these invisible forces worked. One example comes from the Journal of January 31, 1901:
A person watching the tide coming in and who wishes to know the exact spot which marks the high tide,
sets a stick in the sand at the points reached by the incoming waves until the stick reaches a position where the waves do
not come up to it, and finally recede enough to show that the tide has turned.
This method holds good in watching and
determining the flood tide of the stock market. The average of twenty stocks is the peg which marks the height of the waves.
The price-waves, like those of the sea, do not recede at once from the top. The force which moves them checks the inflow gradually
and time elapses before it can be told with certainty whether the tide has been seen or not." John Prestbo
"In a series of stunning editorials for the Wall Street Journal at the turn of the century, Dow laid out the
foundation of his own theory on the stock market. Among them were:
The market is always to be considered as having three movements, all going on at the same time.
The first thing to consider is the value of the stock in which the speculator proposes to trade, the second
the direction of the main movement, and the third the direction of the secondary movement (i.e. stocks fluctuate together,
but prices are controlled by values in the long run).
There are three phases to both a primary bull market and a primary bear market (not to be confused with the
three movements mentioned above).
The formation of a "line" in the averages indicates accumulation or distribution
The market represents a serious well-considered effort on the part of far-sighted and well-informed men to
adjust prices to such values as exist or which are expected to exist in the not too remote future.
The method of making money in stocks, according to Dow, was to study basic conditions and exercise enough
patience to capture the major movements." Henry To
General market observations by Charles Dow
An investor "who will study values and market conditions, and then exercise enough patience for six men, will
be likely to make money in stocks"
"that nobody in the world knew everything-but, that the price movement of the averages did because they represent
the aggregate knowledge of all investors"
Dow was the first known observer to note that "the price trend is not saying what the condition of business
is today, but what it will be months from now"" Henry To
We can see from the evidence shown above that Charles Dow was the Father of investment market analysis. His
observations were irrefutable then, and still are irrefutable.
We are saddened to realize that this keen observer of human nature, and the stock market, was never acknowledged
during his lifetime.
We find it reprehensible that so many second raters crawled out from under the rocks after Charles Dow’s death, claiming expertise
in Charles Dow’s Theory (he didn’t have a theory).
They then went further, claiming the "Downess" of concepts that they made up.
The most obvious of the deceptions was the creation of the Confirmation of the Averages.
Charles Dow said no such thing!
The myth of the Confirmation of the Averages rule was created by William P. Hamilton.
Even stranger is the fact that "although Hamilton did more any other one person to legitimize it, he apparently
did not coin the phrase "Dow Theory" to summarize Dow’s collective market observations and analysis. For that matter
neither did Dow, who made no claims to advancing a "theory" of market behavior. The phrase seems to have appeared first in
1903 in The ABC of Stock Speculation, published by S. A. Nelson as part of Nelson’s Wall Street Library series. (That
book, which quotes Dow extensively, also is available to present-day readers.) In 1921, a reader wrote to the Journal to complain
that he had followed the Dow Theory but hadn’t made any money. An editorial, presumably written by Hamilton, replied
that the Dow Theory was a barometer of market, not a guide to gambling in it. However, the Journal thereafter avoided using
the term "Dow Theory" except to repeat the barometer metaphor. Disciples from outside Dow Jones & Co. picked up the Dow
Theory banner and carried it forward to the present day, notably Robert Rhea and Richard Russell." John Prestbo
"That his legacy, the industrial average, is the "language" people everywhere use to describe what the US
stock market has done, is doing and will do surely would astonish Dow. He probably would be pleased and dismayed in equal
measure – proud that his creation still monitors the mighty engine of US economic growth into the Twenty-First Century,
but upset that the average’s outward show of statistical precision is used by some to lend credence to their stock-promotion
schemes. There’s no evidence in Dow’s market commentary (and he kept no diary nor wrote any letters revealing
his private thoughts) that he regarded his average as anything other than a device to assist in probing and dissecting the
nature of the market." John Prestbo
PART 3 will introduce the intellectual heirs of Charles Dow, and the incredible contributions they made to
build on the work of the great man, Charles Dow.
We must again thank John Prestbo, and the other authors that have provided the historical facts about Charles
Dow, and the ‘Dow Theory".
"We are like dwarfs sitting on the shoulders of giants. We see more than they do, indeed even farther; but
not because our sight is better than theirs or because we are taller than they. Our sight is enhanced because they raise us
up and increase our stature by their enormous height" Bernard of Chartes
Part 3 of THE ‘DOW THEORY" CON! series will present explosive and irrefutable proof that the so-called
DOW THEORY was refuted over 80 years ago! Coming soon!
Wayne N. Krautkramer Onlypill@cox.net https://onlypill.tripod.com/toolsofthetrade
