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February 23, 2006

Who Was Charles H. Dow?
by Tim Wood

Last week, Robert McHugh and myself published a joint article on Dow theory. In this article we gave background on the Dow theory, explained that the Secondary Trend is bullish, that the Primary Trend is bearish, briefly explained the concept of Dow theory phasing, where we are in this phasing and unless this time is different, what should follow according to Dow's theory.

Many are familiar with the term "Dow theory," but very few people actually know anything about Mr. Dow himself. In an attempt to give you more background information on Charles Henry Dow and the origins of what has come to be known as Dow's theory, I took the following information from the 1968 Encyclopedia of Stock Market Techniques. This piece was written by Perry Greiner and is a direct quote from the original material. I hope you enjoy the following background on the man himself, Mr. Charles H. Dow. I will cover the background of the great market technicians that directly followed Dow in a future posting.

In any anthology outlining the origin, development and application of what for more than 60 years has been known as Dow's Theory, it would be entirely appropriate to say at the outset that Charles H. Dow, in a very real sense, deserves designation as the father of modern financial journalism. Dow, against a background of reportorial training under two of the outstanding New England newspaper editors of the nineteenth century, transferred his base of operations to New York City from Providence, Rhode Island in 1880.

Following Dow's move to New York, he and Edward D. Jones, whom he had known in newspaper work in Providence, were employed by an organization engaged in gathering and disseminating financial and business news of the day.

As a result of this association: "In November 1882, Dow and Jones left the Kiernan News Agency to form Dow Jones & Company. Jones stayed with Dow in this new firm until his withdrawal on January 9, 1899, but lived for a score more years, dying in Providence in 1920.

"The first office of Dow Jones & Company was located at 15 Wall Street - 'a ramshackle building next door to the entrance of the Stock Exchange.'"

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."

In his book The Stock Market Barometer, William Peter Hamilton touched briefly on Dow's membership on the exchange, explaining that the arrangement was partly at least an accommodation to Mr. Robert Goodbody until he became an American citizen, at which time Dow "returned to his more congenial newspaper work."

With Dow occupying the editor's post, the first edition of The Wall Street Journal, was published on July 8, 1889. From this rather inauspicious beginning The Wall Street Journal subsequently grew to be this nation's foremost gatherer and publisher of authoritative business and financial news, with Dow serving as its editor until his death on December 4, 1902.

It was sometime prior to the publication of the first issue of The Wall Street Journal in which mention is made of various stock averages - ranging in number from 12 to 60 issues - for which prices are given, dating back in one case as far as 1872. The best available information concerning the different series of averages, however, is contained in a book entitled The Dow-Jones Averages that was published by Barron's - another Dow-Jones & Company publication - in the early 1920's. A revised and more comprehensive edition of this book was published in 1946. Evidence derived from this latter source indicates that a 14-stock average was computed for over 10 months in 1885; a 20-stock average was compiled for a part of 1889; a 20-stock average was presented for the years 1890-1896, inclusive, and a 12-share composition was figured for part of 1896.

What these various combinations of indexes seem to imply is that from 1885 onward Dow was experimenting, searching, investigating the precise combinations of averages he was seeking, to depict the underlying trends of the market as a whole. His search evidently was concluded to his satisfaction when the calculation of dual - Industrial and Railroad - averages was initiated at the beginning of 1897. It was from this point, at any rate, that Dow's Theory as it is known today began to crystallize and to take its place in the field of business and stock market forecasting.

As to the biographical data of Charles H. Dow, Dr. Bishop's research discloses that he was born on November 6, 1851, in Sterling, Connecticut, on the homestead inherited by his father from his forebears who in turn "traced their ancestry to Henry Dow, who arrived in Boston in 1637..." The same source reveals that, at the age of 21, Charles H. Dow's first venture into the newspaper field was in 1872 with The Springfield ( Mass.) Daily Republican, edited by Samuel Bowles. In 1875 Dow moved to Providence, Rhode Island, where he was associated with two newspapers before joining the staff of The Providence Journal, of which paper George W. Danielson was the editor. Dow served on the Journal from 1877 through 1879.

During the Summer of 1879, Dow was selected as one of three newspaper men to accompany a group of Eastern financiers and capitalists on an inspection trip to Leadville, Colorado, where the "Silver Rush" of 1879 in some respects rivaled the "Gold Rush" in California 30 years before. Dow's series of five "Leadville Letters," written for The Providence Journal on this excursion to the Rocky Mountain mining town, vividly describes a fascinating era in the conquest and development of the West.

Any student of Western History will find Dow's "Leadville Letters" to be a thoroughly thrilling and dramatic eyewitness account, that by comparison makes the scripts of many present-day movie and TV thrillers seem tame indeed.

