Local Boy Makes Good

Significance – After writing a financial analysis of the Leadville mining boom for a New England newspaper, journalist Charles Henry Dow rose to prominence as the co-founder of the Wall Street Journal, one of the most respected financial publications in the world. Additionally, he devised the Dow Jones Industrial Average for investors to better understand stock market movements. His series of principles for understanding and analyzing market behavior is now known as Dow theory; it lays the groundwork for significant stock market technical analysis.

Inscription – Charles Henry Dow, the first editor of the Wall Street Journal, created the stock market index with Edward D. Jones in 1897.

Dow, who had worked as a bookkeeper for a Leadville mining operation, was the first Vice-President of the International Trust Company quartered in the Equitable Building.

Originally, the Dow-Jones Industrial Average was based on 12 industrial stocks. Today, it is calculated on 30 selected industrial stocks.

Location – 39°44’43.8″N 104°59’25.1″W

Details – Charles Henry Dow left his life as a Connecticut farm boy to become a reporter in New England. His writing could make history come alive as he elaborated on the intricacies of various industries and their future prospects. Dow was working in Rhode Island as a reporter with the Providence Journal writing about things like Newport real estate investments, public education, the state prison system and money earned and lost during the city’s history. His boss, co-owner/editor George Danielson gave Dow a plumb assignment; to accompany a group of bankers and reporters to Leadville, Colorado, to report on the business of silver mining. The bankers were looking for publicity to encourage investors in Colorado mining ventures.

In 1879, Dow and various tycoons, geologists, lawmakers, and investors set out on a four-day train trip to reach Colorado. Dow learned a great deal about the world of money on that journey as the men bonded; they smoked cigars, played cards, and swapped stories. He interviewed many highly successful financiers and heard what sort of information the investors on Wall Street needed to make money.

Dow wrote nine “Leadville Letters” based on his experiences in the boomtown. He described the majesty of the Rocky Mountains, the intricacies of mining and mining companies, the raw capitalism and the information that drove drilling investments, ordinary people becoming millionaires in a moment. He described the disappearance of the individual mine-owners and the rise of financiers who underwrote shares in large mining consortiums. He explored Leadville’s gambling, saloons, and dance halls. In his last letter, Dow admitted, “Mining securities are not the thing for widows and orphans or country clergymen, or unworldly people of any kind to own. But for a businessman, who must take risks in order to make money; who will buy nothing without careful, thorough investigation; and who will not risk more than he is able to lose, there is no other investment in the market today as tempting as mining stock.”

In 1880, Dow left Providence for New York City, as Wall Street was the ideal location for business and financial reporting.  The 29-year-old found work at the Kiernan Wall Street Financial News Bureau, which messenger-delivered handwritten financial news to banks and brokerages. He married Lucy.  When President John J. Kiernan asked Dow if he could refer another reporter for the Bureau, Dow invited colleague Edward Davis Jones, who had worked with Dow at the Providence Evening Press. Jones could quickly and skillfully analyze a financial report. He, like Dow, was committed to reporting on Wall Street objectively and without bias.

The two young men saw that Wall Street was in need of another type of financial news bureau. In November 1882, they started their own agency, Dow, Jones & Company, welcoming Charles M. Bergstresser as the chief financier and silent partner. The business’ headquarters was located in the basement of a candy store.

Seeking financial news, Dow Jones reporters visited brokerages, banks, and corporate offices, sending handwritten messages back to the Dow Jones headquarters where they were copied and run to Wall Street several times a day. Acquiring information from stock prices in London, Dow Jones began producing a 7 a.m. edition followed by a late edition. Called the Customer’s Afternoon Letter, it was a two-page summary of the day’s financial news.  Circulation soon rose to more than 1,000 subscribers as it was considered to be an important news source for investors.

In time, the partners realized that the time was right to transform their two-page news summary into a true newspaper. The first issue of The Wall Street Journal appeared on July 8, 1889. It cost two cents per issue or five dollars for a one-year subscription. Dow was the editor and Jones managed the deskwork; they had 50 employees. The paper’s motto was “The truth in its proper use.” Its editors promised to put out a paper that could not be controlled by advertisers. The paper had a private wire to Boston and telegraph connections to Washington, Philadelphia, and Chicago. It also had correspondents in several cities, including London.

The WSJ even offered a policy statement: “Its object is to give fully and fairly the daily news attending the fluctuations in prices of stocks, bonds, and some classes of commodities. It will aim steadily at being a paper of news and not a paper of opinions.”

As the Silver Panic of 1893 recession was ending, many business mergers were taking place, resulting in the formation of huge corporations and the need for markets to carry their stock shares. This created a wildly speculative situation and investors desperately needed information about stock activity. Dow saw the need to provide a market average to give the WSJ readership an idea of whether the market was advancing or retreating The WSJ’s exclusive column, the Dow Jones Stock Average became an index calculating the average stock price between nine railroad issues, one steamship line and Western Union.

It provided some clarity and an overall picture that otherwise could be lost while focusing on the ups and downs of a multitude of merging stocks.

This analysis involved into the Dow Jones Industrial Average, an exclusive feature that was of great interest to investors. Calculated using the top 12 stocks in the market; American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal and Iron, U.S. Leather pfd. and U.S. Rubber. These companies represented each sector of the market, thus the Dow Jones illustrated the overall performance of the U.S. market. By tracking the closing stock prices of twelve companies, adding up their stock prices, and dividing by 12, Dow came up with his average. The first such average appeared in the Wall Street Journal on May 26, 1896. The initial calculation was a simple sum and divide that yielded 40.94 as the first published average.

Prior to the Dow Jones Industrial Average (DJIA), there was no consistent or reliable source for stock information. Companies could hide their true values or obscure earnings with excessive information, making it difficult for the layman to make head or tails of the market. Dow and Jones cut through the fog to give the public the same quality of information that was previously only available to elitist insiders.  The Wall Street Journal quickly became the most read financial paper in the U.S., and the DJIA consequently became the dominant average for people wanting to know the direction of the stock market.

Writing consistently on the same topic allowed the editor to devise the Dow Theory. According to Dow, the method of making money in stocks was to study basic conditions and exercise enough patience to capture the major movements. He wrote that a relationship existed between stock market trends and other business activity and complexity lies in the concept that the stock market has three movements, all of which go on at the same time. Dow Theory proposes that stocks may fluctuate together, but that prices are controlled by values in the long run. And there’s a human element; he believed the market was 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.

Dow Theory also recognizes three investment considerations;

  1. The value of the stock the investor proposes to trade.
  2. The direction of the main movement.
  3. The direction of the secondary movement.

Dow also felt that the stock market predicated societal economic variables. He believed that if the industrial average and the railroad average both moved in the same direction a meaningful economic shift was occurring. He also concluded that if both indexes reached a new high, it signaled a bull market was under way. Dow believed his ideas should be only one tool of many that investors used to make business decisions.

Charles Dow impacted the foundations of our modern financial marketplace. The various Dow market indexes have been a revolution for investors. They are benchmarks to measure stock performance against a picture of the overall economy. His theories offer and a source of data to feed all kinds of models, strategies and analyses.

Quiz Questions

What was Charles Dow’s relationship to Colorado? How did it shape his career?

Please explain the Dow Jones Industrial Average.

Why is the Wall Street Journal one of the world’s most respected financial sources?

Why are averages important to understanding the whole picture?

How did Charles Dow’s Theories impact modern financial marketplace?

Bonus question: According to Dow Theory, what is the method of making money in stocks?