Charles H. Dow and the Dow Theory

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(Continued from front flap)

Charles H Dow and the

Dow Theory by George fV. Bishop, .fr.

achieve his finest general reporting in "The Leadville Letters," articles written on a visit to Colorado at the height of the mining boom in 1879, which are reprinted in full in the Appendix. Dow then turned to financial journalism in New York City, soon joined in the founding of Dow Jones & Company,

For anyone interested in stock market speculation or investment, the various "swings" of the market, the daily averages, and the "confirmations" of bull and bear markets are inextricably bound up with the name of Charles H. Dow. Yet not many can say who Dow was, and it is only a rare student who knows anything about his life or just what his contributions to stock market investment theory were. A search for facts in most reference works would reveal surprisingly little.

and shortly after became the first editor of Th e Wall Street Journal. His editorials on the stock market, full of wisdom and common sense, appeared frequently until his death in 1902. While Dow still lived, S. A. Nelson included a number of these editorials as a part of a book, The A B C of Stock Speculation, and the "Dow Theory" was launched. Later exponents, especially William Peter Hamilton and Robert Rhea, added many other features to the Theory, but Dow's thought remains as the foundation of what is still the best known theory of stock market investment.

Actually, Dow was one of the foremost financial journalists of the last half of the nineteenth century. Born in Connecticut in 1851, he received his early newspaper training under two of the top journalists of the era - Samuel Bowles of The Springfield Republican and George W. Danielson of Th e Providence Journal. He then went on to

In its study of a leading financial thinker and those who followed him, this book presents a picture of the development of a classic method of market analysis . As such it will find its plaee in the libraries of all careful students of the market who want a solid background of knowledge on which to base their own evaluation of market movements.

( Continued on back flap)

APPLETON-CENTURY-CROFTS, INC. Publishers New York

CHARLES H. DOW and

THE DOW THEORY

GEORGE W. BISHOP,

Jr.

CHARLES H. DOW and

THE DOW THEORY

APPLETON-CENTURY-CROFTS, INC. NEW YORK

COPYRIGHT,@

1960 BY APPLETON-CENTURY-CROFTS, INC.

ALL RIGHTS RESERVED. THIS BOOK, OR PARTS THEREOF, MUST NOT BE REPRODUCED IN ANY FORM WITHOUT PERMISSION OF THE PUBLISHER. LIBRARY OF CONGRESS CARD NUMBER:

60--7855

PRINTED IN THE UNITED STATES OF AMERICA

To HELEN, GEORGELEN and

GEORGE III

CONTENTS

ix

PREFACE I. THE EARLY LIFE OF CHARLES H. DOW

2.

A NEWSPAPERMAN IN PROVIDENCE

3· 4· 5· 6. 7. 8. g.

LETTERS FROM THE MAGIC CITY DOW IN NEW YORK CITY THE S. A. NELSON VERSION OF THE DOW THEORY THE EDITORIALS OF CHARLES H. DOW THE INTERPRETATION OF WILLIAM PETER HAMILTON THE WORK OF ROBERT RHEA THE EVOLUTION OF THE DOW THEORY

APPENDIX INDEX

vii

1 10

27 35 45 88 172 210 223 248 355

PREFACE

THERE HAVE BEEN MANY ATTEMPTS TO INTERPRET THE FLUCTUA-

tions that occur in the stock market, and William Armstrong, as early as 1848, noted that although "intrinsic value" is the principal determinant in setting the market prices of securities, it is not the only factor involved. Since that time much has been written about intrinsic value, and the other market factors, and although the work of Charles H. Dow is often cited in this respect, an adequate study of Dow's writings has never been undertaken. Likewise, a truly objective study of the Dow Theory remains to be published. This book, first prepared as a doctoral dissertation presented to the Faculty of the Graduate School of Business Administration, New York University, is an attempt to fill this gap. I wish to acknowledge my indebtedness to Dr. John W. Harriman, Professor of Finance at the Graduate School of Business Administration, New York University, for his guidance in the preparation of the dissertation. His aid was invaluable, and far transcended attention to the necessary technical academic details. His broad knowledge of stock market theory and practice opened the way to more effective research. Naturally, any errors or omissions are mine. I am also indebted to Mr. Bernard Kilgore, President of Dow Jones & Company, Mr. Vermont Royster, Editor of The Wall

ix

PREFACE

Street Journal) and Mr. Robert Bottorff, Executive Editor of The Wall Street Journal) for permission to use the facilities of the publication, and to Mr. Sevellon Brown, Editor and Publisher, for permission to use the library of The Providence Journal and The Evening Bulletin) as well as to Miss M. E. Gallagher, of the Springfield Newspapers, for information on Dow's life in Springfield, Massachusetts. Librarians occupy a special place in the activities of all engaged in research. Miss Florence Wagner, Librarian of The Wall Street Journal) Mr. Elliott E. Andrews, Librarian of The Providence Journal and The Evening Bulletin) Mr. Cornelius B. Allen, Associate Curator and Librarian, Graduate Library of Business Administration, New York University, and Mrs. Alys Freeze, Head-Western History Department, The Public Library, Denver, Colorado, were of inestimable assistance. Likewise, the staffs of the Providence Public Library, the City Library Association, Springfield, Massachusetts, the Rhode Island Historical Society, the Library of Brown University, the Providence Athenaeum, the New York Historical Society, and the New York Public Library provided advice and furnished many volumes for study. For her careful typing and preparation of the manuscript, I also wish to thank Mrs. Roberta Johnston. GEORGE

November, 1959

X

W.

BISHOP, JR.

CHARLES H. DOW and

THE DOW THEORY

CHAPTER ONE

THE EARLY LIFE

of CHARLES H. DOW IT IS UNFORTUNATE THAT IN THE WORDS AND THOUGHT OF WALL

Street the name Dow is invariably followed by the word "theory." This has kept many from seeing Charles H. Dow as he really was; directing attention to but one phase of his stock market philosophy has unwittingly blurred his true character. Actually, Dow was a many-sided person. To his contemporaries he was a newspaperman; yet he was more than that, and his associates were aware of the fact that he was a man of unusual capacities. His writings in The Wall Street Journal, of which he was the first editor, showed a firm grasp of economic theory, domestic and international banking, politics, labor policies, corporate finance, financial and economic history, and stock market theory and practice. But above all his lines portrayed human nature with its common sympathies, ambitions, and failings. This, incidentally, is the key to Dow's stock market theories. It has often been said that an outstanding newspaperman must also be a superior student of psychology; this quality was certainly possessed by Dow. Although versatile, Dow was unassuming. He was "of large physical mold and sinewy frame"; modest in dress as well as in speech and manner. 1 Never self-assertive, he was "a man who could not be induced to see merits in himself, and who was very

CHARLES H. DOW AND THE DOW THEORY

slow to admit faults in others." 2 An early associate on The Wall Street Journal, Thomas F. Woodlock, writes, "Dow was a tall, black-bearded, slightly stooping man, with a grave air and the measured speech of a college professor." 3 He was noted for his reticence, and was laconic in speech. 4 This New England characteristic was noted in Springfield, Massachusetts, as well as in New York City, so it must have long been a part of Dow's personality. Oliver J. Gingold, who worked under Dow on The Wall Street journal, when Dow was editor and Gingold a youth in his middle teens, writes: "I recollect Mr. Dow as a tall, portly, imperturbable man with a beard, rather stooped. I never recollect his smiling and he did not talk much to anybody." 5 There is no doubt that this reticence was a pronounced part of Dow's personality. Everything written about his life and his character mentions it. Charles H. Dow was born in Sterling, Connecticut, on November 6, 1851. His father, Charles Dow, was a farmer who inherited the homestead in Sterling where he had been born in 1816. The family traced their ancestry to Henry Dow who arrived in Boston in 1637 and took up his lot in Watertown, about ten miles west of Boston, which was just being settled. A very inconspicuous citizen, although often mentioned in the land records, Henry Dow sold his land holdings on a rising market and left Watertown a moderate capitalist. He settled in Hampton where he became a man of influence and a brisk trader in real estate. Dow's ancestors also included Thomas Dow, "Ye Wheelwright of Ipswich," who is reported to have avoided publicity although a successful speculator and a keen judge of real estate, and Ebenezer Dow (1692-1775) who in 1715 settled in Volunteers' Settlement, which was located a short distance from the area later known as Sterling. The family apparently arrived in Sterling between 1790 and 1810 since Ebenezer Dow (1731-1810) was listed in the 1790 Census as liv2

THE EARLY LIFE OF CHARLES H. DOW

ing in Voluntown, but died at Sterling on April 28, 1810. He was Dow's grandfather. Dow was distantly related to Lorenzo Dow, the famous itinerant preacher. 6 Dow's father died when he was six years old, leaving the farm to the widowed mother. Dow had two older brothers who died in childhood; so that he was the last member of an historic line of "truly New England pioneer stock." Little is known of his early life and nothing of his schooling. He left the farm at an early age and turned his hand to several kinds of work. 7 Later in life, when he was editor of The Wall Street Journal, a story is told that some visitors, who had gathered in his office, were discussing the different kinds of work they had done when launching their business careers. Dow, as usual, was silent, but swiftly wrote a list of the various occupations he had engaged in prior to entering newspaper work. The extent and diversity of the employment noted on the list amazed his companions. 8 Early in life Dow decided the field of journalism was to his liking, and in 1872 he joined The Springfield Daily Republican of Springfield, Massachusetts. In the Springfield City Directories, Dow is listed as Assistant Editor for the years 1872-73; 1873-74, and 1874-75. His residence is given as 60 Carew Street, and also as 34 and 36 Terrence Street. The Springfield Republican was a newspaper of national repute, at this time edited by Samuel Bowles, one of the newspaper giants of all time. In 1872 Bowles decided to separate the newspaper from the printing and binding business of the combined enterprise. This entailed dissolving the partnership that owned, and controlled, the entire operation. Friction developed and Bowles's old partners left and purchased a rival newspaper, The Springfield Union, taking part of Bowles'sstaff with them. The vacant places were quickly filled with new men, and it is likely that this is when Dow joined the paper. This was a trying period for Bowles who had backed Horace Greeley in his unsuccessful presidential campaign of that year. 9 3

CHARLES H. DOW AND THE DOW THEORY

The value of newspaper experience on The Springfield Republican to Charles H. Dow should not be underestimated. Samuel Bowles was as widely known as any man in his generation. Although his area was limited-Springfield grew from some 3,000 to about 35,000 inhabitants during his lifetimehis influence was enormous. The standard of Samuel Bowles's greatness is not the circulation of The Springfield Republican, although this was respectable since by 1850 it had the largest circulation in New England outside of Boston, but the principles of journalism he exemplified. This was Samuel Bowles III. His father, who founded the newspaper, was Samuel Bowles II. Upon the death of Samuel Bowles III, his son, Samuel Bowles IV, assumed control of The Springfield Republican. Because of the similarity in names, it is fortunate that more confusion does not exist. When Samuel Bowles III was young, he was known as "Young Sam," and after his death, when Samuel Bowles IV was editor, he was often referred to as "the elder Bowles." 10 In an age when most newspapers looked as though "the items were thrown together with a pitchfork," The Springfield Republican presented a comely face. Competent journalists commented on the orderliness and smoothness of the work. The New York Tribune, which was friendly to Bowles, once told its readers, "The Springfield Republican is the best and ablest country journal ever published on this continent." The Providence journal, which often differed with him, in an editorial at the time of Bowles's death remarked: There was nothing in the local habitation of The Springfield Republican which gave it either advantage, prominence, or influence. That it became one of the best known newspapers of the country, and as influential as it was widely circulated, was owing entirely to the ability, the peculiar mental constitution, and the untiring industry of Samuel Bowles. 11

4

THE EARLY LIFE OF CHARLES H. DOW

The story of The Springfield Republican forms one of the most interesting chapters in the history of American journalism. Founded in 1824 by Samuel Bowles's father as a weekly, it became a daily on March 27, 1844. "Young Sam" was 18 years old at the time. As a boy he shared his bed with Chauncy White, an apprentice of the paper, who later became foreman under his editorship. After completing high school, at the age of 17, Samuel Bowles joined his father on the paper as an office boy. His father did not believe in the necessity of a college education and Samuel Bowles always regretted the fact that he was not able to continue his academic training. Until his death the younger Bowles was inseparably linked to The Republican. Bowles was a master of the art of writing a news item. He had a passion for terse diction and condensed a lengthy editorial into a paragraph, and a paragraph into a two-line item. His sentences "snapped like a whip and sometimes cut like a knife." 12 He is credited with being the originator of the newspaper maxim: "Put it all in the first sentence." 13 As an editor Bowles was exceptionally careful and conscientious. However, he always hesitated to make corrections in The Springfield Republican. A story is related that a man whose death had been recorded in the paper saw Bowles and demanded that it be corrected. When informed that it was not the policy of the paper to make corrections the man cried, "But I am not dead, as you can see." Bowles pondered for a moment, and replied, "We cannot print a correction, but as your case demands some attention, we will bring you back to life by putting your name in the birth column." 14 Bowles made newspapermen. Van Wyck Brooks tells us, "The Republican was a school for journalists, known far and wide, and travellers-Dickens and Kingsley among themconstantly stopped at Springfield in order to have a chat with Samuel Bowles." 15 While on The Springfield Republican Dow covered the city

5

CHARLES H. DOW AND THE DOW THEORY

route and was noted for the humorous cast of his writing. His work at this time has been compared to the style which made The Danbury Times known throughout the newspaper world. He was one of the best known of The Republican's reporters. His tall figure was a familiar one as he went about the streets of Springfield with his long stride, intent upon newsgathering. Since he was attached to the City Department of The Republican it was natural that Dow would meet a large number of his fellow townsmen as he investigated those usual, and unusual, happenings that are the bread and butter of the city reporter. He systematically covered the city, and although he was reserved and sparing of words, nevertheless, he was a reliable reporter. Other men might be readier in meeting people, but few could match Dow in persistence. When he made friends he kept them. 16 The items in the "Springfield and Vicinity" column, as collected by the City Department, covered many subjects: the height of the Connecticut River and the police court; the weather and the latest sermon; the sleigh ride en joyed by the girls at the paper collar factory and the attempted assassination of the city marshal by "a fellow of low degree without obvious means of support and some 25 years of age." Item followed item --day after day, and year after year. However, Dow was also concerned with more serious matters. The strength of The Springfield Republican was in its political discussions and Samuel Bowles was never reluctant to scourge an adversary regardless of what his position in life might be. His battles with General Ben Butler, David Dudley Field and his son, Dudley Field; with James Fisk, Jr., Jay Gould, and Oakes Ames may be traced in the columns of The Republican. He was especially vitriolic in attacking the abuses of the Grant administration, particularly in the case of the Credit Mobilier scandal. Naturally these affairs were closely followed in Springfield. It is reasonable to believe that the 6

THE EARLY LIFE OF CHARLES H. DOW

members of the staff of the paper were expected to be familiar with the finer points involved. Dow's knowledge of financial and political affairs was, no doubt, broadened considerably. At the time of Bowles's death one of his "graduates" writing in the Boston Evening Transcript said: "Nobody denies to him [Bowles] the credit of making good newspapermen, and I have yet to learn of one who went out from The Republican with his recommendation who has made a failure in the profession." There is no doubt that many able newspapermen were trained at Samuel Bowles's "school of journalism." Charles R. Miller, who later served for nearly 40 years (1883-1922) as editor-in-chief of The New York Times was on the staff at the same time as Dow. 17 S. B. Griffin, who later became managing editor of The Springfield Republican, was also a contemporary staff member. Thus, Charles H. Dow, through his association with The Springfield Republican, advanced his newspaper career under very favorable circumstances. It was here that he learned the style of newspaper writing a great editor taught. Bowles, in speaking of Joseph E. Hood, one of his favorite editorial writers on The Springfield Republican, once said: His style was admirable-simple, direct, pure, forcible without being passionate, pungent without being vulgar, often delicately sarcastic and deliciously humorous, never egotistical, never suggesting the writer, always representing the journal, and this as the voice of the people-he was by nature, by culture, by experience the model modem working joumalist. 18

This was the manner of writing Bowles admired in editorial work, and he himself excelled at writing pithy, epigrammatic sentences in his own editorials. This feature was copied, or unconsciously absorbed, by the other editorial writers and reporters. As a result it is most difficult, and in many cases impossible, to identify positively the author of many of the

7

CHARLES H. DOW AND THE DOW THEORY

editorials that appeared in The Springfield Republican during the period of Bowles's editorship. Bowles had definite ideas on how news items should be reported. He was one of the first to teach the "lead" technique which is now standard newspaper procedure. He once advised a young reporter, "Don't suppose that anyone will read through six lines of bad rhetoric to get a crumb of news at the end." At another time he is reputed to have said, "Never begin a news item by giving the time and place-that fails to attract the reader's attention." 19 It is difficult to know to what extent Dow was influenced by Samuel Bowles. Dow, a young man in his early twenties, was at an impressionable age. Bowles was a great journalist known not only throughout the United States, but with a reputation in Great Britain and Europe as well. The question of how much Bowles's mastery meant to Dow in Springfield, as well as later in his newspaper career, cannot be answered. However, tutelage by a great master is a rewarding experience for an apt pupil, and Dow's later editorial work shows clear evidence of the imprint of Samuel Bowles's teaching. It was said that Bowles was not a man to waste words in his editorial direction. A sentence to a man as he passed or a twominute discussion in private was adequate guidance in most cases. His manner was rapid and brusque. When he spoke it was in a direct fashion straight to the heart of the subject. His criticism was effective, but never nagging or petty. Bowles was not a man to compromise with principle or to equivocate. Fearless, he had many admirers, but he was likewise with his share of enemies, as is any man who dares to take a definite stand on many controversial matters. Dow remained with The Springfield Republican until 1875, and left as a trained newspaperman for Providence, Rhode Island. The circumstances of his leaving are not known, but neither was the event of his arrival made a matter of record. 8

THE EARLY LIFE OF CHARLES H. DOW

However, The Republican did not forget him and a later editor of that famous paper, Waldo L. Cook, recalls that in his own early years on the staff of The Springfield Republican) Charles Henry Dow was regarded as one of the notable "graduates" of the staff, and that "not infrequently I [Cook] heard my elders mention 'Charlie' Dow and his success in financial journalism." 20 NOTES 1.

2.

3. 4.

5.

6.

7. 8. 9.

10.

11.

12. Merriam, op. cit., Vol. I, p. 1 99· 13. Ibid., Vol. II, p. 359. 14. James Melvin Lee, History of American Journalism, (Houghton Mifflin Company, Boston and New York, 1923), p. 402. 15. Van Wyck Brooks, New England: Indian Summer, (E. P. Dutton & Company, Inc., New York, 1940), p. 317. 16. Dow's work as a city reporter is described in the obituary in The Springfield Republican, December 5, 1902. 17. For an account of the experiences of Charles R. Miller on The Springfield Republican, see F. Fraser Bond, Mr. Miller of The Times, (Charles Scribner's Sons, New York, 1931). Both Miller and Dow joined the staff of The Republican in 1872 and left in the same year, 1875. Dow is not mentioned by Bond. 18. Merriam, op. cit., Vol. I, p. 107. 19. Ibid., Vol. II, p. 359. 20. Letter to the author dated October 26, 1949.

The Wall Street Journal, December 6, 1902. Ibid., December 5, 1902. Ibid., June 27, 1932. The Springfield Daily Republican, December 5, 1902. Letter to the author dated March 13, 1950. For further information on Dow's genealogy, see Robert Piercy Dow (compiler), The Book of Dow, (The Tuttle Company, Rutland, Vermont, 1929), passim. Brooklyn Daily Eagle, December 4, 1902. The Wall Street Journal, December 5, 1902. For an account of the life of Samuel Bowles, see George S. Merriam, The Life and Times of Samuel Bowles, (The Century Company, New York, 2 vols., 1885). See Frank Luther Mott, American Journalism , (The Macmillan Company, New York, 1950), pp. 264-265 and 453-454. The Providence Journal, January 18, 1878.

9

CHAPTER TWO

A NEWSPAPERMAN zn

PROVIDENCE THE PROVIDENCE CITY DIRECTORY OF 1875 LISTS CHARLES H. Dow as night editor of The Providence Star} but little is known of his early days in Providence. He continued with The Star the next year as well, and it is reported that he also wrote for The Providence Evening Press. 1 Since The Star was the morning paper published by the Providence Press Company, and The Evening Press was their evening publication, this would have been normal newspaper procedure for the times. Some newspapers employed separate staffs for the morning and evening newspapers, but in many cases one staff serviced both papers. Likewise, articles of local interest were often run in both the morning and evening publications. At times several days intervened before the article reappeared. The City Directory of 1875 also informs us that Dow boarded at 33 Common Street. This street-a short one-is in the Smith Hill section of Providence near the State House. The Reverend Sidney Dean served as editor of The Star at the time Dow was with that paper. Dean was also editor of The Evening Press. The hard times of 1873 caused a reduction in the price of The Evening Press to three cents and to counterbalance this The Star's price was raised to two cents. During the depression of 1873 Dean had a difficult time maintaining 10

A NEWSPAPERMAN IN PROVIDENCE

the newspapers, but managed to do so. It is reported he succeeded by "good management and strict economy." This leads us to believe, with other evidence, that Dow was not paid at an extravagant rate. 2 Not only have The Providence Star and The Providence Evening Press disappeared, but also number 33 Common Street as well. The Providence Star expired in 1877, and The Providence Evening Press departed the scene in 1884. It is not a matter of record when the boardinghouse disappeared, but on the site it occupied now stands the Armenian Saints Sahag and Mesrob Church. From The Star Dow moved to The Providence Journal, where he served under another newspaper giant in George W. Danielson, who was then editor. Dow was a reporter on The Journal for three years, 1877 through 1879, and John W. Barney, an assistant to Danielson, tells how Dow came to be employed by The Providence Journal: He (Dow) came from work with the elder Bowles on The Springfield Republican-an excellent school-and the manner of his joining The Journal forces was characteristic. He called on Mr. Danielson, showing him his string of articles for a fortnight, told him what he had received for it, and asked for a chance to work. Mr. Danielson said he had nothing he could give him to do. Mr. Dow said he didn't need to be given anything to do; that he knew news, and wanted only a chance to go out and get it for The Journal. From that time until he left to go to New York his work was a strong feature of The Journal's columns. 3

Danielson was the second outstanding editor under whom Dow served. It has been said that Danielson led a "genuine New England life." There is no doubt that he went forward on his set course with persistence and energy. Difficulties could not turn him aside, nor could defeat weaken his resolution. He decided early in life to become a man of literary culture and at the age of 14 entered the village printing office at Danielson, II

CHARLES H. DOW AND THE DOW THEORY

Connecticut. From that day on he was concerned with printing, or the newspaper business, until his death 40 years later. 4 Born in Killingly, Connecticut, on April 26, 1829, the son of a rigid Puritan farmer, Danielson was always a diligent student. Reading was his great pleasure, and throughout his life he read avidly. In 1845 he went to Providence as a journeyman printer from the Danielson printing office where he had learned the printing trade. He later worked briefly as a compositor on a New York morning newspaper, but quickly returned to Providence when he found Gotham not to his liking. In 1846 he worked for The Providence Daily Sentinel, which existed for only a short time, and in 1848 he served as editor of The New England Arena of West Killingly, Connecticut. Although only 19 years of age he advised his readers of his intentions in no uncertain terms when he took the helm of this newspaper. In his first number, there appeared over his signature the following lines: "We assume the publication of The Arena for the purpose of gaining an honest livelihood, and although we expect to be obliged to toil unceasingly to accomplish that object, still we expect to merit it and mean to get it.,, Despite the bold words the paper failed and once again Danielson followed the road to Providence. Here he became assistant editor, marine reporter, and foreman of the composing room of The Daily Post which at the time was the most important Democratic newspaper in Rhode Island. After a brief period as editor of The Providence Daily Transcript, on March 14, 1859, in company with Albert R. Cook, Danielson issued the first number of The Providence Evening Press. Unlike The Arena, The Press was at once a success and by September, 1862, aided by the Civil War, it had a circulation of about 10,000. Danielson sold out about this time, and on January 1, 1863, he purchased an interest in The Providence 12

A NEWSPAPERMAN IN PROVIDENCE

Journal. In less than a month a new paper, The [Providence] Evening Bulletin) was successfully added to The Journal. Professor James B. Angell, who had resigned from the faculty of Brown University in 1860 to serve as editor of The Providence Journal) left the paper in 1866 to become President of the University of Vermont. Later his service as President of the University of Michigan crowned his academic career. Danielson took full charge of both The Journal and The Evening Bulletin upon Professor Angell's departure and remained actively in command until his death on March 25, 1884. Like The Republican) The Journal was a first-class newspaper. Danielson was an able editor and knew all phases of the newspaper business. Like Bowles, he was a man not afraid to speak his mind, and his opinions were firm and well pronounced on many matters. This made many friends, but also gave rise to opponents who disagreed with his stand on specific issues. On the paper nothing escaped Danielson's notice. The smallest details as well as the most important matters came under his personal direction. He was, in addition to his newspaper work, a leader in the community although he would never hold public office. A deeply religious man, he was tolerant of the religious beliefs of others, and in his administration of the newspaper saw that coverage was given to the interests and services of all faiths. Danielson's daily routine was a busy one. First appearing on the scene at ten in the morning, he left for dinner at four in the afternoon when The Bulletin had gone to press. Returning to his office at seven in the evening, he stayed until three the following morning to oversee the preparations of The Journal. His life was the newspaper. Like Bowles he was painstaking and conscientious almost to a fault. His style was not unlike that of the famous Springfield editor in its terseness, but he was more

CHARLES H. DOW AND THE DOW THEORY

noted for his administrative ability and technical skill than his literary efforts. John W. Barney, Danielson's "right-hand man" in the preparation and revision of material for the papers, some years after Danielson's death wrote the following lines about him: George W. Danielson was one of the most lovable men I ever knew. He was reserved in manner, save to his intimate friends, was a most considerate and appreciative employer, and his judgment regarding matters of public policy was not to be swerved from his conviction as to the absolute right and truth by considerations of expediency. He made the first editorial column famous for its short editorials ranging from a few lines to a stickful in length. These were always powerful, piercing the joint in the armor, but never malicious nor vindictive. It was my good fortune to enjoy confidential relations with Mr. Danielson, and we, who knew him best, have not ceased to cherish his memory and regret his death. 5

George W. Danielson was, like Bowles, an editor of the old school. Like the famous Mr. Delane of the London Times, these New England editors worked away at sentences and paragraphs with incredible endurance. Their work was of an exacting nature for they had the responsibility of setting the standards for, and maintaining the reputations of, great newspapers. They were a source of inspiration for the men who worked under their direction through the force of their personalities, and this was a necessity if the newspapers they headed were to remain great. The extent of Danielson's influence on Dow is not known, but Dow worked for three years under his direction and this in all probability had a lasting effect. It is noteworthy that before he was 30 Dow worked for both Samuel Bowles and George W. Danielson, two of the most outstanding editors New England has produced. There is every reason to assume that this experience was of great assistance in his later newspaper career.

