Charles Dow’s Theory Still Valid for the 21st Century
Every day we hear about the Dow rising or falling, but we may not stop to think who Dow was, what the Dow averages are all about and what the implications might be.
I’ll start with who Charles Dow was and then how his theory, which has served so well for over 100 years, can still be used in the 21st century as a guide to timing the stock market and making money from it.
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Dow Theory Origins and Background
Charles Henry Dow was born in November 1851 on a farm in Sterling, Connecticut. At the early age of 18, he began his career as a reporter and developed an early interest in business. Subsequently, he and his friend Edward Jones formed Dow Jones & Company in 1882. They published the handwritten Customer’s Afternoon Letter, precursor of The Wall Street Journal, with Dow as its first editor. It was not until May 26, 1896, that the Dow Jones industrial average was born with 12 “smokestack” companies. A year later, a separate average began to keep track of the railroad stocks, which were the primary transportation mode of the day. Both averages have been expanded over time, with 30 stocks now in the industrial average, and the rail average (renamed the transportation average) expanded to include airline, air freight, delivery service, marine transport and trucking companies.
Dow saw the stock market and his idea, yet to be named by others as the “Dow Theory,” as a barometer of business activity. He recognized that if the stocks in his averages were going up, that pointed to future business being good, and vice versa. On January 31, 1901, Charles Dow compared the stock market to the tides of the ocean when he wrote in The Wall Street Journal: “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.”
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