"The 'Leadville Letters' also show Dow's preoccupation with financial matters," asserts Dr. Bishop and he goes on to state, "It is likely, too, that the trip to Leadville influenced Dow in his later writing on the business cycle." Dr. Bishop uses the following excerpt from Dow's letters to illustrate this point.

"All through 1878 people were crowding into Leadville. They needed food, clothing and shelter. Everyone who had either to sell could get his own price. There has always been great difficulty in getting places in which to do business. Today there is not a store or a house to rent in Leadville. In some stores half a dozen kinds of businesses are carried on, and the man who can hire a front window anywhere is content. One man who is doing business in a tent pays $100 a month ground rent; the proprietor of a variety theatre pays $1500 a month for the rude building which his patrons occupy."

Within a matter of months after returning from the booming mining town of Leadville, Dow made his move to Wall Street where his name, if not the history behind it, remains virtually a household word today.

Necessarily, in much condensed form the foregoing paragraphs touch lightly on Dow, the man himself, his journalistic training under outstanding editors of his day and his introduction to Wall Street and the New York Stock Exchange where, because of his fine schooling in newspaper work and his innate ability to grasp details and to make penetrating observations, he was able - through the stock averages he compiled and the Theory he propounded - to make a lasting contribution to the business and financial thoughts of all succeeding generations.

Dow's Original Hypothesis

Dow's original hypothesis evidently was not something that came to him in a single moment of inspiration. But rather, his concepts gradually evolved as he served and studied the countless facts, tips and rumors during his constant search for business and financial news, first for the Kiernan News Agency, and later after the firm of Dow Jones & Company had been formed and had commenced, the publication of The Wall Street Journal.

That Dow was a man of high principles and integrity is clearly indicated in Dr. Bishop's book wherein it is said that, "He made the rounds of the Street and it was recognized that the quiet financial reporter who took shorthand notes on his cuffs was turning routine financial reporting into expert financial analysis. Because of his service under Bowles and Danielson, Dow was already respected as a master journalist. His training and personality were such that the financiers he interviewed realized at once that he could be relied upon to quote them accurately, and that he could be trusted with news in confidence." Thus it is quite likely that Dow had access to sources of pertinent information not always available to less discreet financial reporters.

Speaking again of Dow's original hypothesis, it is obvious from his writings - gleaned mainly from The A B C of Stock Speculation - that, at some point subsequent to the time when the publication of The Wall Street Journal was initiated in July 1889, Dow became convinced that individual stocks, instead of fluctuating solely on the basis of each company's individual prospects (or the way these prospects were regarded by the speculative fraternity), were importantly influenced by the rising or falling tides in general business activity and the coincident bull or bear markets in stocks, all of which were a part of the same long term up or down cycle.

Other observers of the economic scene may possibly have arrived at the same conclusion as did Dow with respect to the fact that, over any extended period of time, stocks, as measured by an averaged group of representative issues, and general business activity, as measured by a comprehensive index of industrial production, tend to move in plainly discernible advancing or declining trends. It was wide public circulation. It was this fact, moreover, i.e., the tendency of both stocks and business to rise and fall together in well-defined and more or less periodic cycles, which caused S. A. Nelson to credit Dow with being the originator of this hypothesis.

S. A. Nelson's Contribution

As a reporter for The Wall Street Journal under Dow's stewardship, S. A. Nelson was impressed by the business and speculative concepts expressed by Dow in his editorial comments and in his verbal discussions of the economic affairs and problems of the late 19th century. That fact is emphasized quite clearly by its inclusion in Nelson's book The A B C of Stock Speculation, of which fifteen chapters are designated as "Dow's Theory" and are composed exclusively of excerpts taken from Dow's columns printed in The Wall Street Journal. Here then, so far as the records show, is the first use of the term "Dow's Theory" to describe the business and stock market principles and philosophy which Dow had - perhaps subconsciously - evolved. There is little evidence to suggest that Dow himself even vaguely considered that he was formulating a set of rules or precepts which could be adapted by investors, speculators and businessmen alike as a dependable, though not necessarily foolproof, guide to use in conducting their commercial and financial operations.

I use a unique combination of Dow theory and cycle quantification. Understand that Cycles ARE NOT a part of Dow theory. Dow theory provides the backdrop, but the cycles work allows for a means of trend quantification. I also covers Gold, the Dollar and Bonds. A subscription to Cycles News & Views includes 12 monthly issues, plus web based updates 3 nights a week. For more information on Cycles News & Views, please visit www.cyclesman.com

Tim W. Wood
Cyclesman.com

Copyright © 2004-2008 by Tim W. Wood. All rights reserved.

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