A NEWSPAPERMAN IN PROVIDE NCE

Alfred Mason Williams, the essayist and historian, was on the staff of The Journal with Dow, having joined the paper on November 1, 1875. Williams had led an interesting life, but it is not known whether or not he discussed his varied experiences with Dow. He may well have contributed to Dow's literary style. Williams was born on a farm near Taunton, Massachusetts, on October 23, 1840. 6 He studied at Bristol Academy and in 1856 entered Brown University. Here he spent two years but, since he developed eye trouble, left on the advice of a physician and returned to his father's farm at Taunton. In the spring of 1862 he enlisted as a private in the Fourth Regiment of Massachusetts Volunteers. The Regiment was taken on board transports in New York and sailed to New Orleans to join the army gathered to take possession of the lower Mississippi. Upon arrival in New Orleans the Regiment joined the forces moving on Port Hudson and was engaged in several minor expeditions. Williams took part in the first and second assaults on Port Hudson and wrote graphic letters to The New York Tribune and other newspapers during the Port Hudson siege. This launched his newspaper career and upon his discharge from the army in August, 1863, he soon obtained a position on the Taunton Gazette and served for two years as a reporter and editorial writer. In October, 1865, Williams set sail for Cork as a special correspondent for The New York Tribune to report on conditions in Ireland. Horace Greeley was editor of the Tribune at the time, and desired a series of articles on Fenianism. When Williams arrived at Queenstown he was arrested and spent a week in jail, as there were reports that officers of the American Army were arriving in Ireland to take command of the insurrectionists. The discovery of a revolver in his baggage, coupled with his military bearing, drew attention to Williams. He was

CHARLES H. DOW AND THE DOW THEORY

released through the efforts of Charles Francis Adams, United States Minister to England. From Ireland Williams wrote letters to The New York Tribune) several Boston papers, and the Taunton Gazette. He returned to the latter paper, and his increased reputation gave him added opportunities for writing articles for the Boston and New York press. He also lectured on the literature of Ireland and conditions in that country. Four years later he was elected to the Massachusetts legislature, and became an ardent advocate of women's suffrage. Williams married and followed Horace Greeley's advice and moved to Neosho, Missouri, where he purchased a newspaper called the Investigator. At the time Neosho was.a flourishing town of some 2,000 inhabitants. The name of the paper was changed to the Journal and within a month editorials appeared on Indian affairs, to the great surprise of a large number of the subscribers. Discussions of the "Indian question," the support of Republican politics in a Democratic community, and the advocation of an unpopular monetary policy, did not aid the ] ournal. There are conflicting stories concerning Williams' reasons for leaving Missouri. One is that malarial fever acquired during the Civil War caused him to return to the East; the other is that the paper was not a success. Apparently he en joyed personal popularity, since he was barely defeated when he ran for the Missouri legislature. At any rate Williams sold out and returned to New England, where he joined the staff of The Providence ] ournal. John W. Barney wrote: "Alfred M. Williams was a rare character. He had the bearing of a recluse, the piercing glance of an Indian, and the impressionistic style of a Stevenson. His articles read like a chapter from Balzac." 7 When Dow was with The Providence I ournal it was located in the Barton block at 2 Weybosset Street, having moved there in 1871 after many years in Washington Row. The move was 16

A NEWSPAPERMAN IN PROVIDEN CE

made necessary by the advances in the printing press, for the new presses acquired by The Journal had to be placed on the ground floor of a building adapted for this purpose. When the office was moved in 1871 a four-cylinder press was installed that was superior to any newspaper press in New England outside of Boston and Springfield. This was really a "double deck" press able to print on both sides of the paper, thus saving running the paper through again. In 187 5 a six-cylinder type revolving press was installed, capable of printing twelve thousand impressions an hour. 8 This press was not replaced until 1881 so it was in use the entire time Dow was on The Journal. In the Barton block Danielson had his office on the ground floor next to the press room. The reporters were located on the second floor, and on the third floor the editorial writers had a small space next to the composing room. Manton H. Luther, who was on the staff with Dow, describes the room where the reporters worked: The city room was commodious. It was situated on the second floor of the old Barton block and was nearly large enough to serve the purpose of a lodge hall. At some former period it had been used by a dealer in stoves, and the board floor was seamed and scarred with the marks of the heavy castings that had been dragged over it. Two windows and a loft door opened into the alley, and through these apertures in warm weather, was wafted an inspiring aroma from "Billy" Arnold's restaurant kitchen, not always unmingled with odors of a less savory character; and through them also came "Billy" Arnold's flies to visit us, when they were driven from his famous eating house. 9

John W. Barney, a contemporary staff member with Charles H. Dow on The Providence Journal} wrote, in 1904, concerning Dow's work on that newspaper: A little more than a year ago Charles H. Dow died in New York. His work left its impress on The Journal, particularly in

CHARLES H. DOW AND THE DOW THEORY

the line of careful, painstaking research, in the development of articles of historical value and of more than ephemeral life, and as a precursor of the special articles and the special correspondence which has come to occupy so large a space in the papers of today. . . . He would get together a page article, broken into sections by double heads, of great historical value, and his less important daily contributions were all along most original lines. 10

The passage of time makes it difficult to identify Dow's work as published in The Providence Journal. In addition, flood waters have twice swept over downtown Providence in the last quarter century. This combination has destroyed many of the records of The Providence Journal covering the years Dow was with the paper. Actually, it is doubtful that they would have been of aid, since newspaper records prior to the tum of the century are not noted for their completeness. The identification of Dow's articles presents several problems. First, the use of a by-line was not the usual journalistic practice of the 187o's. There is no evidence of The Providence Journal employing by-lines during the years 1877, 1878, and 1879, when Dow served on the staff. Several times when members of the faculty at Brown University wrote articles the editor identified the author by means of a brief note of introduction. This usually referred to the writer's special qualifications, or his connection with the subject matter. The same practice was occasionally followed when a member of the clergy wrote on theological subjects, or a medical doctor on a matter of a professional nature. Also, at times, special articles were signed by a nom de plume) or the initials of the author. Although this practice was not followed extensively by The Providence Journal) it was used when Dow was on the paper. Another source of identification of special articles that appeared in The Providence Journal is the "Providence Journal News Index" compiled by Henry R. Davis, who was on the staff 18

A NEWSPAPERMAN IN PROVIDE NCE

with Dow. Davis kept a news index during his many years with The Providence journal and presented it to the Providence Journal Company on January 1, 1916. It is a ledger book kept in his own hand and lists articles, news accounts, and events of special interest. In many instances he identified the author of a particular article. However, Davis only notes one article, "Our Steamboats," as the work of Charles H. Dow. As this article was later published in pamphlet form, with the authorship credited to Dow, identification by Davis in this instance is not of importance. The value of the Davis index lies in the identification of persons other than Dow as authors of specific articles. In this manner search for the work of Dow may be limited to a degree. There were a number of accounts published in The Providence journal during 1877, 1878, and 1879, that have considerable value from the standpoint of regional history, and it would be interesting to ascertain whether Dow wrote any of them. Among these are "The Normal School" (January 24, 1879), "The First Map of Providence" (April 5, 1879), and "Telegraphy in Providence" (May 14, 1878). _ It has been possible to identify five special articles that appeared in The Providence journal as the work of Charles H. Dow. Three of these were later published in pamphlet form and in this way the authorship was easily established. The fourth was collected as a booklet of clippings from The Providence Journal by an enterprising librarian at Brown University, who had the foresight to identify the author on the cover, "State Farm described by Dow of the journal." Dow identified the fifth by mentioning in "The State Farm" article that "Prisons and Prisoners" came from the pen of the same author. Charles H. Dow's first article of historical importance was entitled "Our Steamboats." It appeared in The Providence Journal on April 23, 1877, and later was used as a Supplement to The Evening Bulletin on April 25, 1877. In neither case is 19

CHARLES H. DOW AND THE DOW THEORY

Dow designated as the author. The article was later printed, in the same year, in pamphlet form by William Turner and Company, New York, under the title, "History of Steam Navigation between New York and Providence." The pamphlet consists of 29 pages of small print and contains several colored illustrations. In this work Dow traces the history of steam navigation on Long Island Sound and Narragansett Bay from 1792 to 1877. He includes observations on transportation in general during the early 18oo's, noting the operations of packet lines, stage coaches, and some of the early railroads. His attention is focused upon the city of Providence, but since the lines of transportation connect that city with Boston, New York, and intermediate points, Dow's history covers the whole of southern New England. He discusses financial as well as nautical matters. One of the more interesting financial accounts tells of the failure of the Merchants Steamship Company. This concern was formed in 1866 as the result of a combination between the Neptune Company and the Stonington Railroad Line. Two years earlier the Neptune Company had purchased the Commercial Line-a vigorous competitor. It was felt that the newly formed Merchants Steamship Company could drive out the Fall River Line, by competitive practices common in the business world of that day, and once this was accomplished, it would be in a position to control all of the traffic east of Norwich, Connecticut. The capital stock of the corporation was $2,000,000, but after a series of misfortunes by shipwreck and fire, the company was finally liquidated with the stockholders receiving three cents on the dollar. However, even in those days the art of finance had its rewards, for it is noted that the intermediary who brought about the combination, one Samuel Walsh, received a fee of $50,000. Dow's account of Elijah Ormsbee in this article is of special interest, too. In 1792 this Yankee inventor sped upon the waters 20

A NEWSPAPERMAN IN PROVIDENCE

of Narragansett Bay and the Seekonk River in a long boat borrowed from the ship Abigail propelled by steam power provided by a copper still of about 150 gallons capacity borrowed from a distillery. Dow says also that John Fitch travelled in a boat driven by steam on the Delaware River in 1786, that James Rumsey had used the same method to navigate the Potomac the following year, and that Captain Samuel Mowry used a steam-driven craft on the Connecticut River in 1794. These feats all predate Fulton's successful navigation of the Hudson River in the Clermont in 1807. Dow reports that David Wilkinson, the Rhode Island inventor, who cast and bored the cylinder for Ormsbee's craft, took the inner workings to Pawtucket when Ormsbee returned the still and the boat to their owners. Although Ormsbee's "golden dream" faded, there is a sequel to the story. Dow quotes Wilkinson as saying: About this time, a young man called on me, and wished to see the boat. He remained a day or two, and carefully examined all the works. He told me that his name was Daniel French, from Connecticut. I never knew where he came from or where he went. About the year 1840, I was on the cars going from Utica to Albany, and talking with an aged gentleman, the subject of steam power came up. I told him that I never thought Fulton an inventor, but simply a busy collector of other people's inventions. "Well," said the gentleman, "I always said so, and he would never have succeeded if it had not been for Daniel French." "What do you mean by Daniel French?" asked I. "Why, a Yankee," said he, "that Fulton kept locked up for six months, making drafts for him." The name of Daniel French burst upon my ears for the first time in nearly fifty years, and almost explained some mysteries.

Dow's description of the steamboats that travelled between New York, Providence, and Boston, and his list of the early 21

CHARLES H. DOW AND THE DOW THEORY

boats and their captains would be very difficult to obtain in any other way now. Of significance to the economist are Dow's reports of the struggles of the packet boats versus the steamboats, of the stage coach lines versus the steamboats, and finally of the combined rail and steamer lines versus the steamboat lines without rail connections. The interplay of "new" and "declining" industries, the advantages of monopoly, and the competitive practices that flourished during the 182o's and the 185o's are brought out clearly. Dow tells how the competition between stage coach lines at one time reached the point that one company offered to carry passengers between Providence and Boston for nothing. Thereupon, the opposition not only agreed to do the same, but, in addition, announced that it would furnish the passengers with dinner as well. Not to be outdone, the first company added a bottle of wine to the dinner. In another rate war, the Commercial Line carried cabin passengers from Providence to New York for fifty cents per person. Another of Dow's articles is his history of N ewport, Rhode Island. "Newport: The City by the Sea" appeared in The Providence Journal on May 22, 1879, and in The Evening Bulletin on May 24, 1879. It was later published in 1880 in pamphlet form, by John Sanborn, Newport, Rhode Island. The article is written in narrative style, but in it Dow displays the scholarship of an historian. The four epochs of Newport's history are covered: first, an age of shadowy tradition; second, an era of commercial success and social splendor; third, a generation of decadence; and last, a half century of unparalleled development. The article obviously required considerable research, and Dow's style is particularly effective as the opening paragraphs of his account illustrate: 22

A NEWSPAPERMAN IN PROVIDENCE

Through the realms of letters runs a narrow boundry, separating the domain of history from the province of correspondence. We shall seek to guide this article along that boundry line, willing, if need be, to fall below the dignity of history, and daring to trespass beyond the limits of correspondence, in order to tell, as neither correspondent nor historian would tell, the story of the City by the Sea. Newport is in the fourth phase of her history. Eight centuries ago she struggled out of the impenetrable mystery of the past, and stood, for a little, half revealed, half obscured, amid the mists of tradition. The island remained, as in one of its own fogs, until a handful of years ago, when it emerged into the s•..mlight. Then began a second phase-which continued from 1639 to the Revolution-and was characterized by unbroken prosperity. The third phase saw the destruction of the greatness of Newport, and the decline of its commercial grandeur. The fourth phase is barely forty years old, but its developments have restored Newport. She stands at the head of the list of fashionable watering places. Her climate and scenery are endless delights. Her attractions are manifold. Her cottages are palaces. Her society unites the aristocracy of Europe with the best culture of America.

The rest of the history continues interestingly. Dow traces the path of the Norsemen along the shores of Narragansett Bay. The names Herjulf, Bjarne, Erik the Red, Lief the Lucky, Thorvald, and Karlsefue appear. Dow then recalls Verrazano in the Dolphin, under the flag of France, running before the wind into Newport harbor in the year 1524. During Verrazano's stay many Indians visited the ship and admired more than anything else the mirrors in which they saw themselves reflected. This brought Dow's humor to the fore, and he says that this shows, "that Newport had then some of the characteristics which have marked it ever since." Dow's pen describes the early settlement of Newport; her

CHARLES H. DOW AND THE DOW THEORY

day of grandeur when she was the emporium of the Western World, and her occupation by the British during the American Revolution. Next Dow tells of the paralysis of trade started by the Revolution and completed by the War of 1812, resulting in a state of "suspended animation" until the city emerged as "The New Newport-The Eden of America." Dow's account is well constructed. Nothing is overlooked. Apparently the Old Stone Mill was as much an object of speculation then as it is now, and Dow's treatment has much to recommend it. Much has been written about the stone "mill" or "tower" at Newport. The building has been identified, among other things, as a fort of the Norsemen; a windmill of Governor Benedict Arnold; a trading post built sometime between the discoveries of Columbus and the 16oo's; and a Christian baptistry. Humor appears again when Dow discusses the architecture of the resort. He says: "There are houses in Newport which look like exaggerated bird houses, and there are residences which suggest patent rat traps." In summary, "Newport: The City by the Sea" can be said to be as important a contribution to local history as was his "History of Steam Navigation between New York and Providence." Dow's other identifiable articles, "The State Farm," "Prisons and Prisoners," and "Temples of Learning," are also of Rhode Island interest. "The State Farm" is a description of Rhode Island's charitable and corrective institution, coupled with a history of the care of the paupers, insane, and criminals of the State. It appeared in The Providence Journal, as well as in the Supplement of The Evening Bulletin, on July 14, 1878. Evidently, it has never been republished. "Temples of Learning" appeared in both The Providence Journal and The Evening Bulletin on September 2, 1878. It was written at the time of the dedication of a new high school-the second in Providence. It 24

A NEWSPAPERMAN IN PROVIDENCE

was later republished in 1878 as part of A Brief Sketch of the Establishment of the High School. In this article, Dow traces the history of public education in Providence. "Prisons and Prisoners" appeared in The Providence Journal on January 20, 1879. It covers the history of prisons and famous prisoners in Rhode Island. Again, there is no record of its ever having been republished. In these five articles Dow established his reputation as a historian of the local scene. The style displayed is that of an accomplished writer, and his interest in financial affairs is apparent, as he traces the corporate transactions of the steamship companies or discusses investment in Newport real estate. His work is carefully done and still of value to students of local Rhode Island history.

NOTES 4. For accounts of the life of Danielson see "A Hundred Years of The Providence J ournal," supplement of The Providence Journal, July 23, 1929; Half a Century With The Providence Journal, pp. 18-19, · and A Memorial of George Whitman Danielson, (Privately printed, Providence, 1885). Editorials and obituaries appeared in many New England newspapers at the time of Danielson's death including the following: The Providence Journal, March 26, 1884; The Boston Post, March 27, 1884; The Boston Journal, March 27, 1884; The Hartford Daily Courant, March 26, 1884;

The Providence Journal, December 5, 1902, and The Wall Street Journal, December 5, 1902. 2. The account of Dean's editorship is found in Printers and Printing in Providence, I762I907, prepared by a Committee of Providence Typographical Union Number Thirty-Three as a Souvenir of the Fiftieth Anniversary of Its Institution. [1907]. 3. Half a Century with The Providence Journal, (Compiled and Issued by The J ournal Company for Private Distribution, Printed for Preston and Rounds Company by E. L. Freeman & Sons, 1904), p. 72. 1.

25

CHARLES H. DOW AND THE DOW THEORY

The Springfield Daily Union, March 26, 1884; The Worcester Gazette, March 26, 1884; The Worcester Daily Spy, March 26, 1884. 5. Half a Century With The Providence Journal, pp. 70-71. 6. For an account of the life of Alfred Mason Williams, see the biographical sketch by R.

S. Howland in Alfred Mason Williams, Under The Trade Winds, (Preston & Rounds Company, Providence, 1898). 7. Half a Century With the Providence Journal, p. 71. 8. Ibid., p. 211. g. Ibid., p. 221. 10. Ibid., pp. 71-72.

CHAPTER THREE

LETTERS from

THE MAGIC CITY "THE CITY BY THE SEA" w AS NOT THE ONLY CITY CHARLES H. Dow wrote about in 1879, for in the summer of that year he visited "The Magic City"-Leadville, Colorado. This was probably a turning point in Dow's life and it is very likely that the trip to Leadville influenced him to move from Providence to New York City. John W. Barney describes the circumstances of Dow's visit as follows:

When at the beginning of interest in the discovery of the carbonates at Leadville a number of New England newspapers united in an investigation of the new found deposits, Mr. Dow was selected by persons identified with the management of the properties as the best equipped to write informingly about them, and on their request to the editor of The Journal he was assigned to this work. Association on that trip with men of prominence in the financial world revealed to Mr. Dow a field for his efforts in financial journalism in which he could attain an importance and usefulness not to be hoped for in ordinary newspaper work. 1

It is very difficult now to visualize the impact that the discoveries of gold and silver in the West had upon the people of the rest of the country. In 1879 when Leadville called itself the "Magic City" it did so with justification. From the standpoint

CHARLES H. DOW AND THE DOW THEORY

of mushroom growth it occupies a unique position in the mining annals of the West. In May, 1877, Dow states that there was not a single house in Leadville. In May, 1879, at the time of his visit, he places the population at from 18,000 to 20,000 inhabitants.2 Percy Stanley Fritz advises that in 1877 probably no more than 200 persons were in the whole region with a few log cabins located at the present site of Leadville. He estimates that the population had grown to 5,000 persons at the close of 1878, and cites the Census figure of 1880, which recorded 14,840 inhabitants of Leadville. 3 Muriel Sibell Wolle estimates the population of Leadville grew from 1,500 in May, 1879, to 18,000 people by the end of the year. 4 Naturally, at the height of the boom in 1879 the population very likely fluctuated quite widely. There are estimates of as many as 30,000 inhabitants for the city. 5 Located at an altitude of 10,200 feet above sea level, at the foot of Mt. Elbert (14,431 feet) and Mt. Massive (14,418 feet), Leadville soon became the most famous mining town of the West, if not of the world. Often called "the city of the clouds" because of its altitude, people in every section of the nation talked and read about Leadville's incredible population growth, the richness of its mines, and the multifarious activities of its inhabitants. The story of the discovery of silver in California Gulch by William H. Stevens and Alvinus B. Wood has often been told. They were engaged in gold mining operations when Wood, an expert geologist, discovered that the heavy sand and stones which clogged their sluice boxes contained silver. They turned their attention to searching for silver-bearing ores and in 1875 located the ore bed and staked claims along it. Late in 187 5 they reached the site of the famous Iron mine, which in its day yielded from $15,000,000 to $20,000,000 worth of silver. As the mine was first developed in 1876, this date is often ascribed as

28

LETTERS FROM THE MAGIC CITY ,

the year of discovery. Wood immediately sold his half interest to L. Z. Leiter, Marshall Field's partner, for $40,000. This find was quickly followed by the discovery of the Camp Bird mine by three poor Irish laborers, the "Gallagher boys," who in a fortnight advanced from penury to undreamed-of wealth. Dow notes that on the day before their strike they were refused credit when they attempted to purchase a few loaves of bread. The Camp Bird was sold for nearly a quarter of a million dollars, and the "Gallagher boys" went on to new discoveries. The story of the "Gallagher boys" explains the lure of Leadville, and Dow catches this spirit when he writes: Everywhere that men dug, they came to silver ore. Men sprang from poverty to affluence in an hour. It was an entirely new thing. The experienced miner, the skilled mineralogist, looked at the indications and saw nothing. The ignorant laborer dug his post-hole and emerged to daylight a millionaire. Then the experts cast away their science, and the California miners their boasted acumen, and each dug holes in the side of Bald Mountain, and they, too, became millionaires.6

After the Camp Bird find, other discoveries quickly followed, and during 1877 and 1878 the excitement spread over the country. In 1878, George Hook and August Rische started H. A. W. Tabor on his way to becoming the prototype of the "Carbonate Kings" when they discovered the Little Pittsburg, Tabor had grubstaked the pair at a figure variously estimated at from $17.50 to $64.75. 7 Dow writes that Tabor's half interest "is said to have cost him $17." In Dow's account Tabor, by reason of the grubstake, secured a one-half interest in the Little Pittsburg, and Hook and Rische each held a one-quarter interest. Other writers ascribe equal parts (one-third) to each party. Leadville soon became a scene of "frenzied finance." Jerome

29

CHARLES H . DOW AND THE DOW THEORY

N. Chaffee bought a half interest in the New Discovery mine for $50,000 one morning and at two o'clock that afternoon sold it to Tabor for $ 125,000. He advised a friend, General Bearce, what had transpired, and that he had made $75,000 in a few hours. Instead of receiving the expected congratulations for his feat Chaffee was astonished to hear the General call him an "old fool." General Bearce further told him that he had more likely lost $ 3,000,000 than profited $ 75,000 by the sale. Whereupon, Chaffee bought Rische's interest in the Little Pittsburg for a little over a quarter of a million dollars. 8 Dow sets the figure at $ 260,000. Dr. Fritz writes that Rische sold his interest in the Little Pittsburg "and other mines" for $ 262,500. 9 In November, 1878, the Little Pittsburg was combined with other properties as a stock company with a capital of $ 20,000,000.10

The party of which Dow was a member proceeded from New York to Denver by special train. From there the final leg to Leadville was covered by narrow gauge railroad and stagecoach. The group consisted of some of the directors of the Little Pittsburg, and Eastern capitalists or their representatives, who, as guests of Chaffee and D. H. Moffat of the Little Pittsburg, were invited to visit the mines. Senator Chaffee was unable to make the trip because of illness. As described by Dow, the visiting company was made up of an imposing list of men. Two other newspapermen were present, Alphonso Ross of the Boston Advertiser and Z. L. White of The New York Tribune. Dow reports that some of the capitalists present represented large interests in addition to their own, and that the "Tilden-Havemeyer combination; the Cooper-Hewitt clique, the Griswolds and the Barnum interests were represented.'' David H. Moffat, the host, was at the time cashier of the First National Bank of Denver, and a partner of Senator Chaffee, who was the president of that institution. Moffat became a

LETTERS FROM THE MAGIC CITY

multimillionaire and was the last of Colorado's railroad builders. Moffat Tunnel, the second longest railroad tunnel in the United States, is named after him. Moffat died in 1911. Among the guests was Stephen B. Elkins, who after amassing a fortune in the Southwest, settled in West Virginia. He was Secretary of War from 1891 to 1893, and was elected to the United States Senate from West Virginia in 1894, 1900, and 1906. A multimillionaire, he had large railroad, mining, and other interests. He died in 1911. Others in the party were General Charles C. Dodge, E. H. Potter, Brayton Ives, President of the New York Stock Exchange, R. F. Hill of New York, Captain M. L. Potter, who had amassed a fortune in the China trade, James D. Smith and his son, J. L. So utter, and C. L. Perkins, all noted New York bankers. A. J. Dam, the proprieter of the Astor House and the Union Square Hotel in New York, was included, as well as Captain M. B. Crowell of New Bedford, Massachusetts, Commodore S. H. Kane, E. S. Bowen, General Superintendent of the Erie Railroad, H. W. Gray, a prominent Wall Street operator, Dr. C. F. Bissel of Colorado, J. R. Grant, the son of the President, George Fryer, one of the early "Carbonate Kings" for whom Fryer Hill in Leadville is named, Professor 0. C. Marsh of Yale, and Professor Raymond, an expert geologist. The group was joined later by W.W. McFarland, who on the way foreclosed one of the railroads the group passed over thus combining business with pleasure, and H. A. W. Tabor, the best known of the "Carbonate Kings." Although Tabor's annual income at one time was estimated at $4,000,000, he died practically penniless in 1899. Dow's description of this trip and his letters from Leadville are printed in full in the Appendix. It is most unlikely that the historian in the course of research on Colorado in the 187o's would include The Providence Journal as part of his material. Even if he should discover these articles, it would take consider31

CHARLES H. DOW AND THE DOW THEORY

ably more effort first, to identify the author and second, to establish his stature. Several significant points should be noted in regard to "The Leadville Letters." First, at the time Dow wrote the articles he was an established journalist; trained by two great editors. Second, he was on the scene-actually in Leadville-at the height of the boom. Third, Dow was in a position because of his membership in the visiting party, to secure information from the leading actors of the drama, H. A. W. Tabor, George Fryer, and D. H. Moffat. Likewise, he was persona grata in Leadville. It is interesting to note that in his article, published July 21, 1879, Dow does not picture Leadville as being as dangerous a place for the ordinary citizen as is generally painted, even though 1879 was the year of the "Reign of the Footpads," supposedly Leadville's wildest time. 11 It is also of interest to see that Dow claims George Albert Harris was the first inhabitant of Leadville, arriving on May g, 1877. Prospectors were about in the mountains and Harris was soon joined by "a man from Rosita." This unnamed man was thus responsible for the first doubling of Leadville's population, and initiating its pattern of tremendous growth. By July "two men came from Granite" and the first store was opened by Charles Martin. H. A. W. Tabor arrived about the middle of July to open a second grocery. The next man to arrive on the scene opened a saloon. Dow estimates Leadville's growth as follows: "On the 1st of January, 1878, Leadville had a population of between 500 and 600. Six months later, she had 3,000, and a year later, from 15,000 to 20,000." 12 "The Leadville Letters" also show Dow's preoccupation with financial matters. As in his article on steam navigation between New York and Providence, he carefully traces pecuniary affairs. It is likely, too, that the trip to Leadville influenced 32

LETTERS FROM THE MAGIC CITY

Dow in his later writing on the business cycle. The experience of viewing a mining boom at first hand must have been a revealing one for the New England journalist. Dow noted the effect of the boom upon trade, prices, and rents as follows: 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 business 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. 13

Dow's observations form valuable additions to our knowledge of the fabulous mining days of 1879 in the "Magic City." "The Leadville Letters" make a fitting climax to Dow's career in general newspaper work. They are among the last, if not the last, articles written by him devoted primarily to other than financial matters. Dow's last letter bears a New York date line. The time is July, 1879. Whether Dow had decided by then to move the scene of his activities from Providence to New York is not known, but the entry in the Providence City Directory of 1880 reads, "Dow-Charles H., removed to New York City."

NOTES -The Centennial State) (Prentice-Hall, Inc., New York, 194 1), P· 3o4. 4. Muriel Sibell Wolle, Stampede to Timberline) (Sponsored by

Half a Century with the Providence Journal) p. 72. 2. Providence Journal) June 16, 1879. See Appendix. 3. Percy Stanley Fritz, Colorado 1.

