Charles Dow: His Last Name Says it All
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By: Ken Fisher
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 age 51 in his modest Brooklyn apartment in 1902 -- years before he was credited with revolutionizing the way we now talk about the stock market.
You could explain "his" theory and its technical applications, but during his lifetime, he never laid out a "Dow Theory," per se. When he first began compiling stock market averages in 1884 -- before the WSJ even existed -- he hadn't established much besides an index with an all-inclusive "index number" by which to measure the stock market. Later he added his intuitive opinions. In fact, the Dow Theory as we know it today was only named and extracted from his WSJ editorials twenty years after his death by other market technicians, like William P. Hamilton.
Standing over six feet tall, yet slightly stooped and weighing over 200 with dark eyes and brows, a jet-black beard, and walrus mustache, ultra-conservative Dow had a grave air about him, spoke with measured speech and was reminiscent of an overly serious college professor. He never raised his voice and often said it took him a full 24 hours to get angry, and once angry, he stayed angry. The professorial analogy is strengthened by the fact that, working during the end of the robber baron era, he never chose to play that game, never tried to make a market fortune for himself; he instead chose, to be a sidelines observer and commentator.
He was born on a Connecticut farm in 1851 and worked odd jobs as a kid. His father died when he was six. When he was old enough to choose his career, he chose to abandon farm life for the pen. Following a scant education, he apprenticed for six years with the influential Massachusetts newspaper, the Springfield Republican. Then he moved to a Providence, Rhode Island paper, where he found his niche in financial writing while covering the mining industry beat.
Having made a modest name for himself, Dow, at 31, next ventured to New York and in 1882, founded Dow, Jones & Company with fellow reporter Eddie Jones. They used second-hand office equipment and worked out of a tiny, one-room office in a ramshackle building at 15 Wall Street, building a profitable news agency. They provided daily financial news updates to subscribers, who were mostly typical Wall Street wags. Printed news was scarce on the Street, and there was a value to being plugged into news sources even if they were little more reliable than the gossip proliferating through the crowd. So, their service was cherished, and the firm grew rapidly within the year. Soon, they started publishing a two-page newspaper called the Customer's Afternoon Letter -- the WSJ's predecessor.
It was in the Letter that Dow first published his average, which he left unnamed. For example, on February 20, 1885, his average was compiled from 14 companies -- 12 railroads and two industrials -- whose closing prices totaled 892.92. Dividing this figure by 14, he came up with 63.78. Since the previous day's close was 64.73, the market was said to be down nearly a point for the day. A more precise observer might have been able to note that it was down 1.47 percent. The index was the first enduring attempt at precise market measurement. The index also gave birth to what would later evolve into the entire realm of "technical" analysis, wherein people forecast future price activity based on pricing history.
The Letter grew into the WSJ, in 1889. Costing $5 for a yearly subscription, 2 cents per copy and 20 cents per line for ads, the WSJ contained four pages of financial news and statistics, including bond and commodity quotes, active stocks, railroad earnings and bank and U.S. Treasury reports. At a time when there were about 35 major stocks and several hundred less widely followed names, an authoritative news source began to create, in effect, a standard by which reality was to be measured. We use the same standard today, published by the same firm. That function alone insures Dow a seat in the financial hall of fame.
Dow was a perfectionist. He worked quietly and intently, using his market averages to pursue his theory of market behavior in a series of editorials between 1899 and his death in 1902. Although he predicted the bull markets of the early I900s, Dow disciples believe the furthest thing from his mind was creating a system of buy and sell recommendations; they say he used his own theory to review market history, not predict future activity. Regardless, his efforts linking past and future pricing activity were the seeds of technical analysis, a field which today involves thousands of investment professionals and a major investment of time and money.
The theories Dow put forth in his succinct editorials are technically described in this book's biographies of William P. Hamilton, Dow's successor at the WSJ and major contributor to the Dow Theory; and Robert Rhea, who transformed Dow's and Hamilton's principles into a system.
It is impossible to think of how the Wall Street landscape would look today without Dow's influence. Whether because of his newspaper or technical analysis via his indexes, the name Dow cannot be separated from the market. Dow lived before the beginnings of "the information age." While no one would create an index today that operates in such a bizarre and inferior manner (coupling just a few stocks and price-weighting), nonetheless, it was a breakthrough for its time.
In a world of computers the Dow seems to be our worst major index, poorly conceived and non-reflective of the typical stock in America. But that is looking at it from our perspective today, on the back-end of an information and electronics explosion. Back then it was an easy-to-calculate index, and price-weighting made more sense because the data required to build market cap and unweighted indexes was not readily available and updatable. And the Dow Series was more complete then, because the few stocks they covered were a higher percentage of the relatively few big stocks traded.
Dow was an innovator, foreseeing what wasn't yet there. Several lessons can be extrapolated from Dow's life. First, is the importance of news and information. Second, the importance of perspective -- something this author feels is increasingly lost in a world that now sometimes seems too bombarded with news, opinions, and media. And finally -- the importance of foresight and the ability to see what wasn't yet in the market, and would be important to the future. If instead of being 100 Minds That Made The Market, this book were focus on only a dozen names, Dow would still be one of them.
Copyright © 2007 Ken Fisher
The above is an excerpt from the book 100 Minds That Made the Market by Ken Fisher Published by Wiley & Sons, Inc.; August 2007;$19.95US/$23.99CAN; 978-0-470-13951-6 Copyright © 2007 Ken Fisher
Author Ken Fisher is best known for his prestigious "Portfolio Strategy" column in Forbes magazine, where his twenty-three-year tenure of high-profile calls makes him the fourth longest-running columnist in Forbes' ninety-year history. Ken is the founder, Chairman, and CEO of Fisher Investments, a multi-product money management firm with over $40 billion under management. His success has ranked #297 on the 2006 Forbes 400 list of richest Americans. He is a regular in the media and has appeared in most major American finance or business periodicals. Fisher also recently authored the New York Times bestseller The Only Three Questions That Count, also published by Wiley.
Ken Fisher is best known for his prestigious "Portfolio Strategy" column in Forbes magazine, where his twenty-three-year tenure of high-profile calls makes him the fourth longest-running columnist in Forbes' ninety-year history.
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