33

CHARLES H. DOW AND THE DOW THEORY

7. George

F. Willison, Here They Dug the Gold, (Reynal and Hitchcock, New York, 1946), p. 300. 8. Providence Journal, June 28, 1879. See Appendix. 9. Fritz, op. cit., p. 303. 10. Providence journal, May 26, 1879. See Appendix. 11. Workers of the Writers' Program of the Work Projects Administration in the State of Colorado, Ghost Towns of Colorado, (Hastings House, New York, 1947), p. 77. 12. Providence journal, July 7, 1879. See Appendix. 13. Idem.

The University of ColoradoPublished by Muriel S. Wolle, Boulder, Colorado, 1949), p. 45. 5. Workers of the Writers' Program of the Work Projects Administration in the State of Colorado, Colorado: A Guide to the Highest State, (Hastings House, New York, 1941), pp. 168 and 174. Also see, among others, William M. Thayer, Marvels of the New West, (The Henry Bill Publishing Company, Norwich, Connecticut, 1891), p. 464. 6. Providence Journal, June 16, 1879. See Appendix.

34

CHAPTER FOUR

DOW zn

NEW YORK CITY

WITH HIS LEADVILLE EXPERIENCE FRESH IN HIS MIND AND, MORE

important, a part of his journalistic record, Dow moved to New York City in 1880. 1 The Wall Street journal describes his early experiences in Gotham: Practically unknown in New York and with no backers of any kind, he came down into Wall Street and sought employment as a reporter on mining stocks. He obtained a position at a small salary with one of the daily papers, his duties at once bringing him into intimate connection with the financial world. 2

Dow was soon known in Wall Street as a reticent but reliable reporter. 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. 3 By 1880 financial reporting was already a highly specialized

35

CHARLES H. DOW AND THE DOW THEORY

occupation. This was noted a decade before by a chronicler of the Wall Street scene, who wrote: There is no department so powerful as the financial column in the daily press. It requires rare talent, an industry that never flags, and high-toned integrity to write a reliable money article -one in which the street has confidence. Men can be found by the hundred who can write an able leader, criticise an actor or singer, itemize the city and do the odd jobs about a daily newspaper. But few men have the necessary combinations, and when a paper gets a reliable money writer, his position is usually fixed for life . . . . The work is both difficult and intricate, and to learn the ins and outs of Wall Street is almost the work of a life-time. The gentlemen who at present represent the daily press in Wall Street are possessed of far more than an ordinary amount of talent; and taken as a whole, really represent more brains than has been at any previous time concentrated by the papers . . . . These gentlemen are very industrious, and can be seen during the day flitting in and out of the stock exchange and gold room, and the different offices on the street, and now and then hobnobbing with the leading men of Wall Street; thus they hear all sides, and in this way arrive at an intelligent opinion on matters and things. 4

Alexander Dana Noyes, who began his famous financial editorial career as a Wall Street reporter in 1884, also provides an interesting picture of financial reporting in Wall Street in the 188o's. 5 Noyes writes: Much of the news came to hand as a matter of routine; for the whole machinery of the place was adjusted then, as now, to keeping Wall Street men informed of what was going on. The stock ticker printed at a glance the market's variations. State laws required that company earnings should be published, though by no means with the frequency and fullness of today. Rise or fall of surplus reserves at New York banks-sometimes a key to the whole position-was at week-ends officially re-

DOW IN NEW YORK CITY

ported by the clearinghouse; the course of money rates was posted in the Stock Exchange. 6

Later, Dow was employed as a reporter by the Kiernan News Agency. For a decade prior to Dow's arrival in Wall Street the Kiernan News Agency had delivered handwritten bulletins to the banks and brokers of the financial district by messenger boys. These bulletins were duplicated from manifold books of tissue paper sheets and carbon paper which were called "flimsies" or "slips." This manifolding process was used by the Associated Press in the early 187o's. The books of tissue sheets and carbon paper made it possible to reproduce 20 copies simultaneously. The writing instrument was an ivory pointed stylus, or an "agateware stencil." 7 Deliveries to clients were made at irregular intervals as news developed. The Kiernan News Agency was the headquarters of the roving financial reporters of the New York daily press. Here they would rendezvous and exchange bits of news and Wall Street gossip.Naturally, Kiernan would supply them with newsworthy items and receive information in return. Dow probably joined the meetings of the Wall Street reporters at the Kiernan News Agency during his coverage of the Street and in this way became acquainted with John J. Kiernan. Henry Alloway, a veteran Wall Street reporter, many years later described the operations of the Kiernan News Agency. 8 The atmosphere was apparently a leisurely one since Alloway notes: If a house of the status of Morgan, Belmont, Brown, Cisco, Conner, Seligman, Lanier had announcements to make, there might be hustle; and often super-events did happen; but the average output of an average day by the Kiernan News Agency about fitted a sociable holiday. London quotations an hour ahead of Stock Exchange opening, the end-of-the-week Bank Statement and foreign mail closing hours were top-notch fixtures. Periodically, railway earnings and freight rate fluctua-

37

CHARLES H. DOW AND THE DOW THEORY

tions got attention, not by being sought out but issued as a courtesy. Either before he joined the Kiernan News Agency, or while he was a member of its staff, it is said that Dow wrote financial articles and editorials for the New York Mail and Express when that newspaper was the property of Cyrus W. Field, of transatlantic cable fame. 9 Field did not combine the New York Evening Mail and the New York Express until 1882. 10 Prior to the combination of the two papers Field owned the New York Evening Mail, and it is likely that Dow wrote for this daily~ also. Edward D. Jones was a fellow worker of Dow's at the Kiernan News Agency. Jones was born in Worcester, Massachusetts, in 1856 and was a student in the class of 1877 at Brown University. In 1876 he left college, without graduating, for the more exciting role of a newspaper reporter, working for The Providence Evening Press for two years. It was during these years in Providence that Dow and Jones first became acq uainted.11 The Providence City Directory lists Jones as Editor of The Providence Star in 1878 and of The Sunday Dispatch in 1879 and 1880. 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." A flight of stairs led to a soda fountain, operated by a man named Danielson, and a narrow passageway beside its serving counter led to a small room in the rear of the building. This room served as their first office.12 Like the Kiernan News Agency the business of Dow Jones & Company was delivering "flimsies," or "slips," to the financial

DOW IN NEW YORK CITY

institutions of Wall Street. Dow and Jones took turns collecting news during business hours, and Charles M . Bergstresser, also a former employee of Kiernan, who later became a partner in the new enterprise, wrote, or rather "styloed" it, by the manifold process, upon news slips. Messenger boys provided the motive power for delivering the news slips at their proper destinations. After business hours Jones would make a nightly visit to the Windsor Hotel, a famous meeting place of leading Wall Street figures, for any additional news and would then repair to Dow's apartment where he and Dow prepared the news for the next day. Bergstresser opened the office at seven o'clock in the morning and wrote an early release of which the "Summary for private wires" and "London prices" were the important items. 13 By 1884, although the business was still located in the small dark room in the rear of the soda fountain, it had expanded in size. On one side of the room a few plain pine boards walled off .a cubicle to give Dow and his assistant a private office of sorts. Jones had a desk at the far end of the room upon which he rested his feet as he reclined in a lean-back chair, and dictated the news to four or five manifold writers. A dozen or more "lively boys" waited for the manifold writers to arrange the news slips so that they could deliver them to the customers on their respective routes. Each manifold writer had certain messenger boys assigned to him, and a boy's route consisted of from eight to 12 customers. The chief newsgatherers, or reporters, were Bergstresser and James King. Jones besides dictating the news to the manifold writers directed the activities of the "boys." The scene was one of great activity. As soon as the messenger boys returned from covering their routes, they would start out again immediately if additional news slips had been prepared by the manifold writers. Everyone connected with the firm, including the messenger boys, solicited subscriptions for the

39

CHARLES H. DOW AND THE DOW THE.ORY

news service and the employees were paid on a commission basis when successful. Likewise, the messenger boys reported any news leads they encountered when they were making their rounds of the banks and brokerage offices. The closing of the Wall Street Bank in August, 1884, was reported to Jones by a breathless messenger boy who had been passing the Mills Building on Broad Street where the bank was located, when he noticed a man closing the door. King and Bergstresser were immediately sent to the scene and reported that the boy had been correct in his belief that something was wrong, and that the bank had suspended operations. Railroad earnings reports were items of paramount importance. The main railroads reported earnings on a monthly basis, and as the news was received a great shout of "earnings!" filled the air. This caused manifold writers and messenger boys to drop all other tasks and turn to the duty of forwarding the earnings figures to their customers posthaste. A printed news sheet containing the day's principal news items, which Dow Jones & Company began publishing in 1883, was included in the last delivery of the day. This news sheet could be subscribed for separately and was the forerunner of The Wall Street Journal. Dow Jones & Company began its own printing operations in the old Oil Exchange Building at 71 Broadway apparently in February, 1885, although an earlier start in 1884 also seems possible. 14 On Christmas Eve, 1885, Dow became a member of the New York Stock Exchange and remained one until April 30, 1891. The records of the New York Stock Exchange indicate that he was a partner of Goodbody, Glynn & Dow from December 24, 1885, to April 30, 1891, when the firm dissolved. Dow is not listed as a partner in the successor firm, Robert L. Goodbody & Company. The circumstances surrounding Dow's partnership in the

DOW IN NEW YORK CITY

brokerage -firm are not altogether clear. Henry Alloway claimed that Dow refused an invitation to become a partner in Winslow, Lanier & Company, the American representatives of the Deutsche Bank of Berlin, but that "in a good fellowship to an old family friend he did for a season identify with a commission house, whose title came to be Goodbody, Glynn & Dow.'' 15 William Peter Hamilton writes: Dow also had the advantage of some years experience on the floor of the Stock Exchange. It came about in a rather curious way. The late Robert Goodbody, an Irishman, a Quaker, and an honor to Wall Street, came over from Dublin to America. As the New York Stock Exchange requires that every member shall be an American citizen, Charles H. Dow became his partner. During the time necessary for Robert Goodbody to naturalize, Dow held a seat in the Stock Exchange and executed orders on the floor. When Goodbody became an American citizen Dow withdrew from the Exchange and returned to his more congenial newspaper work. 16

The Wall Street journal at the time of Dow's death printed a letter from Robert Goodbody which said, in part, "I came to New York in 1885 and at once there commenced between us [Dow and Goodbody] a close association in business." 17 On April g, 1881, Dow was married to Lucy M. Russell. A daughter of Mrs. Dow, by a previous marriage, later married William Woodcock Goodbody, a younger brother of Robert Goodbody. Mrs. Dow was born in North Branford, Connecticut, on March 22, 1846. She survived Charles H. Dow by many years. 18 The Wall Street Journal was first published on July 8, 1889, with Dow as editor, and has been a part of the financial scene ever since. Thomas F. Woodlock, who joined the staff in September, 1892, states that at that time the firm was still composed of Dow, Jones, and Bergstresser. Jones devoted his attention to the desk work of the firm, and Dow, Bergstresser, Phelps 41

CHARLES H. DOW AND THE DOW THEORY

(another reporter), and Woodlock covered the reporting assignments. Dow attended to the news concerning the stock market, and was well known at the offices of the leading investment bankers and brokers of Wall Street. By 1893 a "lady typist" was added, and in addition to her stenographic duties she answered the single telephone in the establishment. She was hired by Dow in the hope that her presence would limit the amount of profanity normally present in the newspaper offices of that day. It is difficult now to visualize a newspaper or business office without many telephones. However, Dow Jones & Company did not subscribe to telephone service until 1892. The company first appears in the telephone directory issued by the Metropolitan Telephone and Telegraph Co. on September 1, 1892. A telegraph operator kept in touch with the Boston News Bureau, 19 and full- or part-time correspondents in Washington, Philadelphia, and several other cities furnished The Wall Street Journal with regional news items. Dow's work on The Wall Street Journal firmly established his reputation as a financial journalist. His many paragraphs concerning the financial scene appeared in this famous newspaper from the date of its first publication until shortly before his death on December 4, 1902. Thus, for over a decade Dow's observations on investment and speculation appeared in print. As a matter of course, and in conformity with prevailing newspaper practice, Dow did not identify his writings, but his editorials bear the stamp of his greatness. The Wall Street Journal remains as a monument to his newspaper ability. Conflicting evidence exists concerning Dow's operations as a stock market speculator. One authority writes: "One of the best known classifications of price movements is that of Charles H. Dow, one of the founders of The Wall Street journal) and himself a very successful speculator." 20 On the other hand,

42

DOW IN NEW YORK CITY

William Peter Hamilton advises that Dow's "rare speculations were confined to ten share lots.'' 21 Charles H. Dow was not a financial visionary who evolved a Monte Carlo system of beating the stock market. He was, rather, a journalist of the highest standing who had experienced the leadership of two of the outstanding editors of his day-Samuel Bowles and George W. Danielson. Obviously he was a man of great intellect. Furthermore he knew his subject -the New York Stock Exchange-not only as a financial reporter and editor, but also as a member of that institution where he observed at firsthand its modus operandi. While he was active in writing what S. A. Nelson named "Dow's Theory," Charles H. Dow was one of the leading figures in financial journalism in the country.

NOTES 1.

2.

3. 4.

5.

6.

Brooklyn Daily Eagle, D ecember 4, 1902; The Springfield R epublican, December 5, 1902; The New York Times, December 5, 1902; The Wall Street journal, December 5, 1902; The Providence journal, December 5, 1902. The Wall Street journal, December 5, 1902. Idem. Matthew Hale Smith, Twenty Y ears Among the Bulls and B ears of Wall Street, (American Book Company, New York, l 871 ), PP· 520-52 I. Alexander Dana Noyes, The Market Place, (Little, Brown ·& Company, Boston, 1938), pp. 38- 55. Ibid., p. 49.

43

7. See Victor Rosewater, History of Cooperative News-Gathering in the United States, (D. Appleton & Company, New York, 1930), p. 143. 8. The Wall Street Journal, June 27, 1932. The article is entitled "Wall Street News Gathering a Half Century Ago" and signed H. A. 9. The Wall Street Journal, December 5, 1902; The New York Times, December 5, 1902; Brooklyn Daily Eagle, December 4, 1902; The Providence Journa l, December 5, 1902. 10. Winifred Gregory (ed.), American Newspapers I82I-z936, (The H. W. Wilson Company, New York, 1937), p. 47. 11. Letter from Edward D. Jones

CHARLES H. DOW AND THE DOW THEORY

to Dow Jones & Co. at the time of Dow's death, published in The Wall Street Journal, December 5, 1902. 12. Letter from Dow Jones & Company messenger of 1884, John C. Gerrity, to the Editor of The Wall Street Journal and published therein on August 27, 1948, is main source of descriptive material on early operations of the firm. 13. Barron's, August 24, 1931. The article is entitled "Home Sweet Home" and was written by Thomas F. Woodlock according to the comments of the Editor in the same edition. 14. An unpublished letter dated May 1, 1932, from G. H. Ramsden, an employee in 1885, to C. E. Kissane of The Wall Street Journal, gives the 1885 date and this is generally accepted. However, Charles King is quoted as saying that he came from Providence in 1884 to be a printer for Dow Jones & Company, in an article under the heading "New Home for

15.

16.

17. 18.

19.

20.

21.

44

50th Birthday" in The Wall Street journal, June 27, 1932. The Wall Street journal, June 27, 1932. The article is entitled "Wall Street News Gathering a Half Century Ago" and signed H. A. William Peter Hamilton, The Stock Market Barometer, (Harper & Brothers, New York, 1922), p. 22. The Wall Street journal, December 5, 1902. Robert Piercy Dow (compiler), The Book of Dow, (The Tuttle Company, Rutland, Vermont, 1929), P· 463. The Boston News Bureau was established by Clarence W. Barron in 1887. It was the New England correspondent of Dow Jones & Company. Thomas Conway, Jr., and Albert W. Atwood, Investment and Speculation, (Alexander Hamilton Institute, New York, 19 I I), PP· 102-3. The Wall Street Journal, October 8, 1927.

CHAPTER FIVE

THE S. A. NELSON VERSION

of THE DOW THEORY

The A B C of Stock Speculation as Volume V in Nelson's Wall Street Library. Other books in the series were Volume I, The ABC of Wall Street; 2 Volume II, The Anatomy of a Railroad Report and Ton Mile Cost; 3 Volume III, The Theory of Stock Exchange Speculation; 4 Volume IV, The ABC of Banks and Banking; 5 and Volume VI, The AB C of Options and Arbitrage.6 In The ABC of Stock Speculation the chapter headings of Chapter V through XIX carry an asterisk, and in the accompanying fo?tnotes, explaining this reference mark, are the two words "Dow's Theory." · Evidently, this was the first use of the term in print. Thus, the Dow Theory was originally named in footnotes incorporated in a work on speculation in common stocks, hardly an auspicious beginning for an appellation that has endured in the language of the market place to the present day. In the Preface to the book Nelson advises: IN THE YEAR 1902, SAMUEL ARMSTRONG NELSON ADDED 1

Following the publication of The ABC of Wall Street there were many requests for a book dealing with the principles governing stock speculation. If there is one man better qualified than another to produce such a book that man is Mr. Charles

45

CHARLES H. DOW A N D THE DOW THEORY

H. Dow. Several attempts were made to have him write the desired volume but they were unavailing. From time to time in his Wall Street career, extending over a quarter of a century, Mr. Dow has carefully evolved his theories of successful stock speculation.

Thus, having failed in his efforts to have Dow pen the volume on stock speculation, Nelson undertook the work himself, using selected editorials written by Dow and previously published in The Wall Street Journal} as the basic framework for the book. Of the 35 chapters in the book, Nelson states in the Preface that Chapters IV through XX are the work of Charles H. Dow, but he designates only Chapters V through XIX as "Dow's Theory." In this manner Nelson first named the theory, and was the first disciple of Dow in print. However, Nelson cannot be classified as an exponent of the Dow Theory as his work consisted merely of the selection of material from Dow's editorials. He did not add by way of interpretation to the words of Dow. The following are the dates of Dow's editorials designated by Nelson as "Dow's Theory," and published in The Wall Street journal. These have been correlated to Nelson's numerical chapters in The A B C of Stock Speculation. Dow wrote many other editorials on the stock market in the period between December 14, 1900, and July 31, 1902, in addition to those chosen for inclusion in the book; so Nelson must have used some criterion in order to select 16 of them as "Dow's Theory." It has not been possible to ascertain what standard of judgment Nelson used. The thought that Dow may have aided in the selection is intriguing, but there is no evidence to indicate that he did so. Since Nelson coined the phrase "Dow's Theory," and presented his version of it to the financial reader, it seems logical that the study of the Dow Theory should begin with an an alysis of the 15 chapters designated by Nelson as comprising the 46

THE S. A. NELSON VERSION OF THE DOW THEORY

Chapter Number V

VI VII VIII IX X

XI XII XIII XIV

xv

XVI XVII XVIII XIX

Date of Editorial

Chapter Title Scientific Speculation The Two General Methods of Trading Three General Lines of Reasoning Swings Within Swings Methods of Reading the Market The Operation of Stop Orders Cutting Losses Short The Danger in Overtrading *Methods of Trading

{

The Out of Town Trader The Short Side of the Market Speculation for the Decline Concerning Discretionary Accounts The Liability for Loss The Recurrence of Crisis

December February December January July July December July January June July January October November June July

14, 1900 22, 1901 20, 1900 4, 1902 20, 1901 15, 1902 28, 1900 11, 1901 19, 1901 13, 1901 31, 1902 24, 1902 17, 1901 20, 1901 26, 1901 9, 1902

* Two editorials combined.

theory. For convenience these editorials of Dow will be called the "S. A.Nelson version" of the Dow Theory. As a check, a study of the original material, as published in The Wall Street Journal) has been made to see if Nelson distorted, or misinterpreted, Dow's views. Comparing the work of Nelson with the editorials as they originally appeared reveals that in certain instances there is some abridgment. However, this shortening is minor in character and consists for the most part of the elimination of Dow's observations on the technical position of the stock market at the time of writing. Nothing significant from the standpoint of Dow's stock market thought has been excluded, and if the material omitted were restored, there would be some enlargement on the S. A. Nelson version1 but the basic tenets of the Dow Theory as presented by Nelson would remain unchanged. In the following analysis of the S. A. Nelson version, an attempt is made to discuss at least briefly the principal theme and scope of each of Nelson's pertinent chapters in turn.

47

CHARLES H. DOW AND THE DOW THEORY

ANALYSIS OF THE

S.

A. NELSON VERSION OF THE

Dow

THEORY

Chapter V entitled "Scientific Speculation." Is there such a thing as scientific speculation? Dow says that answers in the affirmative have been so hedged by qualifications as to make them of little, if any, use for practical purposes. However, there are general rules in speculation worth heeding, and the experiences of stock market operators have "crystallized" these into stock market maxims. The first is "buy cheap and sell dear"-according to Dow a precept as old as speculation itself, but this sage piece of advice fails in the vital point at issue in that it does not solve the riddle of when a security, or commodity, is cheap and when it is dear. The elder Rothschilds purchased properties of known value when others desired to sell, and sold when many buyers were in the field. This is a sound principle since the public as a whole, Dow informs us, purchases and sells stocks at the wrong time due to the fact that markets are partly made by manipulation. This has led to the theory employed by certain stock traders that the public is always wrong. Thus, they attempt to ascertain whether the public is buying, or selling, stocks on balance and base their operations on selling when the public is bullish, and buying stocks when the public is bearish. Of course, Dow notes that there are exceptions to the rule; any marked advance of stock prices will result in profits for the public in spite of in judicious timing of stock purchases. However, Dow concludes the Rothschild principle is a sound one. The rule of Daniel Drew to "cut your losses short, but let your profits run" is undeniably sound trading practice. The public usually reverses it by taking small profits and large losses. The difficulty involved in the application of the rule is that the absorption of a series of small losses is discouraging to the stock trader. In conclusion, Dow quotes Jay Gould's policy of endeavoring 48

THE S. A. NELSON VERSION OF THE DOW THEORY

to "foresee future conditions in a property" and to exercise patience in waiting for the desired results after a commitment has been made on the basis of the forecast of future value. With respect to this method Dow says: Assuming the ability to foresee the future, it is the wisest of all courses; but many who have tried this method have found that the omission of essential factors made their forecast valueless, and both their courage and their patience of little avail. Nevertheless, this method should not be discarded on account of the difficulties involved. Within limitation, the future can be foreseen. The present is always tending toward the future and there are always in existing conditions signals of danger or encouragement for those who read with care.

Chapter VI entitled "The Two General Methods of Trading." Dow's editorial was published in The Wall Street Journal under the title "Trading on Scales." In it Dow advised that there are two general methods of trading. The first consists of trading in active stocks in relatively large amounts relying upon stop orders for protection. In using this method the trader is not concerned to any degree with stock market values. He is, in effect, guessing the direction a certain stock will move. If right in his surmise he follows Daniel Drew's motto and "lets his profits run," and if wrong the stop loss order ends the transaction with a loss. Therefore, it is important that the stock traded in be active enough to permit the efficient use of stop orders. Since a stop order covering a round lot ( 1 oo shares) becomes a market order when the limit specified in the stop order is reached, it is, of course, desirable to have as broad a market as possible. Dow ends his comments on this method by observing that the trader is fairly sure of success if he can guess right at least half the time. This would indicate that Dow expects profits, on balance, to exceed losses in amount. The second method requires that the stock trader know:

49

CHARLES H. DOW AND THE DOW THEORY

a) the approximate value of the stock in which he intends to trade. b) the tendency of the market-bull or bear. c) the relative position of the stock from the viewpoint of near term market action. d) the approximate value of the stock "for some months to come." The trader then makes his initial purchase at what he considers a favorable price and proper time. He prepares to buy an equal amount of stock every point down if the stock declines and does so as far as the decline continues. Dow uses the term "per cent" rather than "point." However, when he wrote stocks were considered in terms of par ($ 100) and per cent of par. Notice that this method is not "dollar averaging" as a constant dollar amount is not employed, but rather a constant number of shares are purchased. Although this method is widely used by large operators (men of extreme wealth such as Jay Gould) it must be realized that by virtue of their position, and access to economic and financial intelligence, they know the value of the stock in which they trade, and buy it as the merchant buys staple goods. The small operator, on the other hand, suffers from two distinct disadvantages. First, unlike the large operator, he does not fully know the value of the stock concerned. His knowledge is adequate to a certain point, but beyond this point his information is strictly limited. Since the small trader is uncertain about underlying value a substantial decline is likely to unnerve him causing him to sell at precisely the time when purchase to average his holdings would be to his ultimate advantage. Naturally, the small operator wonders if he has overlooked something in his analysis when a decline of any great proportion occurs. The large operator knows that the underlying value of the stock has not been disturbed by such a decline and that the stock is, after the

50

THE S. A. NELSON VERSIO N OF THE DOW THEORY

decline, a better bargain than when the initial purchase was made. The second handicap of the small operator is that lack of sufficient capital leads to overtrading. Overtrading does not mean excessive buying or selling, i.e.) changes in position in the market, but denotes buying on a margin basis in larger amounts than is prudent considering the resources of the operator. Dow, then, in summary outlines the following points concerning the scale method of operation: If, however, an outsider will provide $2,500 as his speculative capital and will trade in ten-share lots in a thoroughly good railroad stock, beginning his purchases only after a decline of five points in a rising m arket, and ten points in a bear market, following the decline with purchases every point down, and retaining all the stock bought, he seldom need make a loss. Such campaigns require time, patience and the persuance of a fixed policy, but whoever will follow this policy will find himself able to get a high rate of interest on the capital invested. It is an old saying in Wall Street that the man who begins to speculate in stocks with the intention of making a fortune usually goes broke, whereas the man who trades with a view of getting good interest on his money, sometimes gets rich. This is only another way of saying that money is made by conservative trading rather than by the effort to get large profits by taking large risks. After allowing for all the risks involved, we think the outsider who wants to trade in stocks has a better chance working in small lots on a scale than in any other way, provided he will pay attention to certain essential points, which for convenience of reference we will enumerate in order. 1. Bull markets and bear markets run four and five years at a time. Determine by the average prices which one is underway. 2. Determine the stock or stocks to trade in. They should be railroad stocks, dividend payers, not too low, nor too high,

CHARLES H. DOW AND THE DOW THEORY

fairly active, and for the bull side below their value; for the bear side above their value. Values are determined roughly by the earnings available for dividends. 3. Observe the position of your stock with relation to recent fluctuations. In a bull market, the time to buy is when a stock has had four or five points decline from the last previous top. In a bear market, the time to begin to sell is when such a stock has had three or four points rally from the bottom: 4. Stick to the stock bought until a fair profit or until there is good reason for deciding that the first estimate of value was wrong. Remember that an active stock will generally rally from ¾ per cent to ¾ per cent of the amount of its decline under adverse conditions and more than that under favorable conditions. 5. Have money enough to see a decline through without becoming uneasy or over-burdened. $2,500 ought to take care of a ten-share scale every point down-that is to say, supposing the first lot to be bought five points down from the top, $2,500 ought to carry the scale until the natural recovery from the low point brings the lot out with a profit on the average cost. It will not do to expect a profit on every lot, but only on the average. In a bull market it is better to always work on the bull side; in a bear market, on the bear side. There are usually more rallies in a bear market than there are relapses in a bull market. 6. Do not let success in making money in ten-share lots create a belief that a bolder policy will be wiser and begin to trade in 100-share lots with inadequate capital. A few hundredshare losses will wipe out a good many ten-share profits. 7. There is not usually much difficulty in dealing in tenshare lots on the short side. If one broker does not wish to do it, another probably will, especially for a customer who amply protects his account and who seems to understand what he is doing.

It will be noted that in section 3 above Dow speaks of the time to begin to sell in a bear market. This, naturally, refers to

52

THE S. A. NELSON VERSION OF THE DOW THEORY

short sales as is later brought out in sections 5 and 7. Likewise, in section 4 above when Dow writes of a "rally from¼ per cent to o/s per cent" it is obvious from a study of his complete writings that three-eighths to five-eighths of the amount of the stock's decline is meant and the term "per cent" is used in error. Chapter VII entitled "Three General Lines of Reasoning." This chapter contains Dow's famous version of the three movements in the market and further expands Dow's thoughts as set forth in his editorial comprising Chapter V of Nelson's work. Dow reminds his readers that the experience of large operators had "crystallized" into three general lines of reasoning. These are, namely, first, the stock market is deceptive if judged by its surface appearance; secondly, it is a sound practice in trading to cut losses short and let profits run, and, finally, to foresee the future is a certain and simple way to riches. The problem, according to Dow, is how these lines of reasoningwhich he accepts as sound-may be formulated into a practical method of stock market trading. Dow turns his attention to the timing of stock market purchases and states his well-known version of the action of the general market as follows: The market is always to be considered as having three movements, all going on at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement covering at least four years in its duration.

The day-to-day movement should be ignored by all except those traders who pay no commissions-floor traders, or room traders, operating for their own account. They were members of the New York Stock Exchange and as they executed their own orders they had no commissions to pay. At the present time floor traders operate on the same basis, i.e.) they pay no com-

53

CHARLES H. DOW AND THE DOW THEORY

missions. However, it must be recognized that the cost of a seat on the New York Stock Exchange, and various transfer taxes and clearing fees entail considerable expense. The "medium swing," or second movement, should ordinarily be the one utilized by the outside trader. He should not attempt to trade in more than two or three issues at the same time. Dow believes that the stocks selected for trading should be charted so that the operator is familiar with their price movement over extended periods of time. From these charts the trader should be able to ascertain the position of the stock in question with reference to the "general swing" of the market. Dow further advises that, with the chart of a stock, the trader should record the volume of transactions in the issue, and other statistical data with respect to "increases and decreases in earnings, increases in fixed charges, development of floating debt, and above all. the actual dividend earnings as shown from month to month." The operator is also counseled to observe the movement of the market in general as indicated by the averages published daily in The Wall Street] ournal as "this shows the market more clearly than it is shown by one stock." By following this procedure the trader is able to determine the value of the stock concerned; whether this value is increasing or not, and opportune times for purchase. As an example, Dow assumes a stock has historically shown a 30-day swing of 5 points. Thus, the operator would not purchase the stock when his chart showed that 3 of the points had already been recorded since this would limit his expected profit to only 2 points. Following this line of thought further, Dow reasons that a trader should attempt to buy on a low point of a decline. Let us suppose the trader was considering the purchase of Union Pacific and that it was selling at a figure below estimated value. Further, let us assume we were in a bull market, and that 54

THE S. A. NELSO N VERSIO N OF THE DOW THEORY

Union Pacific had declined 4 points from its recent high, that earnings and prospects for the road are favorable, and that the outlook for the general market is in all respects normal. Under these conditions purchase of the stock is in order. The prudent operator would, however, probably only begin purchases here and might buy one-half of the total amount of stock he wished to accumulate. He then would place orders to buy the balance as the price of Union Pacific declined. Dow cautions that the stock might decline to a greater extent than anticipated and it might be necessary to exercise patience and hold the stock purchased for a considerable period of time to secure a profit. Likewise, he does not preclude the possibility that developments after purchase might cause the operator to sell his holding with the thought of repurchasing it at a much lower figure. But, these possibilities should be viewed as exceptions and Dow concludes: "In a majority of cases this method of choosing the time to buy, founded upon clear perception of value in the stock chosen and close observation of the market swings under way will enable an operator to secure stock at a time and at a price which will give fair profits on the investment.'' Chapter VIII entitled "Swings Within Swings." In this editorial Dow, in response to a question from a correspondent, restates his description of the three movements of the stock market. The correspondent had inquired: "For some time you have been writing rather bullish on the immediate market, yet a little bearish in a larger sense. How do you make this consistent?" Dow replies that this question is frequently asked and it illustrates the fact that the questioner is not familiar with the pattern of price fluctuations when viewed over extended periods of time. It is not true, as many people believe, that the price changes in any one day are complete in themselves and are not related to "larger movements which may be under

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way." Again Dow restates his celebrated version of stock market movements as follows: Nothing is more certain than that the market has three welldefined movements which fit into each other. The first is the daily variation due to local causes and the balance of buying or selling at that particular time. The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days. The third move is the great swing covering from four to six years. When the investor views the market, Dow counsels, he must consider these movements. If the main move is upward (a bull market) speculators are provided with opportunities to buy on reactions, but if the main movement is in the opposite direction (a bear market) rallies furnish occasions for short selling. It follows, as a general rule, that losses on long stock should not be taken in bull markets or short sales closed out at a loss in bear markets. Dow continues: It is a bull period as long as the average of one high point exceeds that of previous high points. It is a bear period when the low point becomes lower than the previous low points. It is often difficult to judge whether the end of an advance has come because the movement of prices is that which would occur if the main tendency had changed. Yet, it may only be an unusually pronounced secondary movement. Once more, as in the editorial entitled "Three General Lines of Reasoning," Dow sets forth a basic procedure for the trader as follows: a) Determine the value of the stock selected for trading purposes. b) Determine the main course of the market, i.e.} bull or bear. On this feature Dow says, "We know of nothing more

THE S. A. NELSON VERSION OF THE DOW THEORY

instructive on this point than the course of prices as printed daily." (In The Wall Street Journal.) c) Determine the "position" of the secondary movement, or swing. Dow again uses Union Pacific as his example. He sets forth his premises, namely, a bull market exists and Union Pacific has declined in the past 30 days from a high of 108 to 98. Here the operator could buy part of the total amount of Union Pacific he decided to trade (his line). On further decline he would buy more, and he would do the same on a marked advancing tendency. Once the line is accumulated the operator need only watch the general market and patiently wait for an advance. Under these conditions Dow advises that a 10 point decline in a bull market is practically certain to have a recovery of more than 5 points and a full 10 point recovery is not an unreasonable expectation. Thus, in a good general market, the operator could wait for the 5 point recovery and then consider the use of a stop order to protect his profit as he pursued the recovery movement further. This method, Dow claims, will even work in a bear market but the profit taken should not be as great as a bear market is a weak market and particularly vulnerable to soft spots checking an advance. Chapter IX entitled "Methods of Reading the Market." Through the medium of a reply to the question of a correspondent, Dow, in this editorial, discusses the forecasting of stock market movements. The correspondent inquires, "Is there any way of forecasting the course of the market from the tape, from your record of transactions or from the summarized movement of prices? Transactions must mean something, but how can a trader tell what they mean?" Dow replies that the question is an old one and, although it has brought forth a variety of answers, there is considerable

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doubt if any of the answers have been, or ever can be, completely satisfactory. There are, however, several methods "in practical use" that should be examined to stimulate thought on the subject. Dow discusses the methods in tum as follows: First, the "book method" is discussed. This consists of the charting of 1 point moves in individual stocks to ascertain if manipulators are accumulating or distributing them. As the prices are charted they form lines with an overall horizontal direction changing into diagonals as the market advances or retreats. This normal pattern is interrupted at times when a stock despite good activity (volume of transactions) will remain in a relatively narrow range-Dow suggests about 2 pointsuntil the chart shows a rather lengthy horizontal line. These line formations suggest accumulation or distribution leading many traders to buy or sell at the same time. Records extending over a period of 15 years (circa 1886-1901), according to Dow, "seem to support the theory that the manipulation necessary to acquire stock is often times detected in this way." The next method discussed, named the "theory of double tops," is likewise a charting process involving individual stocks. In this method, if a stock makes a top and suffers a moderate decline, and on the subsequent move advances close to the previous top but does not reach it, the decline from this second top is likely to proceed some distance. If the operator attempts to trade on this theory alone, Dow cautions, he will experience many exceptions as well as many movements when signals are not provided. Following these remarks on a system of trading Dow enters into a discussion of the "theory of averages." This method is based fundamentally upon the thesis that over extended periods of time the market has an equal number of days of advance and decline. Dow says the premise is true-"If there come a series of days of advance there will almost surely come the balancing days of decline."

THE S. A. NELSON VERSION OF THE DOW THEORY

Dow points out that the difficulty with this manner of trading is that the swings of the market are related one to the other and every possible combination of days of advance and decline is liable to occur. Thus, even though the theory, in the long run, could account for any unusual number of days of advance or decline, the operator would find it of little use in trading operations based upon a series of short-term stock market movements. Dow then proposes as more practical a theory based on "the law of action and reaction." This is founded upon the assumption that a "primary movement in the market will generally have a secondary movement in the opposite direction of at least three-eights of the primary movement. If a stock advances 10 points, it is very likely to have a relapse of 4 points or more." Dow states that no matter what the size of the advance the principle still applies. Of course, he recognizes that it is impossible to tell in advance the length of any "primary" (initial) move but the reaction bears a relationship to the magnitude of the movement. Thus, the trader is in a better position to trade with success on the reaction than on the initial movement. In other words he can use "the law of action and reaction" to forecast the magnitude of a reaction even though he possesses no guide to forecast the extent of an initial move. Operators of "large experience" use a method designated as the theory of "responses." This theory is based on the fact that to a lesser or greater degree the market is at all times subject to manipulation. Therefore, a large operator wishing to advance the market "puts up" two or three leading stocks. He might do this by large buying orders or by manipulation. The operator observes the reaction of the balance of the market to this advance on the part of several of the leaders. If the public follows the lead by purchasing other stocks the market, of course, rises. The game of follow-the-leader continues and the operator

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gives another lift to his favorites and the general equity market follows. On the other hand, if the general public is not induced to buy, this manipulative technique is discontinued. This method, Dow informs us, is employed mostly by operators who watch the tape. However, it may be detected by observing what stocks advanced during certain hours and whether the market followed. Dow concluded the editorial with the thought that the best criterion in judging the market is to correlate the stock market to values. In this connection his closing words are of especial significance as he observes: The market is not like a balloon plunging hither and thither in the wind. As a whole, it 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 thought with great operators is not whether a price can be advanced, but whether the value of the property which they propose to buy will lead investors and speculators six months hence to take stock at figures from ten to twenty points above present prices. In reading the market, therefore, the main point is to discover what a stock can be expected to be worth three months hence and then to see whether manipulators or investors are advancing the price of that stock toward those figures. It is often possible to read movements in the market very clearly in this way. To know values is to comprehend the meaning of movements in the market.

Chapter X entitled "The Operation of Stop Orders." As the title of the editorial suggests, this is a discussion of the use of stop orders as a technique of stock market trading. Once again Dow uses the medium of the correspondent inquiry to introduce the subject, and the question to be answered follows: "My brokers advise me to protect my transactions by stop orders. It seems to me that stop orders may be good for brokers

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THE S. A. NELSON VERSION OF THE DOW THEORY

by giving them commissions, but they make customers take unnecessary losses. Do you advise speculators to give stop orders?" In reply Dow advises that the analysis of a considerable number of fluctuations to determine the average performance of stop orders indicated that the employment of stop orders by the trader on margin, particularly the operator trading on relatively thin margin, appears a wise procedure. However, he cautions allowances should be made for differing circumstances. For example, the "semi-investor," i.e.} an operator on 50 per cent margin basing his trades on the values of the various stocks purchased and working in conformity with the longterm movement of the market, need not employ stop orders. In fact, if in a bull market he purchases an "intrinsically cheap" stock based on earnings, at a time the stock suffers a temporary decline, with the investment objective of holding the stock until its market price reflects its value, the use of a stop order is foolishness. On the other hand, the margin trader operating on thin margin with capital of $2,000 or $3,000 basing his trading on "points" or mere impressions of whether the general equity market will advance or decline may profitably employ stop orders. Regarding points, William Worthington Fowler, who closely observed the New York speculative scene in the late 186o's, states, "Pools and points, the P's of Wall Street, are inseparably connected. A 'point' . . . is a piece of information furnished by one operator to another, respecting the upward or downward course of a stock. The operator who gives the point is presumed to know what he is talking about. He may have intimate relations with the director of some railroad company, the stock of which is actively dealt in, or he may himself be a director. Perhaps he is known to do his business in the office of a prominent brokerage-house, where pools are 61

CHARLES H. DOW AND THE DOW THEORY

organized, or, which is more probable, he may be a member of a pool." 7 It is of interest to note that Dow suggests placing a stop order 2 points under the purchase price of the stock concerned. If the trader purchases a stock on advice (a tip) that the stock would advance and if instead of advancing the stock declines 2 points without plain reason for such a decline, it is apparent the intelligence received was faulty, and the sooner out of the situation the better. Likewise, Dow counsels, if a stock declines 2 points it often declines more and "it is a peculiarity of the human mind to disregard a small loss, but to get frightened and take a large loss just when wisdom would call for averaging a purchase." Dow writes that a myriad of traders have decided at 2 points loss that they will hold a specific stock and see the transaction through even if the stock becomes worthless, only to close out the trade at 10 points loss on the fear that the stock might decline 10 more. The experience of most operators employing stop orders is that the small losses entailed effectively brake trading activity with a small total loss, while neglecting to take action on a loss often results in it becoming so large that the trading account must be closed out for lack of funds. Again Dow advises that the maxim "let your profits run, but cut your losses short" has received the sanction of the majority of the eminent stock operators. Daniel Drew is generally credited as the author of this axiom, but there is a very strong possibility that he only popularized the saying, and Dow informs us that a dozen persons have received credit for its creation. However, "the great fortunes in stocks have not usually been made by people who give stop orders," but rather the opinion that the use of stop orders was a sensible market technique came about when it was found an advantageous way of protecting the accounts of traders operating without sufficient capital. Stop orders apply particularly in circumstances of this kind.

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Dow notes that the greatest stock market profits have been captured by people who correctly gauged the chain of events and purchased large amounts of stock on the premise that an increase in general prosperity would result in price appreciation of the stocks held. This entailed patient waiting, for months or even years, and the stock purchased was either paid for in full or carried in margin accounts with a high equity value; i.e.) a heavily margined account in which the operator puts up most of the cash, calling on the broker for little financing. From 1896 to 1902 Dow observes there were "from 20 to 40 stocks" that could have been purchased at 20 and sold above 80, or in the case of at least half of the issues sold above 1 oo. A cautioning note is added that opportunities of this kind are not an annual occurrence, but it is seldom when some stocks cannot be selected as selling below value and as such having a valid claim to advance in price. A stop order may be of use as a speculative aid if stocks are purchased when a reaction is commencing. It will enable the operator to take a quick loss on the premise that the reaction will run to 5 or 6 points and if the stock is purchased at a later time during the reaction some 2 or 3 points may be gained. Likewise, stop orders are useful for "out-of-town customers" whose means of communication with their brokers are limited so that extreme market movements may take place without their knowledge, and for the short side of the market since "a scare of shorts after considerable decline sometimes brings a very rapid rise, which runs away with all the profits that have accrued." Dow cautions that customers using stop orders should realize that they become market orders when the limit specified in the stop order is reached. This is correct to this day with reference to 100 share lots. The procedure for stop orders for odd lots (less than 100 shares) differs slightly. Hence, the marketability 63

CHARLES H. DOW AND THE DOW THEORY

feature of the stock concerned is of importance in the use of stop orders and they should not be employed in stocks with an extremely limited market. In the main their value to the trader is determined by the trading method he employs to attain stock market profits. Chapter XI entitled "Cutting Losses Short." In this editorial Dow is again concerned with stop orders. Experience has shown that the stock trader should embrace one of two methods. He should either cut losses short or purchase stocks on a true investment basis. The editorial discusses the former method. Naturally, when a person buys stock he has a reason for it. He believes the stock is going to advance because someone has told him it would, it is undervalued, or a bull market is in progress. Obviously, except for the case of the undervalued issue the buyer is, in fact, ignorant concerning the stock purchased. His action has been predicated on the advice of others. Of course, it is of advantage to know that a "great operator," or a "great syndicate" intend to move a stock from lower to higher levels, but great operators change their minds and the trader should rely upon the use of a stop order for protection when buying on points (tips). The general rule to employ is to place the stop order 2 or 3 points under the purchase price. The trouble with the stop order technique, however, is that they frequently are executed v.rhen later events showed that the loss need not have been suffered. Dow says that this cannot be helped but stop orders may be placed at different points depending upon conditions. Dow then illustrates the shifting of a stop order in Union Pacific assuming that a bull market exists and the stock has had a 5 point reaction. First the stop order is placed 2 points below the purchase price. If it is executed it would suggest a further decline could be expected. However, if the price subsequently recovered the 2 points and the stock was repurchased

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at about the original price, the stop order would then be placed 3 points below the new purchase price as it would be reasonable to assume the next decline would not extend to the previous low and the stop order limit would not be reached. As Union Pacific advanced the operator keeps his stop order 3 points below the market price until such time as an advance of several points has occurred and the stock has shown a tendency toward "toppiness" (signs that it was about to decline). At this point the operator moves the stop order to a position 2 points under the market price and waits on future developments. The stop order is also of use on the following occasions: It is of salient importance when a stock is first purchased and the wisdom of the purchase is in doubt. 2. It is of primary importance in "pyramiding" operations. In pyramiding the operator buys additional amounts as the stock advances. Dow in this editorial gives as an example of pyramiding that "the stock is being bought on an advancing market every point up." Pyramiding, or "averaging up," is a market technique directly opposite in principle to the method of "buying on a scale down," or "averaging down." Naturally, the use of a stop order in pyramiding operations is to protect profits. 3. It is useful when a stock has advanced the extent of its "normal swing." In this case the operator's profit is captured if a reaction sets in. 4. It is of little importance when a stock is advancing in normal fashion after having been purchased at an opportune time. In this situation the stop order may be set some distance from the market to avoid being executed on a small setback in an advancing market. 1.

The use of stop orders enables the trader to buy active stocks whose value is not clearly defined, and which he would not

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consider on an investment basis. It also permits him to trade in a larger number of shares than he would venture to without this protection. Dow concludes as follows: The stop order is the friend of the active speculator, who wants to make a quick dash for a large profit and who is willing to make small losses in the hope of getting a good run once in four or five attempts. It is the friend of the small operator, the out-of-town operator and the timid operator. It should be applied, however, only in active stocks where there is a large market. Stop orders should not be given in inactive stocks, as the seller may be slaughtered in their execution.

Chapter XII entitled "The Danger of Overtrading." Dow, in answer to an inquiry, discusses the subject of overtrading. As explained above, this is buying on a margin basis in larger amounts than is prudent considering the operator's resources. The correspondent asks, "Can I trade in stocks on a capital of $1 oo, buying on a scale up and stopping my loss so as to protect my original capital?" In reply, Dow advises that a large number of persons in the United States consider stock trading on a capital fund of $100 or $200. Some of them reason that since $ 1,000 seems an appropriate margin for dealing in 1oo share lots, then $ 100 should be a proper margin for buying and selling in 1 o share lots. Dow says the reasoning is sound, but the premise is faulty. The reason for this is that traders cannot hope to make their purchases at the bottom and their sales at the top of stock market movements and avoid losses. In the editorial he states, "A man who may have made $10,000 gross in trading in a specified time will be very likely to have lost $5,000 to $6,000 gross in the same time, leaving a net profit of from $4,000 to $5,000." Thus, Dow calculates net profits by subtracting losses incurred in trading from total gains secured in a like manner. 66

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It is too much to expect to be right all the time, says Dow. Money is made in the stock market through a series of transactions, some profitable and some unprofitable, but ending in a net gain. It is the experience of competent speculators that the ratio of losses to profits runs at a rate of from 50 per cent to 65 per cent. These losses are, in effect, the operational expenses of trading. Dow continues, "Profits and losses run in streaks. There will be times of all profit and no loss, and times of all loss and no profit, but the average even for those who have learned to trade in stocks and who have abundant capital for their operations works out less than one-half of the gross profits as net profits." As a result it is obvious that a speculator-especially a neophyte-has little chance of success on 10 per cent margin as it is practically certain that losses will be incurred before sufficient profits have been taken to increase capital significantly. In retrospect it might be claimed that by correct timing of purchases and sales a 1 o per cent margin would have proven adequate, but it is an entirely different matter to establish what might have been accomplished in the past than to launch future endeavors. Therefore, Dow counsels the man who wishes to engage in stock trading, but has only $ 100 to lose in this pastime, to either: a) Buy one share of some stock outright. The stock should be selling below par ($100) and below its value. He sb.ould then await an advance for a 5 per cent or 10 per cent profit. b) Buy two or three shares on a margin basis utilizing a stop order some two points below the price of purchase. Dow advises that contrary to the opinion held by go per cent of all brokers it is not absurd to trade on $1 oo capital if the trader limits his purchases and sales to 2 share lots. In this

CHARLES H. DOW AND THE DOW THEORY

manner he is in a position to recover from losses and gain confidence and experience in trading. In dealing with 100 share lots on $1,000 capital the same reasoning applies. The operator who buys 100 shares on 10 per cent margin and through a stop order limits his loss to 2 per cent has lost nearly one-quarter of his capital. Let us suppose his next effort shows a gain of 1 per cent, and his third attempt entails a loss of 3 per cent. This last venture will result in "a nearly total loss of confidence" and might cause him to sell short instead of averaging his purchase, thus leading to the closing of the account as a total loss. But, says Dow, suppose this same operator, with his $1,000, had Hmited his purchase to 1 o share lots. He would not have been disturbed by his loss, and would have had the fortitude to average as the price of the stock declined, or to have purchased another stock at a low point. This course would have probably been a profitable one. Dow then notes the psychological effect of overtrading and the remedy for it in his concluding paragraphs: Almost any man can show profits in stock by assuming that he would do so-and-so at various conditions of the market. He succeeds theoretically in this way because there is nothing at risk and his judgment is clear. The moment, however, that he has a risk which is very large in proportion to his capital, he consults his fears instead of his judgment, and does in practice exactly opposite what he would have done had his transactions been purely academic. The remedy for this is to keep transactions down to a point, as compared with capital, which leaves the judgment clear and affords ample ability to cut loss after loss short; to double up; to take hold of something else, and generally to act easily and fearlessly instead of under the constraint which inevitably comes from a knowledge that the margin of safety is so small as to leave no room for anything except a few anxious gasps before the account is closed.

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If people with either large or small capital would look upon trading in stocks as an attempt to get twelve per cent per annum on their money instead of fifty per cent weekly, they would come out a good deal better in the long run. Everybody knows this in its application to his private business, but the man who is prudent and careful in carrying on a store, a factory or a real estate business seems to think that totally different methods should be employed in dealing in stocks. Nothing is further from the truth.

Chapter XIII entitled "Methods of Trading." This is a rather long chapter and represents the consolidation of two editorials on a similar subject. The following chapter of Nelson's book (XIV) is on the same general topic. The first section of the chapter is devoted to answering a question from a correspondent which reads as follows: "How can a man living at a distance from Wall Street hope to follow the market closely enough to make any money trading in stocks?" In reply Dow advises that the question is a frequent one, although the phrasing of it mc:y vary, and it illustrates the incorrect conceptions of many persons as to the factors involved in successful trading activity. Proximity to Wall Street does not insure, as many individuals believe, that the operator knows what the general equity market is going to do. The more knowledge a man acquires about speculation the less positive he becomes with reference to stock market movements with the exception of those movements resulting from general conditions. The salient difference between trading in Wall Street and from out-of-town is the ability of the operator who watches the ticker, or board, to change position on short notice. However, Dow remarks, this often is a disadvantage as well since it induces activity at what later proves to be the wrong time. The out-of-town trader should not try to speculate on a 69

CHARLES H. DOW AND THE DOW THEORY

near-term basis (unless he has a connection by private wire), but should operate "on broad lines and from an investment standpoint." He should avoid active issues and points (tips), and base his trading activity on the likely course of the general equity market and compare the price of the stocks in which he intends to trade to their calculated value. Dow then delves into the problem of the estimation of values of individual stocks. He defines a "speculative investment" as a stock (probably of a railroad company) currently paying regular dividends. In addition the company concerned should report earnings at stated times and publish information at least annually as to its financial and physical condition. From this information it is possible to deduce "fairly accurate knowledge of the value" of the stock. The vital point to consider is whether or not the company has the power to maintain, or increase, the prevailing dividend. If the company appears to be in a position to continue the dividend, and the current return makes the stock "fairly satisfactory" on an investment basis, the stock is an attractive purchase when it declines in sympathy with a decline in the overall market to a point "below its normal price." Dow uses Union Pacific as an example of the judgment of value by advising that a short time before its price ranged from 50 to 60 while the stock paid 4 per cent dividends and earned over 8 per cent. It should be recognized here that when Dow refers to dividends and earnings on a percentage basis the use of par, or$ 100, as the base figure is implied. Hence a 4 per cent dividend is a $4.00 dividend, and earnings of 8 per cent reflect earnings of $8.oo per share. Note that a stock selling at 50 and paying a dividend of 4 per cent (on $100 par value) is yielding 8 percent. Obviously, Dow concludes, on this basis the stock was undervalued and since the time of the valuation an advance of more than 30 points in its price has taken place. He also observes

THE S. A. NELSON VERSION OF THE DOW THEORY

that three months before the values of railroad stocks in general were higher than their market prices. At the time of writing the reverse is true. This means declines in the prices of the stocks are to be expected to bring market prices down to a level where prudent buying is in order. When that time arrives the wise course to follow is for the investor to purchase a good railroad stock outright as an investment. He could average on a decline, but only after assuring himself of the existing relation of the value of the stock and the general market. The stock should then be held until a profit was obtained. The investor should ignore near-term fluctuations in the process. Once sold the operator should wait until another opportunity presents itself to purchase the stock again, or some other issue. This may take months of waiting. From this point Dow concludes the first editorial as follows: The outsider who tries to follow the market from day to day is not likely to have very marked success. The operator who selects investment properties carefully and buys after the market has had general declines, and who exercises a good deal of patience both in waiting for the time to buy and the time to sell-who, in short, treats his speculation as an investment, will be likely to make money in stocks as a rule.

The second part of the chapter consists of an editorial based on a question from a correspondent which reads as follows: "Is there any way by which an outsider who cannot watch fluctuations of the market hourly can trade in stocks with a fair chance of making money?" Dow answers that two methods are open to the outsider and either method gives him "a fair speculative chance." The first method is to purchase stocks outright on an investment basis. The operator should select stocks with market prices below their value and wait for the stock to move up in market price to its value.

CHARLES H. DOW AND THE DOW THEORY

The following standards and comparisons decide value: a) "The margin of safety over dividends." (Excess of earnings over dividend payout.) b) Total amount and trend of earnings. c) "Soundness of the balance sheet and of operating methods.'' d) Overall future prospects. Dow advises that the determination of value sounds complicated but may be worked out with facility. For example, he notes that earnings during the past year ( 1900) had increased consideraby while fixed charges had not advanced. At the same time stock prices had in the main, declined. But, the value of the stocks had actually advanced so it was obvious that either earnings would fall off or stock prices advance. In other words a condition existed in which stocks were undervalued in relation to earnings. But, now ( 1901) most stocks are dear on earnings. While earnings have increased stock prices have advanced at a much more rapid rate with the result that "in whatever form the yardstick is applied the result is unfavorable to value." With respect to value Dow claims if a stock returns approximately 3½ per cent it is evidently dear unless there is some particular reason for the market price. He continues, "In the long run, the prices of stocks adjust themselves to the return on the investment and while this is not a safe guide at all times it is a guide that should never be laid aside or overlooked." Prices have a tendency, over extended periods of time, to work toward values. Hence the outside investor has a criterion to ascertain what investments to buy, namely, the calculation of value through an examination of "earning conditions." The second method by which the outsider may have a sporting chance for profits is to follow the maxim "approved by the great masters of speculation" and "carried out with greater or

THE S. A. NELSON VERSION OF THE DOW THEORY

less precision by a majority of successful traders." This is the familiar, "cut losses short but let profits run." This rule is a difficult one to follow despite the fact that it appears easy to observe. The prime difficulty involved is the reluctance of a trader to suffer a small loss when his experience has demonstrated to him that many times like losses have been sustained unnecessarily. In addition, following the rule may entail purchasing the same stock three or four times with the same result, namely, a small loss, before a worthwhile advance ensues. These small losses are, of course, onerous and often lead traders to abandon the practice of cutting losses with the result that a large loss follows. Dow again speaks of the proper place to position a stop order and advises that "experience indicates that 2 points is the wisest place to stop a loss." If a stock declines 2 points after purchase it is likely to decline more, and it carries the suggestion that the anticipated advance has either been detained or will not materialize. Using Union Pacific as an example, Dow has the operator determine the stock a good purchase at 107 based on "information, study of values, experience in markets and the tendency of the period." If after purchase Union Pacific declines to 105 theoretically the trader should sell cutting his loss short and prepare to repurchase the stock when conditions again appear favorable. "Extended records of trading," Dow continues, "show that this policy, blindly followed with blind following also of the plan of letting profits run, would give better results than most people are able to obtain by the exercise of judgment." However, judgment should not be abandoned and may be sagaciously employed. If the price of a stock is abruptly "jammed" down 2 points but the market shows rallying tendencies it is wisdom to pause a bit. If a stock declines as the obvious result of a break in another issue, and the decline in

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the other stock seems to be abating it is not necessary to use a stop order. "The idea is to stop the loss when the market has legitimately declined to that extent." With reference to the process of "letting profits run" there are, according to Dow, two methods that may be utilized in deciding when to close the transaction, i.e., to sell long stock or to buy in a short position. The first is "to wait until the general market shows a decided change of temper." The second method is to keep a stop order approximately 3 points below the higher market price on the advance and close out the transaction via the stop order. Experience illustrates a manipulated stock seldom will react to the extent of 3 points on an advance until the move is over. A 3 point reaction could indicate the manipulators had run into difficulty, although such reactions are sometimes used to shake out an unwanted following. Judgment must play a role here according to Dow. The operator who buys a stock in a bull market and observes that it is advancing in a favorable fashion from his purchase price should not be anxious to sell. In a bear market if the stock (sold short) declines he likewise should not be in a hurry to close. Dow concludes: We do not wish to be understood as saying that there is any sure way of making money in stocks, but the principle of buying after a period of steadiness in prices, stopping losses and letting profits run will, as a matter of statistical record, beat most people's guessing at what is going to occur.

Chapter XIV entitled "The Out of Town Trader." In this chapter we find that a correspondent asks a question very similar to the two questions propounded in Chapter XII of Nelson's work. The question is "How can a man living in an interior city, where he sees quotations only once or twice a day, make money by trading in stocks?"

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THE S. A. NELSON VERSION OF THE DOW THEORY

Dow in reply states that the question assumes that being close to Wall Street carries with it special benefits in trading activities. Naturally, in the case of a member of the New York Stock Exchange, who by virtue of his membership pays no commissions, there is a decided advantage. However, Dow points out that not every member trading for his own account is able to show profitable results. Most operators, no matter where they are located, are handicapped by the commission involved. The commission charge at this time (1902) was ¼ of a point ($ 12.50) per 100 share transaction, i.e., ¼ point ($25.00) for the round turn. At the present time, the scale of commission charges is considerably higher, and commission schedules are calculated on a more complex basis. If a profit of 5 or 10 points results from the trade, the commission charge is not significant. However, if only a 1 point profit is secured, the commission charge is a heavy burden. If a trader operated on 1 point profits, it is only a question of time before he has given all of his money to his broker in the form of commissions. Thus, the objective of the ordinary trader should be relatively large profits. He should not purchase a stock unless he is of the opinion that it will advance 4 or 5 points. In this manner he will make double the amount lost on his unsuccessful trades where a 2 point stop order has been expected. The operator not in Wall Street has an advantage in attempting to trade on 5 and 10 point profits. He is not influenced by rumors since they do not reach his ears, and he is not in a position to observe momentary changes in market prices as is the trader operating in a brokerage office. Dow notes that at the time of writing many people operating in Wall Street have been long of stocks for a month and yet have not secured profits because they were frightened into selling by rumors and insignificant market declines of a tem-

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CHARLES H. DOW AND THE DOW THEORY

porary nature. The man who does not watch the market is not influenced by these factors. He does have one disadvantage, however, in that the market may suddenly reverse its course, changing his profit into a loss, or causing him to take a much greater loss than he had envisioned. However, movements of this kind are exceptional as the market normally fluctuates considerably at its turning points. For example, after an advance of 5 points a stock normally moves over a narrow range for a sufficient period of time to permit the out-of-town operator to sell. Stop orders are "the special protection of the out of town trader" and by their use, if he deals in sound common stocks, he is able in most cases to cut a loss short or capture his profit at, or close to, a designated price. Dow advises the out-of-town trader to start his trading operations by choosing a stock he believes is selling below its value. He should be firmly convinced of this fact so at the very beginning he will not be disturbed if the stock selected declines in price. Having selected his stock in this manner the operator should defer purchase until such time as the general market has a normal decline from a high point. In this connection a normal fall on the average of twenty active stocks-The Dow] ones Railroad Average-would be 4 points after a bull market advance of 10 points. Here the operator makes his initial purchase. The out-of-town trader should be patient. He will observe other stocks advance while his stock remains unchanged in price. He will daily receive intelligence that other issues are creating wealth for other traders, but he must disregard this even if the market advances of certain stocks appear to give a basis of fact for the stories he hears. "He must just sit on his stock, which is intrinsically below its value, until the other people observe that it is selling too low and begin to buy it or manipulate it." When most operators buy a stock which remains dull for a

THE S. A. NELSON VERSION OF THE DOW THEORY

period of time after purchase they tend to sell the stock at the first sign of activity fearing that dullness will again set in. Dow claims this is an error as movement in the stock suggests that it is the time to buy more for it is evidence that other operators have found the stock is undervalued. After the stock has advanced some 2 or 3 points it is wise to make use of a stop order. This should be placed about 2 points under the top and moved with the rise. In the utilization of this market technique the trader should pay no attention to reports or rumors on the stock and should close out the trade either when the stock appears fully priced according to value or the general market indicates profit taking is in order. In his concluding paragraph Dow counsels: An out-of-town operator can do all this just as well as an office trader and in some respects better. Some of the large operators like to go away from the market and work from Newport or Saratoga or other distant points in order to look at the trading with an unbiased mind and without being unsettled by the rumors that always grow out of any special move. The outsider who will wisely study values and market conditions and then exercise patience enough for six men will be likely to make money in stocks.

Chapter XV entitled "The Short Side of the Market." Dow receives another inquiry from a correspondent as follows: You demonstrate that an operator in stocks ought to work on the short side of the market during about half of almost every decade. I feel some hesitation about selling property which I do not own. Will you not make it clear how the short side of the market is normal trading?

Dow replies that it would have been judicious to have traded on the short side of the market fully half the time during each of the past four decades. The general public does not care for short selling. Corners occur, but not at frequent intervals.

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They cause great financial harm, however, to those persons unfortunate enough to be short the stock concerned. Dow considers corners "a very remote danger" to the short seller because they make their appearance infrequently-about once in every ten years. The famous Northern Pacific corner had occurred in May, 1 go 1, so it was still fresh in the memory of the financial community at the time of Dow's editorial some eight months later (January 24, 1902). He then explains the principle of short selling as follows: A customer X directs Broker A to sell short 100 shares of Union Pacific at par. Broker B buys it. A, not having the stock, goes to Broker C and borrows from him 100 shares of Union Pacific, giving in security $10,000 in cash. This stock is then delivered by A to B, who pays A $10,000 therefor. Matters then rest until Union Pacific advances or declines enough to make X wish to close his account. He then directs A to buy Union Pacific, say at 95, and A gets the stock from Broker D. The stock thus obtained is delivered to C, who thereupon returns the money which ·he has had as security and $9,500 of the amount goes to D, leaving $500, less expenses, as the profit of X on the transaction.

Dow's explanation of short selling is quoted above to explain the principle involved. The reader, however, should be aware that at present all transactions do not require borrowing the stock from another broker (C in the example), since a broker may borrow the security from another of his customers, provided the security is carried on a margin basis and the customer has agreed in writing to so lend his securities. This consent is obtained when the customer signs a "lending agreement" which is often done in a perfunctory manner. Dow then discusses loaning rates, premiums, and the reasons brokers are willing to lend stocks. These explanations are presented in a technical manner and the statistical information used in this connection is not applicable at the present time.

THE S. A. NELSON VERSION OF THE DOW THEORY

However, the principle that a broker is willing to lend stock to reduce his interest charges on bank loans still applies. This fact, i.e.) the willingness of brokers to loan stock, is the reason short selling is a relatively safe operation. Of course, shorts are squeezed at different times. The squeeze may develop naturally or be manipulated. When a large short interest exists in a certain stock the manipulators attempt to frighten shorts into covering by refusing to loan stock and persuading others to do likewise. If the shorts run to cover, brokers are called upon to return borrowed stock causing the stock to lend at a premium. Such squeezes only last a few days and after completion the weight of sales at the advanced prices reached causes the price of the stock to decline usually to a lower figure than that from which the move originated. There are times when a short interest remains large for extended periods of time. Although this is evidence of eventual decline, the expense of paying premiums and dividends may leave the operator little profit despite a rather substantial decline in the price of the stock-the operator who is short must pay the lending broker (via his own broker) all cash and stock dividends and all rights issued during the lending period. Dow informs us Jay Gould was short New York Central for over four years but his large profit between selling and buying prices was reduced substantially by his payment of dividends over the period. Dow concludes as follows: In picking out a stock to sell short, the first consideration ought to be that the price is above value, and that future value appears to be shrinking. It should be an active stock and, if possible, a stock of large capital. It should be an old stock by preference, which means having wide distribution instead of concentrated ownership. By preference it should be a high-

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priced stock with a reasonable probability that dividends will be reduced or passed. Such a stock should be sold on advances and bought on moderate declines, say 4 or 5 points, as long as the market seems to be reasonably steady. But, if the market becomes distinctly weak, only part of the short stock should be bought in with the hope that some short interest may be established at a price so high as to be out of reach of temporary swings. The best profits in the stock market are made by people who get long or short at extremes and stay for months or years before they take their profit.

Chapter XVI entitled "Speculation for the Decline." In this chapter Dow also discusses the short side of the market. He advises that the question is often posed as to whether or not a bear on the market expects all stocks will fall or that some stocks will fall and others not be affected. The answer to the inquiry, Dow says, must be approached from two standpoints, namely, "the speculative movement" and "the effect of values." If the market suffers an extended or severe decline all stocks will decline in accordance with the movement. Naturally, individual stocks will vary in the extent of their respective fall. It is paradoxical, but in periods of panic shares possessing considerable investment merit, or value, will sometimes suffer a larger decline than stocks of less merit. This is brought about by the fact that persons who need to sell stocks select those for sale which possess the best market. Such stocks usually have little or no short interest existing in them with the result that they fall in price until investment demand appears. Thus, in a general decline in the equity market investment merit in a stock will not prevent its decline, and it may be recognized as an accepted principle that all stocks will go down in an extended or violent fall in stock market values. However, when recovery ensues the stock with investment

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THE S. A. NELSON VERSION OF THE DOW THEORY

merit will not only recover more than the stock which possesses little value, but will also hold much better at recovery prices. In the long run values will determine stock prices. Two stocks may sell at the same price; one undervalued and one overvalued on an intrinsic basis. They may seem to be moving in the same fashion for the next six months rising and declining together in the majority of the fluctuations of the general market, but at the end of the half-year period the more valuable stock of the two may be 10 points higher. This results from the fact that on successive rallies and relapses the better stock advances slightly more on upward movements and declines slightly less on downward moves. This will also happen in a bear market when "there will be a sifting of the better from the worse, visible enough at a distance, but not conspicuous at any particular stage in the process." Even in a bear market, however, a marked increase in the value of a stock will be translated into higher market prices. During the period 1881-1885 the general equity market declined but Manhattan Railway Company advanced from about 30 to approximately 100 because of the great increase in the earnings of the company. Dow counsels the operator not to trade in stocks unless he believes he knows their worth and is in a position to watch changes in value as they occur. He should have an opinion at a stated time regarding which stocks are overvalued and which are undervalued. If in a bear market, the trader should sell short the stocks he thinks are overvalued when they advance strongly and cover his position on their subsequent decline. If he expects a rally in the general market, he should buy those stocks which appear undervalued and sell them when he has secured a reasonable profit. If the market is in a "doubtful position" a wise course at times is to take a short position in a stock that appears manifestly overvalued and purchase a stock obviously undervalued. The theory is that one position will 81

CHARLES H. DOW AND THE DOW THEORY

act as a shield for the other until the course of the market becomes more clearly defined. Traders, Dow informs us, used to buy Northwest and sell St. Paul short for this purpose with generally satisfactory results. During 1900 and 1901 operators bought Manhattan Railway Company and sold either Metropolitan Elevated Railroad Company or Brooklyn Rapid Transit short. In operations of this kind the trader secures his profit from the difference in the movement between the two stocks concerned. Dow advises this market technique is based on the general law-"Stocks fluctuate together, but prices are controlled by values in the long run." Chapter XVII entitled "Concerning Discretionary Accounts." This editorial is concerned with discretionary accounts. These are accounts in which a designated person, or persons, exercise judgment with respect to buying and selling securities without prior consultation with, or the concurrence of, the person who provides funds for the account. A correspondent advises he has received a circular requesting he grant a discretionary account to the solicitor, who promises large profits and claims past dealings have been successful. The correspondent reasons that "a man in the market ought to be able to do better for me than I could do for myself at a distance." He then asks Dow if the person soliciting the account is reliable and if the plan is a safe one. Dow replies that the question has been frequently asked and frequently answered, but it is not easy to explain the truth to people who believe that parties in Wall Street possess knowledge as to the future course of the stock market. Holding this belief the only question in their minds to be resolved in granting a discretionary account is whether or not the persons administering the accounts are honest. Of course, Dow states, "people in Wall Street, even those who get very near the center of large operations, do not know what the market is going to do with any regularity or certainty." In fact the more knowl-

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edge a man has the less confident he is of the market's future course. Large operators usually are the least confident of all because they are aware of the hindrances and obstacles unexpectedly met during market movements. Dow continues: People who trade in stocks can set down as a fundamental proposition the fact that any man who claims to know what the market is going to do any more than to say that he thinks this or that will occur as the result of certain specified conditions is unworthy of trust as a broker. Any man who claims that he can take discretionary accounts and habitually make money for his customers, is a fraud; first because he knows when he makes such statements that he cannot do it regularly or with certainty, and, second, because if he could, he would surely trade for himself and would scorn working for ¼ commission when he could just as well have the whole amount made.

New York Stock Exchange firms are not permitted to advertise that they will handle discretionary accounts. Further, Dow advises, any member who claimed he was attempting to increase his business by taking discretionary accounts from his customers "would lose caste with his fellow members." He would be looked upon as either dishonest or deficient in judgment. Stock Exchange firms sometimes handle discretionary accounts but "they take them unwillingly in very limited amounts, only for people with whom they have very confidential relations and who understand speculation sufficiently to expect losses and failures quite as frequently as profits." Dow returns to his discussion of the "men of little or no capital and little or no reputation" who advertise in the press and guarantee profits from discretionary accounts. He describes how these swindlers operate and concludes: Speculation is not at its best a simple and easy road to wealth, but speculation through people who advertise guaran-

CHARLES H. DOW AND THE DOW THEORY

teed profits and who call for participation in blind pools is as certain a method of loss as could possibly be discovered. The mere fact that a man openly asks for such accounts is the most ample and exhaustive reason for declining to give them.

Chapter XVIII entitled "The Liability for Loss." Dow receives an inquiry as follows: "I was long of stocks May 9, 1901, and was sold out. The broker now asks me to pay a loss in excess of my margin. Am I liable therefor?" In reply Dow discusses the legal ramifications involved and the court decisions under particular circumstances. He displays a broad knowledge of the legal background and aspects pertaining to the question and has a keen insight into the position of the broker "acting in a double capacity," i.e., as a broker in executing orders for a customer and as a banker loaning the customer the funds to operate a margin. Since the entire chapter is a discussion of a legal question and not one concerning stock market theory, the matter will be left to the legal fraternity which, no doubt, by this time has accumulated ample cases to add to those cited. Chapter XIX entitled "The Recurrence of Crises." Once again the editorial answers a question from a correspondent, namely, "Is it true that commercial or stock exchange panics are approximately periodic in their occurrence?" Dow replies that events indicate this is the case and there is a reason why it is so. The "business community" has a propensity to move from one extremity to the other. It is either engaged in reducing business activity believing prices will be lower, or increasing activity because it is of the opinion that prices will rise. "It appears to take ordinarily five or six years for public confidence to go from the point of too little hope to the point of too much confidence and then five or six years more to get back to the condition of hopelessness." Professor William Stanley Jevons (1835-1882), the English 84

THE S. A. NELSON VERSION OF THE DOW THEORY

economist, Dow tells his readers, traced this "ten-year movement in England" in connection with his hypothesis that sunspot cycles and business cycles bear a close relationship. Dow adds that discussion of this sun-spot theory is not germane, but uses the dates stated by Jevons as depression years in England overthe past two centuries-1701, 1711, 1712, 1731-2, 1742, 1752, 1763, 1772-3, 1783, 1793, 1804-5, 1815, 1825, 1836, 1847, 1857, 1866 and 1878. Concerning this periodic tendency Dow says, "this makes a very good showing for the ten-year theory, and is supported to a considerable extent by what has occurred in this country during the past century." A review of the crises in the United States in the nineteenth century is next set forth by Dow with a word of explanation about the nature and causes of each one. He sets the crises years at 1814, 1837, 1857, 1873 and 1893. He notes also that there was "a near approach to a crisis in 1819 . . . lower prices and some money stringency in 1826 . . . the London panic in 1866 precipitated by the failure of Overend, Guemey & Co., was followed by heavy fall in prices in the Stock Exchange here . . . the year 1864 brought a Stock Exchange smash but not a commercial crisis." Dow concludes: Judging by the past and by the developments of the last six years, it is not unreasonable to suppose that we may get at least a stock exchange flurry in the next few years. This decade seems to be the one for the small crisis instead of the large one -a type of 1884 rather than a recurrence of 1837, 1873 or 1893.

SUMMARY

In the S. A. Nelson version, the Dow Theory consisted of a set of principles which could be utilized by investors and speculators engaged in investing and trading in common stocks.

CHARLES H. DOW AND THE DOW THEORY

The following precepts comprise the main standards of the S. A. Nelson version although many other principles were established as well: Sound trading practice includes the observation of the maxim-" Cut your losses short, but let your profits run." 2 . There are two general methods of trading in stocks. One entails trading in relatively large amounts coupled with the use of stop orders; the other consists of buying on a scale down. 3. The stock trader should avoid overtrading. 4. There are three movements in the market all going on at the same time. These consist of the daily fluctuation, the short swing ranging from ten to 60 days, and the main movement covering at least four years in duration. 5. The stock trader should have an idea of the value of the stock in which he trades. Value is largely determined by earnings available for dividend payment. 6. The law of action and reaction consists of the rule that a primary movement in the market will have a secondary movement in the opposite direction of at least three-eighths of the primary movement. The same rule applies to movements in individual stocks. 7. Stop orders are a speculative aid in stock trading under certain circumstances. 8. The stock trader should ascertain whether a bull or bear market is underway. Trading in a bull market should be confined to the long side, and in a bear market to the short side. 1.

NOTES 1.

S. A. Nelson, The A B C of Stock Speculation, (S. A. Nelson, New York, 1902).

2.

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S. A. Nelson, The ABC of Wall Street, (S. A. Nelson, New York, 1900).

THE S. A. NELSON VERSION OF THE DOW THEORY

3. Thomas F. Woodlock, The Anatomy of a Railroad Report and Ton Mile Cost, (S. A. Nelson, New York, 1900). The material had been previously published in separate publications. The Anatomy of a Railroad Report appeared in 1895 and was published in New York by the United States Book Company. Dow Jones & Company, New York, published Ton Mile Cost in 1899. 4. Arthur Crump, The Theory of Stock Exchange Speculation, (S. A. Nelson, New York, 1900). This book, concerned with speculation on the London Stock Exchange, was originally published and went through several

editions in England. The third edition was published by Longmans, Green, Reader and Dyer in London in 1874. Nelson was not the first to publish it in the United States as there is an edition published in New York in 1887 by H. W. Rosenbaum who wrote a Preface and Annotations. 5. George M. Coffin, The ABC of Banks and Banking, (S. A. Nelson, New York, 1901). 6. S. A. Nelson, The ABC of Options and Arbitrage, (S. A. Nelson, New York, 1904). 7. William Worthington Fowler, Ten Years in Wall Street, (Worthington, Dustin & Co., Hartford, 1870).

CHAPTER SIX

THE EDITORIALS of

CHARLES H. DOW

Dow's EDITORIALS IN The Wall it is possible to establish the but difficult, is Journal Street identity of his writings during the period from April 21, 1899, to October 25, 1902. The first issue of The Wall Street Journal appeared on July 8, 1889, and it seems reasonable to assume that Dow, who served as editor from that time until his death, contributed many articles on financial matters over the 13-year period of his editorship. As the articles in The Wall Street Journal were not identified by by-line, or initial, until a much later date, Dow's work may not be definitely established until he began his column entitled "Review and Outlook." Of course, an editor is responsible for the contents of a paper in toto so identification of the personal writings of Dow is not a matter of salient importance. It must be remembered that during Dow's editorship The Wall Street Journal had at least three other facile writers on its staff-Edward D. Jones, Thomas F. Woodlock, and William Peter Hamilton. All were financial journalists of outstanding ability. Hamilton places the dates of Dow's editorials on "the substance of his theory" between June, 1goo, and July, 1902 .1 S. A. Nelson, as has been noted, compiled his chapters designated as "Dow's Theory," in The ABC of Stock Speculation, from the

THE IDENTIFICATION OF ALL OF

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THE EDITORIALS OF CHARLES H. DOW

editorials of Dow dated from December 14, 1900, until June 31, 1902. Actually, in the editorial dated December 14, 1900, Dow advised that he would write a series of editorials discussing stock market speculation. Thus, Hamilton's period includes that of Nelson, and embraces in addition June to December 14, 1900. Woodlock states that Dow wrote the "Review and Outlook" column in The Wall Street Journal and places among his last articles those editorials concerning the anthracite coal strike which appeared in the latter part of October, 1902. 2 That these were probably among the last composed by Dow is likely because he was seriously ill for about a month before his death on December 4, 1902. 3 Gingold confirms that Dow wrote the "Review and Outlook" column, 4 which made its initial appearance on April 21, 1899, about ten years after the founding of The Wall Street Journal. All of Dow's work quoted by Nelson and Hamilton is found in this column. It appeared almost daily until Dow's death, but it is significant that it did not appear in every issue. Hence, it was not a daily feature, but rather a special column. It can be assumed that Dow wrote the "Review and Outlook" column from the time of its inauguration, April 21, 1899, until October 25, 1902, the date of the last coal strike editorial. From this latter date until Dow's death there is nothing in the column that would add significantly to the material presented. The "Review and Outlook" column dealt mainly with stock market activities and other financial matters. However, on occasion, it included discussions of such subjects as politics, labor matters, economics, monetary theory, and affairs of current interest. The reader soon notes that Dow's stock market philosophy was founded upon the cornerstone of common sense. The movement of stock prices was not a mystery to Dow, but was, rather, the natural consequence of human activity coupled with the course of the business cycle. 89

CHARLES H. DOW AND THE DOW THEORY

In the following discussion of the editorials of Charles H. Dow, the emphasis will be placed upon those concerned with the stock market. The editorials compiled in S. A. Nelson's book and discussed in Chapter Five above will not be reconsidered. Therefore, the editorials that follow will supplement those selected by Nelson, and the resultant will be the original theory as revealed within the period from April 21, 1899, to October 25, 1902. Dow's editorials can be most conveniently viewed under the following subject headings: 1.

2.

3. 4. 5. 6. 7. 8. g. 10.

11. 12. 13. 14.

The Business Cycle. The Three Movements in the Stock Market. The Discount Feature of the Stock Market. Monetary Theory and the Stock Market. Dow's Views on the Dow-Jones Averages. Confirmation of the Dow-Jones Averages. The Law of Action and Reaction. Earnings (Values) and Stock Prices. Manipulation and Stock Prices. Industrial Stocks. Forecasting the Magnitude of a Trend. Volume of Transactions. Narrow and Dull Markets. Dow's Stock Market Philosophy.

The Business Cycle. Dow's view of the business cycle was an advanced one for the times. He used a dual approach and examined the cycle and its relationship to equity prices from an historical standpoint as well as by close observation of trade and financial affairs as they unfolded on the economic scene. It must be remembered that Dow did not have the benefit of the statistical information available to those who followed him, but he made effective use of the material at hand. His adult life spanned the great depressions of 1873 and 1893, and go

THE EDITORIALS OF CHARLES H. DOW

he was present in Wall Street during the latter period. Likewise he witnessed the stock market panic of 1884 and the debacle caused by the Northern Pacific corner in 1go 1 from the vantage point of Wall Street. In addition he had an advantage denied to many trained economists concerned with the study of the business cycle in that he had over the years held many personal interviews with the leading banking and financial figures of the era. From an academic standpoint Dow was apparently impressed by the work of William Stanley Jevons, who sought the clue to the business cycle in solar radiation and its relationship to crops and general business. As previously noted in Chapter XIX of Nelson's The ABC of Stock Speculation, entitled "The Recurrence of Crisis," Dow observes the propensity of business to move in a cyclical pattern, and states that Jevon's decennial movement in England had received historical support from economic events in the United States. Dow wrote many editorials about the business cycle, however, and this editorial selected by Nelson was only one of them. Dow was particularly concerned with the business cycle and its relationship to stock prices. He believed firmly that there was a periodicity in the movement of the cycle, although the interruption of special factors, primarily wars, must be given consideration. Nayes writes that at this time the belief that depressions occurred at 20-year intervals was widely held in Wall Street. 5 However, Dow's treatment of the cycle goes far beyond this point. On April 21, 1899, Dow advised his readers that "during the present generation" the main movement in the market had never been completed in less than four years. This had been brought about by the fact that the equity market reflects general conditions and "it takes several years for . . . a change for the better or for the worse to work its way through the community, so that the mass of people are either optimistic or pessimistic in their views. Some people foresee changes in the 91

CHARLES H. DOW AND THE DOW THEORY

situation much quicker than others, but it takes a change of opinion on the part of millions of people to produce a welldefined sentiment throughout the country." On April 24, 1899, Dow traces the effect of changes in public sentiment throughout the course of the business cycle. When the stock market is at a low ebb business is depressed, railroad earnings are meagre, "commodities are well down to the cost of production," and the public has liquidated their investments either for living expenses or to use the proceeds for business purposes. "Everybody buys from hand to mouth because the experience of the years preceding has been that everything grew cheaper." From this level "some one industry begins to improve. Others gradually follow." The initial improvement may be caused by higher prices for agricultural products or some other cause which exerts an influence. Now as business revives people "find themselves making money instead of losing it," price advances are noticed in "raw materials or halffinished products." Inventories are increased by merchants as well as by manufacturing enterprises. This period has an unusual effect upon the psychology of the individual, and people gain in confidence as they find their efforts meeting with success instead of failure. "A man who would hardly dare to put in his winter stock of coal one year will be found two years later quite willing to buy a coal mine, with a view of supplying the wants of the community." Dow notes that it takes several years for this change to sweep through the nation "because millions of people have to experience in their own fortunes the change of conditions before they are willing to accept them as genuine." Likewise, once the tendency for better or for worse is established it is not easily changed. This is why bull and bear markets persist, as the mass press forward in line with the established tendency. The following day, April 25, 1899, Dow also discusses the business cycle and the stock market. After a period of pros92

THE EDITORIALS OF CHARLES H. DOW

perity has run for some time "production will outrun consumption," and this will curtail "the prosperity of one industry after another, resulting in contraction and later in the loss of profits." Dow, on May 13, 1899, writes: The stock market is in the nature of a barometer which reflects the rise and fall in general conditions. The stock market is made by outside business. Stocks getting dividends, instead of fixed interest, get the surplus profits of good times and are the first to feel the loss of profits in bad times. As long as general business is prosperous, the surplus earnings which are the stay and support of prices of stocks will continue. The editorial of June 12, 1899, illustrates Dow's thought with respect to improvement in general business conditions and an advance in stock prices. Dow observed that business improvement had recently been reflected in rising prices for iron products, pig iron, cotton goods, woolen goods, and boots and shoes. Bank clearings outside of New York showed a distinct gain, and wages were increased "in over 20 important cases." Railroad earnings were likewise higher. Under these conditions, Dow states that it is not surprising that stock prices have also advanced, and it seems reasonable to Dow to look for further strength in stock prices "in weeks to come." He writes, "Nothing is more certain than that the permanent course of the stock market depends upon the condition of general business, as shown by the profitable employment of capital and labor with the resulting increase in the surplus fund for investment." An interesting point is brought out in Dow's editorial of April 24, 1 goo, when he writes: It is evident that falling off in business as a result of high prices must strike the manufacturer of finished goods first. The man who buys to sell again had as soon have one price as an93

CHARLES H. DOW AND THE DOW THEORY

other provided his margin of profit is the same, but every line of goods ultimately reaches the customer, who does not sell again and to whom the price is vital. It is vital in a sense . . . that finished goods should move freely into the hands of consumers. If this does not occur, the manufacturer of finished goods must buy less of partly finished products and that must lead to smaller purchases of raw material which in turn must reduce the employment of labor and thereby curtail the public power of buying food products and goods of every description. Trade continually works to such a circle and the steps in this progression constitute the difference between rising and falling markets.

On April 25, 1900, Dow's editorial contains a number of interesting observations as follows: When the sale of the finished product in any line of goods falls off, the demand for partly finished products must fall off as a consequence. When falling off in demand is general through the country, shrinkage is also general through the country. When . . . the falling off in demand is limited to a single industry, or perhaps to a part of a single industry, the general effect will be much less. The effect, however, of a large reduction . . . in prices must be to check the demand for . . . goods where reduction in prices have not been made. Every buyer that can do so will delay purchases in the hope of decline in prices.

Dow describes the continuity of the business cycle, on May 3, 1 goo, when he states, "The wheel has turned round, but the wheel never stops, and after the circumference reaches the highest point it begins to go down." Dow's editorial, on May 5, 1900, contains an interesting point with respect to prices when he writes as follows: Business moves in cycles because everybody in business tries to make money when they can and to save it when saving is the only thing that can be done. For instance, in a period of de-

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pression, the keeper of a country store buys no more goods than enough to meet current requirements. When, someday, he finds that demand for consumption in his locality has increased, perhaps on account of a better sale for agricultural products, he increases his orders on the nearest wholesaler. Presently he finds himself unable to get as good prices from the wholesaler as before, because other retailers are increasing their demands. This happens three or four times and each time the retailer regrets that he did not buy more when prices were lower. Under the influence of this feeling, he buys for future requirements as well as for present needs, with cumulative effect upon the prices of the goods which he requires. This goes on all over the country. Experience shows that it takes three or four years to create general confidence in values and a general willingness to buy for future requirements. But there comes a time when the large jobber finds that he has bought too much and could have obtained goods cheaper if he had waited. After an effort to maintain prices, he lowers them and the local distributors find that they too have overbought. They also hold prices as long as they can and then lower them, convincing the retailer that he has been oversanguine. The coil then contracts. The retailer buys less, the wholesaler buys less and so it goes on until the demand upon the producers of manufactured goods has fallen so materially as to compel a reduction of wages or the closing of mills, which, in turn, strikes at the buying power of the general public in all departments and gives another turn to the wrench which is working consumption and prices down. This goes on until production is closely adapted to actual requirements. As the country never stands still, it can be said accurately that times are always becoming a little better or a little worse. It seems to take about ten years at present for a complete revolution of the industrial and speculative wheel. The going up process is more rapid, more vigorous and necessarily much more agreeable than the decline. The decline is slower because everybody except those who

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are able to be short decline as strongly as possible. It is not impossible that with better knowledge, greater wealth and wiser methods the extent of the advance and of the decline may be smaller, but until human nature changes materially there is not likely to be an abandonment of the law of expansion and contraction in business or discontinuance of its effect on prices of stocks.

On May 10, 1 goo, Dow speaks of the element of time necessary for business conditions to undergo a change from prosperity to depression when he states, "The great manufacturing and mercantile interests of the country are not going in a single month from great prosperity to depression." The thought that general business conditions are the key to the action of the stock market is reaffirmed in Dow's editorial of May 12, 1900, when he writes: All this goes to show a market in which fundamental principles must be kept in mind. The fundamental principles are that the market as a whole is controlled by the business situation which is reflected in larger or smaller earnings and profits and a consequent larger or smaller intrinsic value in stocks.

The editorial of May 23, 1900, is of interest since in it Dow employs index numbers illustrating the movements of commodity prices with stock market averages to prove that "the movement of stocks is an effect and not a cause." Although the discount function of the market may distort the relationship at times, Dow holds: "The condition of general business is the key to the stock market, as a whole, just as the investor is the person who determines the value of each stock in the long run."

Dow first compares the index number covering 22 commodities as published in the London Economist with the DowJones 12 stock average from 1885 to 1890. Incidentally, the London Economist's index is the oldest, dating from 1869. In 96

THE EDITORIALS OF CHARLES H. DOW

this editorial Dow shows that he is also aware of Sauerbeck's English series, first published in 1886, and Bradstreet's index number, started in 1897.6 The period from 1885 to 1890 was one of rising prices for stocks in the United States and for commodity prices in Britain. The period 1890 to 1896 witnessed a decline in both commodities and stocks, although commodity prices rose from July, 1895, until January, 1896, reflecting, according to Dow, the increased gold output from South Africa and speculation in South African mining stocks. Stocks rose from July, 1896, until April, 1899. Due to the delayed movement in 1896 commodity prices did not reach bottom until July, 1897. Thus, it is to be noted that although the decline was delayed in 1896, the trend was not reversed. From 1897 to April, 1899, both commodity prices and stock averages advanced. From 1896 to the conclusion of the editorial Dow employs the Dow-Jones 20 stock average. From April, 1899, to April, 1900, English commodity prices advanced while American stock prices declined. Dow then employs figures on ten commodities from Dun's Review for the period November, 1899, to May, 1900, and shows by this comparison that American commodity prices also declined. Stocks had likewise declined from November, 1899. Since the British commodity market was late in turning up compared with American stocks Dow predicts it will lag on the down turn but will decline with both American commodity prices and American stocks. Dow's forecast turned out to be correct. A business recession was experienced in England in the summer of 1 goo. 7 Dow's editorial of May 26, 1900, clearly illustrates his grasp of the business cycle. Dow had advised in a previous editorial that the small trader should decide whether he was in a bull or bear market by a study of general economic conditions. A correspondent inquires in this connection: "The ordinary reader may not be in a position to judge this matter, and it would be interesting to have you give reasons why, for in-

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stance, that we can expect any important period of depression to follow the present period of prosperity. Can you expect a town to become again a village?" Dow replies: That depends. There are a good many former towns in Western Kansas which have become even less than villages. Many dividend paying investment stocks have, in the course of time, been reorganized out of existence. Present value does not mean future value unless present conditions are maintained. All this, of course, will be agreed to, and we assume the real question to be whether there is reason for believing in trade cycles and that every boom carries with it the potential of a serious relapse.

Dow then compares bank clearings in New York City with stock averages for 1873 to 1899 using the high and low points of clearings as his turning points. He raises the point that this series may not be acceptable since it reflects stock speculation to an extent. Therefore, he follows this comparison with others, over relatively the same period of time, involving customs revenues, internal revenues, net earnings of all national banks, pig iron, bar iron, bituminous coal, anthracite coal, railroad earnings and dividends paid by railroads, and stock prices. He ends with the thought: "The comparisons could be indefinitely increased without changing the essential conclusion, which is that business of all kinds moves in periods of alternate expansion and contraction." On June 8, 1900, Dow again shows that he understands human nature and the part it plays in economic events when he observes: Men who find paper profits in various industries disappearing, who discover their shelves stocked with goods which they cannot sell at a profit, who are annoyed by contracts likely to be unprofitable, who see over production and no satisfactory way of checking it, are in no frame of mind to buy stocks.

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Dow illustrates his belief in the periodicity of cycles on August 2, 1900, in an editorial which says, in part: It seems to be a law of cycles that a great commercial depression comes once in about twenty years, and a sensible, although smaller depression about once in ten years. The great panics and commercial crises of more recent times have been those of 1837, 1857, 1873 and 1893. Each intervening ten year period has, however, been characterized by a well defined area of depression noticeable in 1846, 1867 and 1884. Assuming the rule to hold good, the depression of the present decade will be of the smaller type and will not be a general commercial panic.

Dow's editorial of December 29, 1900, is an interesting one. He ascribes "well-defined causes" to the bull periods of 18671872, 1877-1881, and the period inaugurated in 1896 and still in progress at the time of the article. The great speculative period of 1867-1872 was brought about by "the energies of something like two millions of men released from the pursuits of war and turned to the development of the country." The war removed men-particularly those from the North-from their local surroundings and broadened their outlook, resulting, once peace was declared, in the industrial expansion of the West on a grand scale. The period 1877-1881 was featured by the construction of the railroads, and the consolidation of the smaller roads into large railway systems. "From a financial point of view it was the day of railway building for the purpose of making money out of the construction of roads. The best business of the period was the manufacture and sale of railway securities." The bull period which began in 1896 was the result of dual causes. The first, and most important factor, was the expansion and consolidation of industrial corporations. The second feature was railway combination. Dow, however, shows that a difference existed as follows:

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The policy in industrials was to take all the concerns engaged in a given line of business and combine them into one issue of stock greatly in excess of the true value of the property concerned . . . . The railway policy, on the contrary, has been one of contraction, not in railway mileage, but in the control of railway properties. It has been the expansion of systems, but the contraction of responsibility.

On February 21, 1901, Dow again recognizes the part human action plays in the business cycle when he writes as follows: But after allowing for all these things, it is fair to assume that the trait in human nature which makes cycles in trade has not changed and that it will work out the same over-trading and over-commitments which have been the cause of declines heretofore. A period of prosperity always encourages trading. As long as people make money, their tendency is to enlarge commitments. This is true of everybody from banking syndicates to the keeper of a cross-roads' general store. When, on the other hand, ventures cease to be profitable, contraction invariably follows, increasing with the shrinkage which contraction promotes.

The editorial of June 8, 1901, is entitled "The Cause of the Next Depression." In this article Dow's analysis of "the cycle of trade" illustrates his contention that the business cycle process is a self generating one. He writes: The cycle of trade is well known. Beginning with a period of depression, the small dealer finds himself unable to buy the amount of goods required for hand-to-mouth trading quite as cheaply as when the previous purchase was made. He, therefore, buys a little more. The aggregate of this buying increases the business of the jobber and this swells the output of the manufacturer, who is enabled to employ more labor, resulting in larger purchase by labor of manufactured goods and agri100

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cultural products, which brings the circle round to the producer. At each step in the proceedings, rising prices bring increased purchases and increased confidence, until the retailer buys without hesitation many times the amount of goods which he would not have dared to take at the beginning of the cycle of improving trade. This multiplied by millions makes the demand which at times seems inexhaustible, which supplies the railroads with tonnage, and which in its ramifications creates the investment fund which finally seeks employment in Wall Street. The declining period is accompanied by steady reversal of these varied transactions. When the retailer and the jobber find that goods cost less than before they shrink purchases. When purchase in advance of requirements bring loss and not profit, they bring also loss of confidence and curtailment of demand. As the progress of shrinkage goes on, it touches all points of trade. It is a kind of flame which creates the fuel which is burned. Experience has shown that it takes about five years for one of these cycles to complete itself. It takes approximately five years for the country bare of stocks to become the country filled with stocks, and it takes about five years more for the over-stocked markets of the country or of the world to become practically bare.

S. A. Nelson includes this editorial in The A B C of Stock Speculation giving credit to Dow as the author. He omits the last paragraph, which reads: The cause of the next depression in stocks will be a falling off in general trade. It will be distinguished by reduced clearings, decreased railroad earnings, a smaller demand for stable goods, smaller exchanges at the clearing house, an increased amount of idle money, and smaller additions to the country's wealth.

Again the human element is discussed when Dow, on July 3 1, 1 go 1, writes that "the tendency to over-do in times of 101

CHARLES H. DOW AND THE DOW THEORY

prosperity rests on a principle in human nature which makes a man always want to make money, no matter how much he has made. Hence, over-doing may occur in large capital and large resources as well as small." The editorial of August 2, 1901, entitled "The Lamp of Experience," is in reply to a correspondent who asks if periods of depression are inevitable. Dow, in reply, uses a quotation from Patrick Henry, namely, "I have but one lamp by which my feet are guided. I know no way of judging the future but by the past." Although Dow acknowledges that on a theoretical basis it is probably accurate to say that as the wealth of a country increases general business conditions become more stable, nevertheless, experience indicates "the millennium of business, of finance and of transportation has not been reached." Through prompt action along the lines of sound economic principles advantages may be gained. But even though advances may be achieved in one direction, it is not unreasonable to assume that other difficulties will arise. The remedy to cure a specific ill will cause new maladies to appear on the economic scene. Dow advises his readers that the advances in the banking system of England did not eliminate the business cycle in that nation, and this despite the fact that the country showed great advances in wealth and general economic development. He concludes: If all corporations were rich and conservative, prices might be expected to become stable and periods of depression might disappear. If all individuals were rich and conservative, panics and hard times might disappear. But, as long as corporations and individuals differ greatly in resources, but are alike in the desire to make money, there will continue to be elemental conditions likely to produce instability, and enough toppling over to produce cycles of depression. Falling prices are produced by falling profits. Falling profits 102

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are caused by an excess of supply over demand. Excessive supply is always the result of overdoing and over-trading is generally the result of haste to be rich. Until some link in this chain is broken we think the lamp of experience will continue to flicker.

On August 31, 1901, Dow's editorial describes the progress of the business cycle as follows: There is a general similarity in all "booms" and in all periods of depression. The character of these movements is like a snowball running down an inclined plane and gathering snow as it runs. The movement is slow at the start, becoming quicker as progress is made and usually being quickest of all just before it ends. When the character of the motive power is considered it is evident why this should be the case. "Booms" are made by the gradual but increasingly rapid growth of confidence among the people.

Dow discusses the part played by credit on successive days in the editorials of January 22 and 23, 1902. In the former he writes: Modern business is done chiefly on credit. As long as there is confidence, everything is serene. But anything which impairs or seriously disturbs confidence might change the situation beyond the possibility of recognition within thirty days.

The following day Dow remarks: A halt in a bull period almost always starts with something which lessens confidence in credits. When credits begin to shrink, business begins to contract, and as this throws labor out of employment, the great circle is established and generally runs until self correction takes place.

On February 6, 1902, Dow writes as follows, "As long as labor is profitably employed general business is prosperous, because the wages of labor pay for such an immense amount

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of supplies as to create the main market for all who have products or goods to sell." The editorial of February 27, 1902, is concerned with the correlation of the employment of labor and stock market prices. Dow uses the percentage of labor employed in the United Kingdom from 1860 to 1899 for his labor figures and employs a 60 stock average from 1872 to 1885, and a 20 stock average from 1890 to 1go 1. Dow uses the years stocks made high and low points as the basis of his tabulations. Thus, the gap from 1885 to 1890 represents the difference between a low point in stock prices (1885) and a peak (1890). Since the stock averages are used solely for purposes of illustration the change from a 60 stock average to a 20 stock average does not cause difficulty. In this editorial Dow states: Periods of depression in business and in prices are invariably preceded by periods of good business and advance in prices. At such times, which usually last for several years, there is a gradual increase in the employment of labor until at the high point abundance of work, large production, large profits and high prices go together. It is equally certain that periods of depression begin with over trading, over production, over confidence, and general excess in all directions. Upon this condition of affairs comes some sudden shock. It may be an important failure; it may be some great catastrophe or national event; it is something which arrests attention and makes people stop and think. They see that they are extended, and begin to restrict operations in whatever line of business they may be in. Lenders of money restrict credits, merchants restrict purchases, creditors urge payments, and, as a result of this shrinkage, the demand for labor lessens a little in each case, but enough to make a large aggregate. This begins to be felt in reduced consumption, and this is the first turn of the wheel which brings about general contraction.

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The Three Movements in the Market. One of Dow's most important original contributions to stock market thought was his theory of the three movements in the market. He discussed this classification of stock market fluctuations in several editorials during the period under discussion. Dow first forwarded his explanation of market movements on May 12, 1899, in which he states: The stock market has three movements. It has a daily fluctuation ordinarily running over from ½ to 1 ½ points. It has a longer swing frequently through a period of about 20 to 40 days. It then has its main movement which extends over a period of years.

On January 15, 1900, Dow repeats his description as follows: Any close student of market swings discovers that the stock market has three movements which are separate yet united. The movement most generally observed is that which occurs from day to day. The ordinary movement of active stocks averages between¾ and 1 ¼ points a day. There are abundant exceptions, but the trader who calculates on this limit between high and low would find it works out as a whole. This movement is made, to a considerable extent, by professional traders . . . . The second movement in the market is the result of manipulation. Men who deal in from 50,000 to 100,000 shares have to move the market from three to six points in order to complete their turn. . . . A move of this character usually requires from 20 to 40 days for its consummation. The average extent of these moves is about 5 points . . . . During the time of this movement the daily swing goes on without interruption. If the thirty-day swing is up, the daily declines are less and the daily advances are more, while if the thirty-day tendency is downward the daily up-swings are less and the downswings are more. The third movement of the market is the one extending over a period of years.

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In the editorial of December 20, theory as follows:

1 goo,

Dow restates his

The market is always to be considered as having three movements, all going on at the same time. The first is the narrow movement from day to day. The second is the short swing, running from two weeks to a month or more; the third is the main movement covering at least four years in its duration.

Dow refers to the three movements again in his editorial of January 4, 1902, in which he writes: Nothing is more certain than that the market has three welldefined movements which fit into each other. The first is the daily variation due to local causes and the balance of buying or selling at that particular time. The secondary movement covers a period ranging from ten days to sixty days, averaging probably between thirty and forty days. The third movement is the great swing covering from four to six years.

The Discount Feature of the Stock Market. The question whether or not stock prices discount future economic conditions is one that has long challenged the economist. An extensive literature exists on the subject, and a survey of this aspect of stock market activity would be well beyond our scope. However, Dow was a firm believer in the discount feature of the stock market, but noted several important qualifications which should not be overlooked. On May 1g, 1899, Dow discusses the then current market, and in the course of his comments observes, "Wall Street discounts the future, but its ablest leaders often get wrong by being too far ahead of the public." Dow's editorial of July 26, 1899, states: The factors which make for a bull market are certainly very powerful, but in the face of them there is hesitancy in buying. Wall Street in this respect seems to be in a measure behind the country. Reports from all directions are that business is active,

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labor is well employed, and business men are making money. Such a condition has already brought about high prices in every department of trade. The question is whether Wall Street has discounted this condition in full, or has it still more to discount? The average of stocks has risen sufficiently within the past six months to indicate that a great deal of prosperity has been discounted.

The editorial of August 15, 1889, observes, "It remains to be seen whether the continued prosperity of the country has been discounted in the average price of stocks already attained." Dow introduces the note, on November 3, 1899, that stock market prices need not always discount the future when he writes: It is often said that the stock market discounts a change in the condition of business. This may usually be the case, but in this instance the bullish sentiment is more in the nature of the appreciation of a result. Prices of commodities and manufactured products are on a higher and firmer basis than ever before and it is not strange that the prices of securities representing them should also seek a higher level of value.

The editorial of May

10, 1 goo,

reads as follows:

The stock market discounts tendencies. Stocks went up before the improvement in business became pronounced. Stocks will discount depression before depression actually exists, but this discounting quality in stocks makes them run to extremes. They discount shadows as well as substances and often anticipate that which does not occur.

Dow receives an inquiry in which the correspondent notes that he has been rather bearish in his views while admitting that the country is in an extremely prosperous condition. Dow replies in an editorial dated January 22, 1902, and writes, in part, as follows:

CHARLES H. DOW AND THE DOW THEORY

While values support prices, manipulation usually advances them . . . because the manipulators foresee the values which are to come. In other words, prices generally discount events, or what stock operators think events will be.

On February 28, 1902, Dow writes: There is one qualifying point not to be overlooked. This is that the stock market discounts expected changes in condition. It is probable that stock prices will fall before changes in earnings become extremely pronounced. Hence, at a turning point, the rule of sustained values will be temporarily misleading.

Monetary Theory and the Stock Market. As are all financial writers, Dow was constantly concerned with the condition of the money market. Naturally, many of his editorials made reference to interest rates, bank reserves, and similar subjects. Dow did not formulate any specific theories with respect to monetary theory and the movement of stock prices, but the following editorials contain sufficient material to illustrate that Dow held an advanced view for the times. The editorial of April 25, 1899, states, in part, as follows: The advance in prices has absorbed money. The increased volume of business in all lines over the country has absorbed money, and the creation of new securities has been a further draft upon the surplus fund of the country. There will certainly come a time when the supply of money will not be adequate to sustain prices at the level which they will have reached.

On May 22, 1899, Dow makes the sage observation, "In the long run there is no one factor more potent than easy money." Dow notes the following in his editorial of July 17, 1899: It is beginning to be better understood that falling reserves and a higher money rate are the inevitable accompaniments of

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growing confidence and reviving business. The more active business becomes the more likely the resources of the banks will be drawn upon, and the lower the reserves will conseq uen tl y be.

In the editorial of August 9, 1899, Dow states: It is much more to the purpose to educate the public to right understanding of the cause of higher money rates . . . than to use undue influence to keep the rate down. The higher money rate is natural and logical, and reflects sound, healthy business prosperity, and simply calls for patience in such readjustment of values as are called for by the new conditions.

An interesting note is introduced in Dow's editorial of November 9, 1899, when he writes: The dear money which comes from prosperity is only relatively dear. It is better to pay 6% or 8% for money and have a condition of prosperity reflected by large railway earnings, large industrial profits and a speculation averaging 700,000 shares a day than it is to have the reverse of all these conditions and money 1½%· Interest is a very small item in speculation when stocks are active. It is only burdensome when they are dull. Consequently money for speculative purposes will not be lacking at a price as long as speculators, on account of their profits, can afford to pay the price.

One of the most interesting editorials is entitled "Effects of Dear Money." It appeared on October 9, 1902, and was among the last editorials from the pen of Dow. In this editorial Dow observes that the stock market, because of the number of stocks carried in margin accounts, "is always sensitive to the condition of the money market." Dear money, according to Dow, may be of two kinds. The first is "a quick flurry, very high rates and great scarcity of money due to a panicky feeling." The second is "the slow hardening of money rates resulting in continued difficulty in obtaining loans." The first 109

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condition is of a temporary nature and stocks recover as soon as money becomes available. The second condition is the result of an extended period of prosperity. It represents "the conversion of floating into fixed capital," and "has marked the approaching end of every period of great expansion which this country has seen." Dow states it was a characteristic of the panics of 1837, 1857, and 1873. It was a factor, but not a conspicuous one, prior to the decline of 1893. Dow concludes as follows: Dear money, after a period of prosperity, does not always mean an immediate turn in the tide. It is sometimes a feature of current business a year before the turn comes, but, after dear money has once come, it usually recurs until it has its effect. The effect is always the same in the end. It means contraction, curtailment and lessened demand for funds. The more money has been tied up, the longer it takes to secure adequate liquidation. The sounder the situation, the less the unfavorable effect, but permanent relief from money absorption must come through lessened demand.

Dow's Views on the Dow-Jones Averages. It will be discovered in a later discussion of the Dow-Jones averages that Dow computed the average, or the arithmetic mean, of stock prices by adding the prices of the stocks included in the specific average, and dividing this figure by the number of stocks so used. He did not use a weighted mean, or make adjustments of any other nature. There is no evidence that Dow looked upon the averages as containing anything more than an indication of a statistical nature of the trend of the stock market as a whole. It was for this reason that Dow found it desirable to include "active" stocks in the averages. The following editorials illustrate Dow's thought with respect to the value of the averages and their use. On April 22, 1899, Dow has an interesting editorial on the averages with respect to high and low points from 1872 until 110

THE EDITORIALS OF CHARLES H. DOW

the time of writing, 1899. Dow writes, "It may be added the general character of the market has been the same since 18 57, but the comparatively small number of active stocks during the war period makes that average less significant than it has been since." Thus, it is apparent that Dow did not believe that the average of stock prices during the Civil War was as valid as the averages compiled after that time. Dow's editorial of April 11, 1900, shows that he considers other factors than the Dow-] ones average in his analysis of the stock market. He writes: The fact that the high point in the average has not gone as high as it went in September is unfavorable. Against this, however, are the distinctly favorable facts in the general situation. The steady gains in earnings and consequent additions to the dividend fund are a powerful influence against great declines.

The editorial of May g, 1 goo, contains the following: Whether a bear period is underway cannot with certainty be said. It is certain that the high point in September was not quite as high as the high point in April 1899. The high point in April 1900 was not quite as high as the highest in the September or April preceding. This is the sign of a bear market. Nevertheless, the high points have been comparatively near together and there is always a middle period when there must be some uncertainty whether the tendency is still upward or whether decline has begun.

Dow's famous editorial in which he compares the averages to the tide is dated January 31, 1901, and is entitled "Watching the Tide." It reads, in part, as follows: A person watching the tide coming in and who wishes to know the spot which marks the high tide, sets a stick in the sand at the points reached by the incoming waves until the 111

CHARLES H. DOW AND THE DOW THEORY

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 prices-waves, like those of the sea, do not recede all 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 high tide has been seen or not.

The editorial of February 27, 1902, contains an interesting point when Dow states: Our record of average prices does not go back to 1860, but with the war and the inflation of the currency, quotations of stocks between 1860 and 1865 could not be considered fairly representative. The starting point for modern compilations of stock prices was in 1868, when the reaction after the inflation immediately following the war was felt.

On March 6, 1902, Dow writes, "The average of twenty railway stocks has proved to be fairly illustrative of changes in general conditions." Dow compares the prices of twenty railway (active) stocks for June 17, 1go 1, and April 4, 1902, in his editorial of April 8, 1902. The average on each date was practically the same, namely, 117.65versus117.56. Comparison of the prices of the individual stocks that comprise the average revealed to Dow that 6 advanced, 2 remained relatively stable, and 12 declined. A much greater advance was made in 2 stocks than in the other 4 that advanced in price. Dow says, "Probably a fair deduction from this is that too much significance should not be attached to the fact that our average is apparently up to last year's high point." Confirmation of the Dow-Jones Averages. Confirmation means that when either the Dow-Jones industrial or railroad average moves into new high or low ground the other average 112

THE EDITORIALS OF CHARLES H. DOW

must do likewise for the movement to have significance. Either average may penetrate first. The Dow-Jones public utility average is not considered. This subject will be discussed in detail in Chapters Seven, Eight, and Nine. For the period under review there is no mention by Dow of confirmation, but several editorials bear upon the movement of both averages in a general fashion. The editorial of April 22, 1899, states, in part: Since August 1896, the advance has been comparatively steady. The average of twenty railroad stocks has risen from 41.82 to 87.04, a gain of 45.22. The average of twelve industrial stocks has risen in the same time from 28.48 to 76.04, an advance of 47.56. It is noticeable that industrials and rails have risen in the present period almost exactly the same amount. On May 31, 1899, Dow discusses the effect of serious crop damage upon the price of railway stocks. He reasons that although railroad shares are in a stronger position than industrial stocks, nevertheless, they are subject to the influence of reduced agricultural crops. Dow continues: Here may be a matter of importance for the future. There has been recently some separation of the railway from the industrial list in the matter of the average movement. The market no longer moves together. On some days, the industrial list has declined while the railroad list has advanced. This might easily grow out of a change in speculative sentiment which led operators to buy the railroads and sell industrials. The fundamental reason for this wou,ld be that the railway list has not been greatly expanded in recent years . . . . The industrial list occupies an entirely different position. There has been a very large creation of securities. The editorial of July 21, 1899, contains the following: The revival of interest in industrial stocks is but the natural outcome of prosperity in the industrial world. Some lead113

CHARLES H. DOW AND THE DOW THEORY

ing interests have recognized that it was foolish to rush railroad stocks any further upward and talk about industrial prosperity without also buying industrial stocks. Such a course was hardly consistent. Either the industrial prosperity, they argued, was a fact or it was not. If it was a fact it made industrial stocks cheap and certainly more inviting to the speculator than the high price of railroad stocks. The view at any rate has lately given some turn for the better in the industrial stocks . . . . The upward movement in the industrials seems certain to have started, and gives promise of continuing until the average of these industrials has risen to a basis considerably higher than the present. The movement may safely be counted upon to bring more or less sympathetic buying into the general list of railroad stocks as well.

Dow, on October 18, 1899, discusses activity in the market at that time. In the course of the discussion he states, "The general impression was that the bears finding the railroad list firm, thought it would be worth while to attack industrials for the purpose of disturbing confidence." The editorial of March 5, 1900, contains a reference by Dow to the action of the railroad average as compared with the industrial average. However, Dow does not elaborate upon this observation when he writes: The feature of the market has been the comparative strength of railway shares, and the distinct weakness of industrials. The railway average has fallen from 78.60 to 77.86, but this has been insignificant compared with the decline in twelve industrials from 64.52 to 61.95.

Although Dow's editorial of March 7, 1900, does not mention the Dow-Jones averages, it is interesting from the viewpoint of the position of industrial and railway shares. Dow states: 114

THE EDITORIALS OF CHARLES H. DOW

The tendency of the whole market during the next decade is likely toward specialized movements. Speculation in the early seventies was confined to a comparatively small number of stocks. Nearly all were affected by similar causes and it was natural that they should move together. The market around 1880 was broader, but it was still a railway market and to a large extent different stocks moved together. The market of 1890 began to include an industrial element, but the number of active industrials was so small as to be affected by the railway list except where the developments were very pronounced .... The market has now reached a point where the railway list has become greatly extended, where many of the railway stocks are practically investments, and where varying conditions make similarity in movements impractical. Furthermore, the industrial list is getting to be as important if not more important than the railroad list and it is obviously absurd to sell Steel and Wire short because one of the transcontinental lines cuts passenger rates. It is also absurd to buy Continental Tobacco because Leather increases its dividend. The grouping of stocks within the boundaries of one room must make some sympathetic movements, but the tendency will be to lessen fluctuations of this character and to make speculation run in stocks according to developments in that property.

On October marks:

12, 1 goo,

Dow returns to the subject and re-

When the active list comprised only a dozen railway stocks it was natural that it should move together but there is no good reason why an advance in Manhattan should be accompanied by a rise in Peoples Gas. Stocks still move together when the swings are important because it is easier for operators to go with an obvious tendency than against it.

The Dow-Jones averages are discussed in the editorial of January 29, 1901, in which Dow states:

ll5

CHARLES H. DOW AND THE DOW THEORY

There has been, as students of our averages know, a very small rise in the twelve industrials as compared with the very large rise in twenty rails. This has not occurred before 1900 and is a new feature in the speculative situation. It means either that the rise in railroad stocks has been a response to improved conditions present and future, in which the industrial list does not participate and therefore has not risen; or that leaders of the market have pushed forward the railway stocks intending to bring the industrial list up as a re-enforcement of lagging bull sentiment at some opportune time. On October 5, 1901, Dow comments upon the fact that the industrial average has not performed as well as the railroad average. However, he observes that a decline in industrial prosperity will be reflected in lower railroad earnings. He writes, in part, as follows: Whatever falling off in business there may be, will have an influence on railway tonnage; hence on railway earnings and on the actual value of stocks. An important decline in the industrial market will, therefore, reflect conditions which will be against railway shares. Furthermore, decline in industrial shares will . . . to some extent induce those who hold industrials to sell railway stocks, for which there is a good market in order to protect industrials, which the owners cannot sell to advantage now, but which they hope to be able to sell to advantage by and by. Dow writes on January 7, 1902, as follows: Stocks do not move together in any such sense as they did when the speculative list included railway properties alone. Nevertheless, persistent decline in one set of stocks is very apt to weaken others. Although the editorial of February 28, 1902, is primarily concerned with earnings, Dow remarks, "Under normal con-

ll6

THE EDITORIALS OF CHARLES H. DOW

ditions, stocks move together if all nearly related in conditions." The editorial of May 14, 1902, is based upon a correspondent's inquiry as to whether or not the bull market then underway was at an end. Dow replies, "If our averages are a true guide to the market for railroad stocks, as they have been in the past, it follows that if the end of the bull campaign has been reached, it was reached on May 1, 1902, or less than two weeks ago." Dow bases his reasoning upon the fact that on May 1, 1902, the railroad average stood at 121.86, or the high point of the bull movement to the date of the editorial. However, Dow warns that it is too early to "establish the fact of a permanent turn." It is interesting to note that the high point of the market was reached on September 9, 1902, at a figure of 129.36, and that the May 1 high was exceeded on July 7, 1902, when the average closed at 122.21. In the course of the editorial Dow notices that although the railroad average closed at a new high on May 1, 1902, the 12 industrial stock average on that date stood at 67. 1 1, or close to 9 points below the figure of 75.93 established on May 1, 1901. He does not expand upon this observation, and it seems logical to assume that if confirmation of the averages was a tenet of Dow's theory he would have made further comment along these lines. The Law of Action and Reaction. Dow emphasized in many editorials his "great law of action and reaction" which should be considered as one of the most important precepts in the original theory. In the editorial of May 16, 1899, Dow advises: It is a law of the market swings that large primary movements shall have large reverses. The bigger the advance, the bigger the reaction sooner or later. The ordinary development is that the secondary movement is from three-eighths to fiveeighths of the amount of the primary movement. 117

CHARLES H. DOW AND THE DOW THEORY

Dow illustrates the application of the law of action · and reaction when he discusses, in his editorial of May 27, 1899, the decline in the market that occurred in the spring of 1899. He writes: The rapid decline has led many people to believe the bull market over. They argue that there has been no such decline in the last year or two and that its coming shows that the market has changed. Those who argue this way forget the great declines which have occurred in the course of every bull market on record. There was a decline in the spring of 1879 which was regarded as beyond all peradventure the end of the bull market. There was a decline in the spring of 1888 which cut more than one-half of the rise of the previous year. The decline measured by its length has not been greater than those which have frequently occurred in the course of bull markets in the past and is really not greater than the rise immediately preceding theoretically required.

An effective presentation of Dow's thought is contained in his editorial of July 7, 1900, in which he writes, in part, as follows: It is a remarkable fact in speculation that both the average price of a number of stocks and the price of individual stocks show strong tendencies, both in rallies and relapses to reach one-half of the primary movement. When a stock falls ten points in a comparatively direct movement, it is extremely likely to rally as much as five points from the lowest. It often rallies or relapses more than half of the original swing, but it is generally safe to wait for about half. A comparison of the averages . . . shows how regularly this movement occurs. When a recovery does not come near being one-half of a decline, it generally means that the primary movement has not been completed and that a new low quotation will be made.

118

THE EDITORIALS OF CHARLES H. DOW

The editorial of October 1 g, 1 goo, is also very effective as will be noted from the following: The market is always responsive to the great law of action and reaction. The longer the swing one way the longer it will be the other. One of the best general rules in speculation is the theory that reaction in an advance or a decline will be at least one-half of the primary movement. The fact that the law is working through short ranges and long ones at the same time makes it impossible to tell with certainty what any particular swing may do; but for practical purposes, it is not infrequently wise to believe that when a stock has risen 10 points, and as a result of one or two short swings does not go above the high point, but rather recedes from it, that it will gradually work off 4 or 5 points.

On November 24,

1900,

Dow states:

The principle of action and reaction applies in the market almost as certainly as it does in mechanics. The secondary movement as a rule bears some relation to the primary movement. The larger the original advance, the larger the reaction. This is qualified, however, by the fact that when an advance represents an adjustment of prices to new conditions, a relatively large part of that advance is retained. The ordinary rule of reaction in a rising market is that it will be from three-eighths to five-eighths of the amount of the advance. In large movements, for well-defined causes, this rule does not hold. It is rare, however, that reaction, even against large movements, does not amount to one-quarter of the primary move. Reactions come in two ways. Sometimes they take the form of a sudden slump in which prices drop from 3 to 10 points within two or three days. The more general course is.a sagging movement in which prices work off for from 15 to 30 days. The former case usually applies when there is alarm and a sudden liquidation; the latter when the liquidation represents a preponderance of selling over buying orders.

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CHARLES H. DOW AND THE DOW THEORY

On January 22, 1901, Dow restates the principle when he says, "It often happens that the secondary movement in a market amounts to¼ to½ of the primary move." On January 30, 1901, Dow writes as follows: "Whoever will study our averages, as given daily in The Journal for years past, will see how uniformly periods of advance have been followed by periods of decline, amounting in a large proportion of cases, to from one-third to one-half of the rise." Dow, on March 27, 1901, advises his readers, "It is a theory of speculation that even in a bull market the relapses will be approximately half the amount of the advances." Earnings ( Values) and Stock Prices. One precept that Dow continually kept before his readers was that earnings, or values, in the long run determined the prices of individual stocks. The subject is covered in Dow's editorial of May 18, 1900, as follows: It is always safe to assume that values determine prices in the long run. Values have nothing to do with current fluctuations. A worthless stock can go up 5 points just as easily as the best, but as a result of continued fluctuations the good stock will gradually work to its investment value, while the poor one will gradually go to its value as a gambling counter or perhaps with reference to its voting power for control.

On May

19, 1900,

Dow writes:

Out of the uncertainty comes one clear fact. It is no new one to readers of this column, but it is one that will never grow old in its practical application. Values will tell in the long run. The values of railway stocks can be ascertained to a reasonable extent. If a railway stock is selling below its real value, based not upon hearsay, but upon a careful study of the figures, it will work higher, even if the general market declines. If a stock is selling above its value, it will gradually come down to 120

THE EDITORIALS OF CHARLES H. DOW

that value. Values are all the time changing, but . . . can be watched closely enough . . . to keep measurably in touch with the facts.

The editorial of October 25,

1900,

contains the following:

Whether the market goes up or down a few points in any one month does not alter the fact that if extraordinary increases in earnings radically change the value of a certain stock, the price of that stock will perhaps slowly, but with certainty, ad just itself to its new value.

Since values determine prices, a mutually related aspect, according to Dow, is the fact that the investor-basing his actions on value-in the long run determines stock prices. The editorial of May 2, 1900, illustrates this when Dow states: Nothing is more certain in finance than that the investor makes the prices of securities in the long run. Stocks and bonds are temporarily carried above or below their value by special causes. But in the end the operator for a rise or for a fall has to accept the judgment of the investing public as to the proper price of any given security.

The editorial of October

18, 1901,

says, in part:

We have tried to show, in recent articles, that value has little to do with temporary fluctuations in stock prices, but is the determining factor in the long run. Values, when applied to stocks, are determined, in the end, by the return to the investor, and nothing is more certain than that the investor establishes the price of stocks. The manipulator is all-powerful for a time. He can mark prices up or down. He can mislead investors inducing them to buy when he wishes to sell, and to sell when he wishes to buy; but manipulation in a stock cannot be permanent, and, in the end, the investor learns the approximate truth. His decision to keep his stock or sell it then makes a price independent of speculation and, in a large sense, indicative of true value. 121

CHARLES H. DOW AND THE DOW THEORY

On November 28, 1901, Dow writes: There is only one unchanging rule in speculation. That is the certainty that values determine prices in the long run, and that the fundamental effort on the part of everybody who tries to make markets is to foresee values and to make money by adjusting prices thereto.

The editorial of January 28, 1902, discusses earnings as a factor in setting stock prices. Dow states, in part, as follows: Nothing strengthens a stock more than margin of safety in dividend earnings, and nothing weakens a stock more than doubt in regard to stability of dividends. The price of bank stocks is almost uniformly determined by the profits instead of by dividends, and bank stocks have not infrequently sold at very high prices before any dividends were declared, because of the known policy that all profits were to be carried to surplus account until the surplus approximated the amount of capital.

Dow writes on February 25, 1902, as follows: The one thing sure in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes prices in the end. The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of the price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise. In a bull period, extending over four to six years, it will be found in every case that the value of stocks has risen with the rise in prices, sometimes falling back, and at others running ahead, but, in the main, keeping, not only the same general direction, but moving over approximately the same points. If prices go up and values do not follow, prices will presently fall back, but if values do follow, prices are likely to advance again and stocks may be cheaper at high prices in view of the 122

THE EDITORIALS OF CHARLES H. DOW

values that exist than they were at low prices with the values then existing.

The editorial of March 6, 1902, restates Dow's belief that values in the long run determine prices. He writes: Values follow earnings. Manipulation makes temporary movements but the main course of prices is simply a response to changes in values. Prices cannot be held up without values . . . and they cannot be kept down if supporting values are underneath.

On March 11, 1902, Dow remarks, "Whether a stock is dear or cheap depends not upon the price but upon the worth of the stock." The editorial of April 22, 1902, contains the following, "Values make prices, and earnings make values . . . . Earnings make values, and in the long run, crops make earnings.'' Dow discusses values in his editorial dated June 20, 1902. The editorial is an interesting one and is entitled "The Position of Values." He writes, in part, as follows: The business of life insurance is founded upon the fact that out of a thousand people of a given class, approximately twenty will die each year. The scale varies with difference in ages and in surroundings, but the law in the case is beyond dispute. Scientific speculation stands upon a condition somewhat similar. It is impossible to say what the temporary movement of a stock may be, but nothing is more certain than that prices respond in the long run to changes in values. Allowances must be made for discounting expected events, and for the effect of conditions that may be temporarily more powerful than values, but the investor finds that after a little time value reasserts itself, no matter whether stocks were pushed temporarily too high or too low. Other factors bearing on speculation are influential; value is essential. 123

CHARLES H. DOW AND THE DOW THEORY

A correspondent advises Dow that his recent articles are helpful to small investors all over the country, but requests that additional information be given with respect to the manner in which the value of a security may be ascertained. Dow replies to this inquiry in his editorial of August g, 1902. He writes, "The first thing in determining value is to understand how railway accounts are made up." He discusses the income statement of a railroad and after various computations arrives at the amount "earned on stock." This amount is available for dividends, although Dow cautions his readers that only a part of it may be distributed. Dow refers the reader to various statistical manuals for the purpose of obtaining background information, as well as the past records, of individual corporations. He suggests that the data contained in the manuals be brought up to date by use of current earnings reports as published in The Wall Street Journal. Dow advises that annual reports, as issued by the individual company concerned, may also prove of aid. It will be noted that Dow confines his answer to railroad securities. However, when he describes the statistical manuals available, he mentions that Moody's Manual of Corporation Securities gives special attention to industrial corporations. Poor's Manual is also mentioned, as is a Supplement issued by the Financial Chronicle. Manipulation and Stock Prices. William C. Van Antwerp declared in 1g13 that "The Stock Exchange has nothing to conceal, and it recognizes not only that manipulation exists, but that at times it assumes the proportions of a real evil." 8 Charles H. Dow was likewise aware that manipulative practices employed on the New York Stock Exchange had an important bearing upon stock prices. A great deal has been written about manipulation on the New York Stock Exchange. One of the favorite periods covered is that of the Erie Railroad operations in the 186o's. Another more recent period 124

THE EDITORIALS OF CHARLES H. DOW

that has attracted the attention of many authors is that of the great bull market of 1929. Dow had a practical approach to manipulation. It existedand he described its modus operandi and its effect. It will be remembered Dow served on the floor of the New York Stock Exchange as a broker, and there is no doubt that he learned a great deal about trading operations from this point of vantage. Dow's editorials that discuss manipulation follow. The editorial of April 24, 1899, contains the following: There is a pronounced difference between bull markets that are made by manipulation and those that are made by the public. The former represent the effort of a small number of persons; the latter reflect the sense of the country on values. It is possible to create a limited public sentiment by manipulation, but the sentiment that endures and sweeps away the strongest interests which oppose it is invariably founded upon general conditions which are sufficiently universal and sufficiently potent to affect the opinions of practically everybody.

On June 29, 1899, Dow writes: The reactions which come from day to day are not significant. They reflect in many cases the selling which is done by the manipulators for the purpose of seeing what there is in the market. It is a matter of comparative indifference with a large operator whether the stock which he is handling is a point or two higher or lower. The thing which is important is whether the public follows up the advances so that he can sell. The development of a rising market very generally follows one course. Operators acquire at low prices a line of stock which they wish to sell at high prices. They begin advancing quotations by buying and selling through different channels. They watch the return from their brokers to see how much new business comes in. They sometimes gain stock in considerable quantity at the outset, but frequently persevere until the account begins to change, and they find it possible to sell more 125

CHARLES H. DOW AND THE DOW THEORY

than they buy. This in a successful bull campaign goes on until all the stock for sale has been marketed. It often happens, however, that the public after buying freely for a few days will stop and the manipulators will find themselves accumulating stock or getting no new business. When this occurs, it is considered good business to drop quotations back to a point where the trading community again takes hold. This is the explanation of many interruptions in an advancing market. Dow tells of pool operations in his editorial of July 14, 1899, when he writes: Dullness is again followed by higher prices. A few weeks ago dullness was succeeded by falling prices. The change has brought to the front a little more manipulation and the organization of pools which may be a factor on the bull side for a while. These pools, however, find their success in working with the current rather than against it, and the fact that they are made up of men of experience in market movements testifies emphatically to their belief tl:.at the tendency of the market for the time being is upward. The editorial of July 15, 1899, returns to the subject of the daily fluctuations in the market. In this connection Dow remarks that, "Those in a position to know, who are good judges of the market, feel confident that the daily fluctuations of 1 or 2 per cent are not without their purpose in the general control of the market which is undoubtedly exercised by the monied interests of the country." The activity of manipulators is mentioned in the editorial of July 29, 1899, when Dow says that, "investment buying is stimulating operators and insiders to make active and higher stocks which do not yield a revenue so as to arouse speculation in a class of securities which need to be made attractive for the gain from probable appreciation in value rather than in immediate dividend paying qualities." 126

THE EDITORIALS OF CHARLES H. DOW

On August 14, 1899, Dow states: The presence of a master mind was more or less apparent all week in market movements. Natural forces were made to play their part to good effect. It was a strong market, in the sense that it was under perfect control by the bull interests practically all the time.

Dow writes on September 7, 1899, that, "specialties are moving under pool manipulation while the public continues to absorb standard stocks, carrying them to prices appearing absolutely prohibitive to the professional bull operator." The editorial of September 21, 1899, contains the following observation: "The market is evidently under control of some rich men and a masterly control it is, which has so far permitted liquidation without a panic." On October 26, 1899, Dow says: As usual in strong bull movements, new pools are formed which are surrounded with special reasons for advancing the prices of their securities. These have a decided sentimental effect even upon securities which are in no wise related to other securities in other lines of business.

An example of the size of the pools operating is contained in the editorial of October 31, 1899. Dow writes: Pools organized in specialties in the last two or three weeks have taken a good deal of money. In fact it is claimed that the advance in Sugar alone has brought requirements for upwards of four million dollars.

On November 8, 1899, Dow states, "The trading throughout the whole list Monday clearly indicated that the stock market is in the hands of master minds and that the public is perfectly willing to buy stocks on any temporary reaction." The editorial of November 18, 1899, contains the followmg:

CHARLES H. DOW AND THE DOW THEORY

The specialties will undoubtedly remain the leaders in the market. One of the prominent features of the breadth of trading at present is that unlike previous manipulation of stocks specialties are now used more like barometers to indicate the action that large interests are taking.

Dow writes on January 27,

1900,

as follows:

If conditions make large holders of securities not anxious to sell, there is always the possibility that a combination of their number may bring about an artificial advance with a view of encouraging trading and stimulating bull speculation. This frequently occurs in a market where the main tendency is unquestionably downward.

An interesting observation is contained in Dow's editorial of February 9, 1900, when he says: It is an easy matter for a large operator to move prices, but unless the advances which he brings about are accompanied by general buying, his work is thrown away and will be discontinued soon after the facts become clear. The most successful manipulators of stocks are the men who keep in touch with the actual market, not going fast enough to get beyond the reach of support and not moving so slowly as to leave the public without leadership. It requires nice management and explains why not everybody in a position to undertake the task has been a successful leader.

Dow explains a manipulative technique in his editorial of April 7, 1900, when he states: After the market has advanced considerably, leading bulls always begin to sell. The market takes a certain amount of stock and then becomes weak. The bull leaders then cancel their selling orders and advance prices, bringing covering from those who have gone short and a certain amount of outside buying from those who believe the advance will go further. This enables the execution of a second batch of realizing orders 128

THE EDITORIALS OF CHARLES H. DOW

on which the market again declines, going this time a little lower than before. The bidding up manoeuvre is then repeated and so on as long as the bull manipulators wish to sell. . . . It is generally a part of such tactics to show strength in highpriced stocks.

On July 10, 1900, Dow advises that a group of traders have been trying for several days to start an advance in the market, but that the results of their efforts have not been well defined. In the editorial on the following day, July 11, 1 goo, Dow writes: The traders combination is making headway toward better prices. It is composed of skillful room operators, who buy at opportune times and make their purchases count for their full value. In this way, they get larger effects than might be obtained by larger operators with worse methods.

Dow writes on October 24,

1901,

as follows:

In a bull market, it has been generally found good policy to start advances by putting up a few of the high priced stocks. This has served to attract attention and dispose the public to follow buying in the speculative list.

The last three articles on the subject were included by Nelson in The A B C of Stock Speculation. The editorial of July 1, 1902, discloses Dow's views on several aspects of manipulation: In a broad sense, trading on the stock exchange represents the operation of supply and demand as applied to securities. Ordinarily, however, a comparatively small part of the business is done by investors. The larger part is the outcome of professional trading and of the manipulation that is carried on by large interests to accomplish desired results. Trading in stocks can ordinarily be divided into professional and public dealings. There is a great difference between the two. Professional trading includes manipulation and the op129

CHARLES H. DOW AND THE DOW THEORY

erations of those who make trading in stocks a considerable part of their daily business. Trading by the public covers investment business and a form of dealing which is partly speculative and partly investment. The professional operator trades all the time. Public trading is variable and very uncertain. The two extremes in the market are occupied by manipulators who either wish to buy or to sell in considerable quantity, and the public which, in the end, wishes to invest wisely. The manipulator, therefore, looks to the public to buy the stocks which he wishes to sell, or to sell those which he wishes to buy. A large proportion of all manipulation is aimed at the public, and professional traders are merely the middlemen who try to take profits out of the movements which manipulators appear to be trying to make. Suppose that a syndicate finds itself with a profit in the form of $ 10,000,000 worth of stock. The way to convey this profit into cash is to sell the stock. The syndicate, therefore, makes an arrangement with some skilled manipulator, who undertakes to induce the public to buy this stock. He begins by seeing that the merits of the case are stated as fully and widely as possible. Whether the stock is intrinsically valuable and the enterprise sound or unsound makes a great difference as to the class of men which undertake the manipulation, but it makes but little difference as to the methods which are employed to secure public buying. In any event, the first thing is to have the property known about and talked about. The way to obtain this result is to have the stock do something which makes brokers and speculators and writers try to find out what is causing the movements which are recorded on the tape. Manipulators in such cases usually tell friends that the stock in question is to be made active and advanced. This brings buying of a professional class, because it is understood that a deal of the magnitude proposed cannot be accomplished without sustaining the market for the stock for a considerable time during which trading in it will be comparatively safe. Manipu130

THE EDITORIALS OF CHARLES H. DOW

lators know, furthermore, that one of the best ways of getting a stock talked about is to have people tell friends that they have made money by buying it. Accordingly, there is almost always money to be made with a minimum of risk in the early stages of such a campaign. The manipulator must keep the stock active, buying and selling from ten to twenty thousand shares a day in order to keep traders confident of a market on which they can sell, if at any time they become alarmed. It is characteristic of the public to buy on advancing prices rather than on declining prices. A stock which is to be sold is therefore kept strong and advanced moderately if the general market will permit this to be done. The larger the manipulation, the larger will be the volume of professional trading, and the greater the likelihood of the public taking an interest in the stock. Usually in such cases the public buying is at first small, then it becomes more confident, and finally there is full confidence and the stock is rapidly unloaded upon the public buying. Then the activity dies out, professional trading becomes less, and the public is satisfied or dissatisfied with its bargain, as the case may turn out. This occurs to a greater or less extent in the market all the time. There is always some large interest which would like to have the public buy or sell, and manipulation is going on with that end in view. Large interests know that if the public can be induced to trade freely in stocks which are of unquestioned value, they can generally be led into other stocks; therefore, an attempt is often made to get the public into the market by advancing three or four leading stocks. If the public comes in, the market is widened. If the public does not come in, the manipulators discontinue their efforts to make a market after a few days and wait for a more opportune time. The rule for the public ought to be essentially the rule which is followed by professional traders. When a stock is made active, consider it first with reference to its value. If it is intrinsically cheap, it can ordinarily be traded in as long as it is kept active. But it is generally wise to sell when activity

CHARLES H. DOW AND THE DOW THEORY

ceases. If the stock is apparently above its value, a good deal more caution ought to be exercised about going in, and stop orders should be used to guard against severe drops. Generally speaking, manipulation in a new property is for the purpose of selling; in an established property, bull manipulation is usually discounting some favorable news which insiders are holding back. Bear manipulation in perhaps eighty per cent of cases is the discounting of something which is unfavorable. In twenty per cent perhaps, it is for the purpose of accumulating stock with reference to a succeeding rise. As a whole, however, bear manipulation is founded on knowledge that the stock under treatment is intrinsically dear. It is not, as a rule, good judgment to buy stocks which are under attack until the attack ceases and there are indications of a rally on the short interest which may have been made by those who followed the decline. 9

Manipulation is also discussed in Dow's editorial of July 23, Here Dow writes, in part, as follows:

1902.

The stock market alternates between periods of activity and periods of rest. Its periods of activity are usually started by manipulation and continued by a mixture of manipulation and public buying. Professional traders and the public usually try to follow the lead of some individual or clique which is apparently advancing some particular stock or stocks. The main difference between manipulators and general traders is that the manipulator endeavors to take advantage of conditions which he thinks will exist in the future. He believes that the condition of money or change in the value of a particular stock or something else will cause a given security to be worth more three months hence than it is now. He buys stocks quietly and then advances the price slowly or rapidly, as the case may be, with the expectation that the public will take his stock off his hands when it sees what he saw at the beginning. Whether the public does this or refuses to do it determines the success of the campaign.

THE EDITORIALS OF CHARLES H. DOW

In a majority of cases, a well sustained advance supported by large trading will bring enough outside buying to enable a manipulator to unload a substantial line of stock. The speculative public always buys on advances and seldom on declines, in which respect it differs from the investing public which buys on declines and sells on advances. One of the most skillful manipulators in Wall Street says that any stock possessing merit and having some influential fact to be made the basis of a campaign can be marketed at an advance in price, if the manipulating interest is willing to pay the cost of such a campaign, which would perhaps average $250,000. This cost is chiefly applied to the creation of a market. The rules of the Stock Exchange do not permit A to tell B to buy stock from Cat a given price, but it does not prohibit A from telling B to buy 10,000 shares of a given stock and at the same time telling C to sell 10,000 shares of the same stock. The results of such an operation would show that many brokers had participated in the trading, through a wish to take either the buying or the selling side, and that on the whole the market, although artificial in one sense, had been legitimate in the sense that anybody had a chance to step in and buy or sell at the price established. A bull campaign in the market is a far bigger undertaking than a campaign in one stock, because many stocks have to be moved. On the other hand, it is sometimes easier because it invites co-operation from many sources, and sometimes a very small amount of encouragement in a stock is sufficient to induce its friends to do all that is required to promote an active speculation. The general progress in a bull market is for the manipulating interest to take two or three prominent stocks, and by making them active and higher attract attention to the fact that a campaign has been started. It is customary to take stocks of the best class, in which there is a large investment interest and where the supply of floating stock liable to come on the market is known not to be large. This is why St. Paul is so often used 1 33

CHARLES H. DOW AND THE DOW THEORY

as a leader, and why closely held stocks like Rock Island, Northwest and others of that class are frequently advanced materially at the beginning of a bull campaign. After stocks of this kind have been put up from 5 to 10 points, it is customary to shift the trading to stocks of the middle class on the idea that the public will not buy where there has been very large advances or where prices are very high, but will buy the cheaper stocks, even if they are intrinsically dearer. After stocks of this kind have been carried up a few points, it is customary to take up stocks of still lower price. It was considered for many years that when manipulators moved Erie, the end of a period of rising prices was at hand, because Erie was regarded as of next to no value and putting it up was considered diversion of the public, while other stocks were being sold. In a prolonged bull campaign, after the manipulators have moved the low priced stocks, they sometimes go back and move the others all over again, following the same order-the high priced stocks first, stocks of the middle class next, and then the cheapest on the lis t. 10

On July 26, 1902, Dow in discussing the placement of stop orders mentions manipulation in the following: An operator running a bull campaign likes to see reactions of about a point, because they enable him to test the market frequently and to see if the public is following his manipulation. But he does not like to see reactions go much further, because they would have a tendency to chill the bull enthusiasm which he wishes to create. Success, from his standpoint, means a growing public interest which will gradually absorb the stock which he has to sell. This interest can be kept up only by a comparatively large market, a well sustained tone and a gradual rise. 11

Industrial Stocks. At the turn of the century, the industrial companies of the nation were undergoing their great period of combination and industrial stocks were looked upon as specu134

THE EDITORIALS OF CHARLES H. DOW

lative in nature when compared with the shares of the better railroad companies. It must be remembered that Dow died in the year following the formation of the United States Steel Corporation. Despite this fact he clearly foresaw the role that industrial companies would play in the economic life of the nation, and the future action of their securities on the nation's stock exchanges. Dow notes the formation of industrial combinations in his editorial of April 22, 1899, when he writes: This is preeminently the period of industrial speculation, yet the creation of industrial stocks has become pronounced only within a year. It is impossible that any large portion of the industrial stocks created in the last six months should have been marketed. As it is the intention of the promoters of industrial combinations to sell a portion, at least, of the stocks which they have made, it follows that there must be a very strong body of capitalists prepared at present to resist anything like collapse in the industrial market and to promote by every means in their power firm or advancing prices for the market as a whole.

On April 27, 1899, Dow compares the bull market of 1879, which was concerned with speculation in railroad shares, with the bull period of 1899, which witnessed great speculative activity in industrial stocks. He notes that the railroads had to be constructed, but that the combination movement underway in the industrial field dealt with established industries. Thus, the "creation of industrial securities" proceeded at a more rapid rate. Dow warns the investor in industrial issues of the danger of overcapitalization and of the lack of information available on earnings and other financial matters. The editorial of October 27, 1899, states, in part, as follows: One of the features which becomes more strongly pronounced is that the industrials are more and more divorced from the movement of railroad securities and the classes are 1

35

CHARLES H. DOW AND THE DOW TH EORY

becoming more defined. There should be nothing in this to give any less confidence in the general situation. It is well known that the production and consumption of American manufactured articles is greater than ever before. The efficiency, however, of trust organization as at present capitalized must still be determined.

Dow notes the complexity of the industrial situation in 1900, in his editorial of January 18, 1900, when he states: The railroad development, however, was gradual and institutions had time to ad just themselves to the situation as it came. The industrial development has come suddenly, and represents at present an intermixture of good and bad undertakings. Some of those which have been badly put together may be saved by good management, while some which have been not badly composed will be ruined by bad management.

On February 20, 1900, Dow discusses industrial stocks as investments. He points out that many factors are often overlooked because most of the industrial corporations concerned are of relatively recent formation. As long as prosperity lasts, industrial companies should participate, Dow reasons, but, when decline sets in, overcapitalization in some cases will cause readjustment. Dividends will be omitted, and the industrials will have to ad just to normal conditions. If the investor is in a position to secure facts on a particular company, Dow advises, he might make a wise investment. However, there is little to go on from the standpoint of security analysis. Dow compares the period from the standpoint of investment and speculation in industrial stocks to that which existed in railway investment in the 187o's. At one point he states, "It 'is certain that industrial securities will be a great speculative factor in this country." Dow's editorial of March 3, 1900, clearly shows his views as to the future of industrial shares when he states:

THE EDITORIALS OF CHARLES H. DOW

It is as certain as anything in the future that industrial securities will form the principal medium for speculation in this country. The field for the formation of industrial corporations is vast and varying degrees of skill in management, coupled with the succession of good times and bad times, will make constant changes in values which will be discounted by movements in the prices of stocks.

Dow's views, as expressed in his editorial dated March 7, 1900, are similar: The industrial market will become in due time almost an ideal trading market. There will always be changes in values. There will always be schemes for combinations; always fears of competition, always possibilities which will tend toward advance or decline in prices.

On October 12, 1900, Dow says, "It is probable that speculation in this country will run very largely to industrials in the future." The editorial of February 15, 1901, contains the following, "The industrial market is destined to be the great speculative market of the United States." An interesting point is noted by Dow, in the editorial of May 23, 1901, when he writes, "There is no way to prevent great changes in the profits of industrial companies. Profits will rise and fall with general and special trade conditions." Dow's editorial of March 22, 1902, shows the difficulties present, at the time he wrote, for the security analyst in attempting to evaluate industrial securities. Dow advises that railroad analysis consists of rearrangement of the statistical information available to reveal "the vital features and facts" disclosed. From this point comparisons are made with figures from previous years as supplied by the same company. Then a comparison of the individual company is made versus other companies in the industry. The industrial companies, in many 1

37

CHARLES H. DOW AND THE DOW THEORY

cases, have no past to use for comparison. Dow asks, "How, for example, can the U.S. Steel Corporation undergo comparison with anything?" Secondly, many industrial corporations have not released financial information in which case all the analyst can do is "make a very rough approximation and then qualify that." A discussion of management takes place in Dow's editorial of June 1 7, 1902: The importance of the personal equation in the management of an industrial company is perhaps not accorded proper recognition by those who study industrial investments. It is however thoroughly well understood by people who have had much to do with the question of financing these concerns.

Forecasting the Magnitude of the Primary Movement. As previously seen in Dow's writings on the business cycle, he held definite views about the duration of the primary trend. However, in the period under discussion, Dow never forecast the magnitude of a primary movement. The editorial of September 22, 1900, sets forth Dow's position as follows, "No one at all acquainted with the uncertainties of speculation would undertake to say how far the decline may go or when would be the best time for buying investment stocks." On April g, 1 go 1, Dow says, "We do not know where the top of the market is going to be . . . . " Dow writes, on January 4, 1902, "No one can tell how far a main advance or decline will go." Dow's editorial of February 11, 1902, states, "No one can ever say that the top of the market has been reached except by looking back at a high point." On May 14, 1902, Dow writes: The first thing that is necessary to note is that in dealing with the stock market there is no way of telling when the top

138

THE EDITORIALS OF CHARLES H. DOW

of an advance or the bottom of a decline has been reached until some time after such top or bottom has been made. Sometimes people are able to guess when prices are at the top or at the bottom, but such guesses are of their nature of no particular value, and it is a proverb in Wall Street, that only a foolish speculator hopes to buy stocks at the lowest and sell them at the highest. The speculator with experience knows that no one can do this with certainty or regularity.

Volume of Transactions. Dow mentioned volume at various times during the period under study. However, for some reason a belief exists that he never discussed volume in his editorials. For example Leffler states, "Mr. Dow never mentioned volume in his editorials on stock movements." 12 In Chapter Nine this matter will be taken up in more detail. The editorial of March 19, 1901, contains the following: While the market moves in cycles, it is consistent to suppose that these cycles may be of an expanding character. A market moves by its momentum. The momentum represented by transactions from 700,000 shares to 1,500,000 shares a day, is obviously greater than the momentum represented by transactions only half as large. The bull markets twenty years ago very rarely reached 700,000 shares a day. Transactions now rarely fall below that figure, which means that the forces which have produced this market are broader and stronger and may be expected to last longer than the forces which have carried prices up hitherto.

On April 13, 1901, Dow writes: Momentum is just as much a factor in the stock market as in physics. The tendency of a market represented by transactions of over 1,000,000 shares a day is not easily checked or reversed. Such checks as come are at the surface, reflecting the operation of traders, and those in a position to foresee changes far off. The mass of buyers do not heed danger signals at the 1 39

CHARLES H. DOW AND THE DOW THEORY

outset and the pressure of their buying brings recoveries after temporary declines.

Dow's editorial of May 29,

1901,

says, in part, as follows:

In other words, a great market represented by transactions of from two to three million shares a day, carries with it the possibility of movements in prices as much greater than normal as is the volume of trading greater than normal. There is a relation between the volume of business and the movement of prices. Great activity means great movements whenever the normal balance between buyers and sellers is violently disturbed.

In the editorial of December 5,

1901,

Dow states:

Momentum is just as real in the stock market as it is in physics. The momentum which carried prices down from 1892 to 1896 was so strong as to keep the market heavy and frequently weak for eight months after the turn in the tide came. The momentum which carried prices up from 1877 to 1881 was so strong as to give the market striking powers of recovery up to midsummer in 1882.

A declining market occupies Dow's attention in the editorial dated January 21, 1902, and he refers to volume as a guide to future market action when he says: The facts will be indicated to some extent by the volume of business. If tomorrow or next day, the market is found heavy in tone, but with a small volume of business, it will suggest that manipulators are putting prices down without getting stocks. If the market should be weak and more active, it will denote liquidation and lower prices.

Narrow and Dull Markets. Dow recognized that the market at times moved in a narrow range, but he never defined a "line" formation as such in the Dow-Jones averages. His references to narrow and dull markets are found in the following editorials.

THE EDITORIALS OF CHARLES H. DOW

On October 13, 1899, Dow writes, "The longer time, moreover, that the market remains dull the more important is the movement likely to be." The editorial of January 17, 1900, states: The narrowness of the market is entirely normal. It means that those who have stocks to sell are not anxious while those who are disposed to buy believe that sellers will make concessions.

The following passage, from the editorial of February 19, 1900, describes the action of the Dow-Jones railroad average, but it will be noticed that Dow does not mention that this is a "line" formation. The average price of twenty active stocks has fallen from 79.28 to 79.16 during the week. The range has been within 1 per cent, showing very clearly the narrowness of trading. Transactions have on no day exceeded 450,000 shares. Such dullness in a market well filled with good news shows that large operators do not think the time opportune for a manipulated movement, and the public is not disposed to do anything on its own account.

Dow discusses another comparatively narrow movement in the Dow-Jones railroad average in the editorial of April 5, 1 goo. However, he does not call it a line, and does not use his observation as a guide to the future action of the market. Dow states: The market remains at the upper level of prices. Weakness is shown here and there, but with offsetting strength in other stocks. The average has swung between 81.50 and 82.40 since the 26th of March. This is capable of two constructionseither the large operators are allowing the market to take care of itself and the volume of buying and selling is practically equal, or the leaders are keeping the market comparatively

CHARLES H. DOW AND THE DOW THEORY

steady while they distributed some of the stocks acquired at lower prices. We know no way of telling with certainty which is being done, although the chances are somewhat in favor of the last named theory. It may be said that stocks are being accumulated. In a bull market stocks often are accumulated after a general rise, but this is not as likely to be done at a relatively high point as it is at a relatively low point. The psychology that develops as the result of a dull market is commented upon by Dow, in the editorial of August 29, 1900:

The resistance to a decline will come not so much from an organized support as from the general inertia growing out of a feeling on the part of many holders of stocks that they can take care of what they have and therefore do not feel like selling. This sentiment often exists in a dull market, but seldom exists long after prices begin to go down, as holders are then disposed to sell with the hope of getting stocks back cheaper. On December 12, 1900, Dow says, "In a narrow market it is as easy to create a show of strength as it is to create an appearance of ·weakness." The editorial of January 16, 1901, says, in part: There is no way of telling when the market will change from narrow swings to a prolonged move except by a steady watch of what takes place. If, as a result of days of trading, there is increasing weakness the chances are for decline. If the market hardens on trading, the chances are for advance. As long as strength and weakness seem to about balance each other, the chances are for short turns. Dow writes, in the editorial of January 18, 1901, "Dullness usually runs into advance in a bull period and into decline in a bear period."

THE EDITORIALS OF CHARLES H. DOW

Dow, on March 7, 1902, discusses periods of market dullness in some detail. He writes: . . . the action of the market after dullness depends chiefly upon whether a bull market or a bear market is in progress. In a bull market, dullness is generally followed by advances; in a bear market by decline. As bear markets as a rule last longer than bull markets, dullness is followed by decline rather oftener than by advance. There are exceptions, but they do not alter the general rule. The reason why, in a bull market, dullness is followed by advance, is that a bull market is the exponent of increasing values. Values go on increasing, while the market rests and prices start up because it becomes apparent to cliques or individuals that values are above prices, and that there is margin for rise. Exactly the reverse argument applies to declines after dullness in a bear period. Prices fall because values are falling, and dullness merely allows the fall in values to get ahead of the fall in prices. The start after a period of inactivity is generally due either to some special event or to manipulation. In the former case, the reason for acting is obvious. In the latter case, manipulators begin by studying the situation and reach a conclusion that it will pay them to move prices. They then scrutinize the speculative situation and learn something of the position of traders; whether they are carrying a good many stocks or not; whether they seem disposed to deal; whether margins appear to be large or small; and whether specialists have large scale orders to either buy or sell. This gives a basis on which manipulation begins. The public often follows the lead given, sometimes to its own advantage and sometimes to the advantage of the manipulators.

Dow's Stock Market Philosophy. Dow wrote a great deal about various stock market principles and practices, and his writings reveal a basic stock market philosophy that is as applicable today as it was sixty years ago. This philosophy can be 1 43

CHARLES H. DOW AND THE DOW THEORY

understood best by tracing it through his main editorials in the period under consideration, in their chronological order. On April 21, 1899, Dow remarks: It is the experience of practically all operators in stocks that they do not wait long enough for profits. This is due to the fact that the public buying or the public selling which, in the end, determines the movement of stocks, is much slower and also much more persistent than is expected.

The editorial of May 1o, 1899, states, "When the public begins to sell, it sells sometimes as blindly as it has bought." Dow, in the editorial of May 13, 1899, writes: The level of prices is high compared with two years ago, but no one can say with certainty that it is high compared with the prices of next year. In other words, the level of prices, speculatively considered, is relative rather than actual.

The editorial dated May 15, 1899, contains the following: It almost universally happens when a man of great prominence dies suddenly that the market is supported on the first news, is rallied vigorously, and then begins a slow decline. This was the action following the death of Mr. Vanderbilt, and a similar movement occurred when President Garfield was shot.

An interesting observation is included in the editorial of May 18, 1899, when Dow says with respect to an advance then underway that it was "quite within the possibilities of the well established rule involved in a sudden decline . . . that there will be a very substantial rise within eight days of the low point." On May 19, 1899, Dow comments, "The decline after a quick rise is not usually rapid, but is apt to be a slow, irregular movement." At another point in the editorial he writes: 1

44

THE EDITORIALS OF CHARLES H. DOW

The element of time is as important in movements in the market as it is in mechanics. Even admitting the situation to have changed from bull to bear, it would take considerable time to get a conviction of this change spread through the country so as to turn the tendency of the trading community from the long to the short side.

The editorial of May 25, 1899, says, in part, "During the progress of a bull market, the low prices are made in the first half of the year, and the high prices in the second half." Dow's insight into human nature is contained in his editorial of June 23, 1899, when he writes, "It has often happened, however, that people who were quite anxious to sell on a declining market have been found very willing to cancel selling orders when a rising tendency in prices became obvious." On July 20, 1899, Dow remarks, "The public has become fully aware of a few stock market rules, one of which is that if a market does not go up on favorable news it may hang a while at a sustained level, but will sooner or later go down thereafter." A familiar saying is included in Dow's editorial of August 3, 1899, when he observes: It is a common saying that it is not well to put too many eggs in one basket and investors generally seem to apply this rule to their investments, but there is another common Wall Street saying that sometimes it is well to put all your eggs in one basket and watch that basket.

Dow writes, on August

11,

1899, as follows:

Just at present there is a perceptible increase in trading in fancy stocks. This has not always been the best sign of a continued general upward movement for any great length of time, although it is certainly an accompanying feature of a bull market. 1 45

CHARLES H. DOW AND THE DOW THEORY

The term "fancy stock" used above was an old one in Wall Street at the turn of the century. William Armstrong says fancy stocks are "of no particular or known value" but this does not interfere with wide price movements on their part depending upon "the wealth or talent employed" in effecting this result. 13 A similar thought is expressed on the following day, August 12, 1899, when Dow comments that "there are many operators who like to be in the going stock, and when this stock is a fancy . . . they are apt to sell what they hold and buy into the new thing." Dow says that this causes a shifting of accounts, but this is a feature of a bull market at "a certain level of prices." On August 15, 1899, Dow states: The market is acting at present in full harmony with previous market movements after a prolonged rise. This is to say, stocks which have not shared in the advance gradually come up while those which have been leaders are sold in order to take profits. There is a point where most stocks can be said to have had a considerable swing upward and when the average is at a point inviting more or less liquidation simply to take profits.

The editorial of August 22, 1899, contains the following: In a broad way the market is working in exactly the direction that might be expected. The time has come when stocks of the middle class ought to be prominent, and that is exactly what we see from day to day. Those who remember the great advances made by stocks of this group in 1880 can anticipate the possibilities in such stocks now.

Dow describes stocks of the "middle class" as "low priced stocks which are earning 1 per cent or 2 per cent." Dow's editorial on the following day, August 23, 1899, states, in part, the following:

THE EDITORIALS OF CHARLES H. DOW

In a condition of speculation where some stocks are going down for cause, others may be expected to sympathize if the volume of trading in the falling stocks is large and the declines important, but the stocks which are in a position to go up for cause will, in due time, assert themselves and resume their advance. Good stocks and bad ones go up and down together, but as the result of a series of movements, each takes its true position determined by its individual merit. On August 24, 1899, Dow writes: There are standards upon which one can confidently approximate the value of a railroad stock and bond. There is getting to be an approximate standard upon which to gauge the value of an industrial stock. Some no doubt will give these matters study enough to invest and speculate intelligently, but it is safe to say that in the present market there will develop a wildness and eagerness in speculation which will make the stock market for awhile anybody's market, where he who knows the least about a security will be perhaps the greatest gainer, while those who know the most, while not losing, may nevertheless not make much money from the advance.

The following day, August 25, 1899, Dow remarks, "The broad facts which control the public mind lead to investment of money for a longer time and larger turns than a mere trader can hope to effect." Dow lists the "broad facts" as the growth in population, agricultural crops including export of the same, the great growth in manufacturing, the development of natural resources, and the increased wealth of the population as a whole. An interesting point is raised in Dow's editorial of September 12, 1899, when he states, "People have been educated to buy on declines. There is a point, however, where such buying ceases and selling begins." 1 47

CHARLES H. DOW AND THE DOW THEORY

The editorial of September 13, 1899, contains the statement, "Accidents seem to happen mostly in favor of the bears." On September 18, 1899, Dow writes, "It is, however, simply emphasizing a Wall Street maxim not to believe too much of the bull stories when stocks are up, and to look with suspicion upon strong bear statements when stocks are down." Dow discusses large operators and their activities in his editorial of September 27, 1899, as follows: It must be apparent to any one familiar with the movements of large operators that these men, by reason of superior sources of information and experience, for the most part aim to learn the probable natural movement of prices and then follow it. The resisting of a natural movement on the part of any man, or set of men, is more apt to lead to disaster than to success ....

Dow's editorial of October 4, 1899, contains the following: When the market will not go down on bad news of unfavorable conditions, it usually has some advance shortly afterwards. The effort of traders is always to work along the line of least resistance, and when the market will not go one way it usually will go the other.

On the following day, October 5, 1899, Dow writes, "Theoretically the low point of the stock market for the fall should be seen during the month of October." The editorial of October 9, 1899, remarks, "It usually takes an appreciable time for prices to ad just themselves at the end of a decline or a rise before beginning a fresh movement." On October 16, 1899, Dow's editorial contains the following: There is no profit in hammering the market after hammering ceases to bring long stock. The bear leaders know this as well as anybody and will waste very little time in shaking the tree after apples stop falling. . . . When the market is driven down and has a quick recovery on small transactions and

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THE EDITORIALS OF CHARLES H. DOW

when this occurs repeatedly in different stocks, the evidence is usually clear enough to lead somebody to take the long side.

Dow discusses what is commonly referred to as a "broad market" in his editorial of October 24, 1899. He writes, "Another indication that there is a general belief in the general stability of the market is the large number of stocks which are being traded in whenever there is evidence that an advance in the market is pending." An interesting observation is included in the editorial of October 28, 1899. Dow states: If you ask the average man who trades in the stock market for a reason why he purchases a specific stock, he tells you "by instinct." He is perfectly familiar with the conditions which underlie the market, and as he sees quotations advance, he feels that he will be distinctly out of the running if he does not buy something. This "instinct" is nothing more nor less than an abiding faith in the lasting prosperity in nearly all lines of business.

The Boer War was mentioned several times in Dow's column, and on October 30, 1899, he states, "War news to exert a decisive influence must be of a sensational nature." On November 15, 1899, Dow writes, "As is usual when traders have the market the bulk of the trading was in specialties." The following day, October 16, 1899, Dow includes an interesting item, as follows: There are many conservative people who like to follow up old trading rules and wait for reactions before making purchases. This class of people usually have money and have made it in the stock markets. They base their conservative actions largely upon the past history of the market.

The assembling of Congress causes Dow to remark, in his editorial dated December 5, 1899, as follows: 149

CHARLES H. DOW AND THE DOW THEORY

Again the assembling of Congress seldom if ever has elicited an outburst of bull enthusiasm in the stock market. The disposition of the average Congressman has heretofore apparently been to find fault rather than to encourage Wall Street speculation.

In the editorial of December 11, 1899, Dow writes, "There is a point where people with money will invest it in securities of recognized merit after a period of decline." On December 12, 1899, Dow states: It is one thing to see a market decline under the pressure of sales produced by failure of crops or some other great calamity and quite another thing to see liquidation produced by a high money rate as the result of high tension of business activity. The former condition brings failures and widespread ruin. The latter reduces the wealth of a few but easily brings a cure by liquidation of a disturbing element and makes recovery from depression a comparatively easy matter.

Dow, on December 21, 1899, remarks, "It is almost a certainty that after a panic of any considerable magnitude a sharp rally and then a gradual sagging off in prices will be the outcome." A similar note is sounded, in the editorial dated December 26, 1899, when Dow says, "It is almost uniformly true that a severe decline . . . is followed by rallies . . . after which the market has a period of sagging, ending in comparative dullness and steady prices." An interesting observation is contained in Dow's editorial of December 27, 1899, as follows: There is some disposition to anticipate a January rise in the market as a result of January disbursements. It is an old theory of speculation that the market always has a January rise. This is by no means true, although such an advance comes as of ten in January as in any other one month except July.

THE EDITORIALS OF CHARLES H. DOW

On December 28, 1899, Dow writes: "Under ordinary conditions, the rally succeeding a flurry culminates within about a week of the day on which the lowest prices were made." In the same editorial Dow states: Individual opinions may differ as to what stocks are cheap, or are improving in value, but the buyer should have his own mind clear on this point, so that in case the market declines instead of advancing he will have courage to average his holdings under a conviction that the value of the stock owned will assert itself in due time. Dow's editorial of December 30, 1899, contains many interesting points, and, therefore, is quoted at some length below: The market is governed by sentiment, manipulation and facts. Sentiment rests on facts as they are supposed to exist, but the supposition is often wrong. Manipulation on a large scale is always in line with essential facts for the long run, but temporarily is often directly opposed to the facts. Temporary sentiment affects the market from day to day. A rumor of something which has occurred or that is expected to occur will give a trading impulse which may last for an hour or for a day according to character. Such sentiment is responsible to a large degree for sudden changes in the market. A market which is strong at 1 o'clock with the room bullish may be weak at 1: 30, because the sentiment of a few active traders has changed. They sell a few thousand shares, and decline makes other people sell amounts small for each individual, but large enough in the aggregate to alter the character of the market. Sustained sentiment lasts for months. The sustained sentiment of the public in a belief that the market is going to be better or going to be worse is one of the most powerful factors in speculation, and when it is widespread will defeat the strongest speculative combinations which may be working against it. "Everybody," said Mr. Vanderbilt, from experience, "is stronger than anybody."

CHARLES H. DOW AND THE DOW THEORY

Manipulation is usually carried on by large operators for the purpose of buying stocks or for the purpose of selling them. The thought of the large operator must be always in advance of existing conditions. He wants to know not what is, but what is going to be. His thought is how other people can be induced to sell stocks to him at a low price and subsequently buy them from him at a high price. An operator who swings 100,000 shares cannot acquire that amount of stock at a low price without considerable effort, nor can he sell it ordinarily without both effort and time. The intermediate stage of advancing prices from the low point to the high point is the simplest part of his programme. His main thought must be this: "If I buy stock now will the conditions that prevail next February or March induce other people to take them off my hands at that time at prices ten to fifteen points above those now prevailing." It is evident, therefore, that whether speculation is considered from the standpoint of sentiment or of manipulation, it all comes back to a question of facts. The small operator who can see the facts correctly for next spring can trade in stocks with full confidence that he is doing very nearly what the largest operators are doing. Then comes the vital feature of the case: How can the facts be foreseen and what facts must be taken into account. The first great fact to be considered in all stock speculation is the supply of money. A very large portion of stock speculation is done on borrowed money. A huge fabric of credit and confidence is built on a comparatively small foundation of cash. Anything that makes it difficult or expensive for large operators to borrow millions or for small operators to borrow thousands must militate against bull speculation. The second great fact is whether the business of properties in which it is proposed to trade is improving or deteriorating enough to radically change the intrinsic value of its securities. Value determines prices in the long run. If a property having a stable business increases its earnings so that the rate of divi-

THE EDITORIALS OF CHARLES H. DOW