Capital Ideas. Bernstein Peter L.

      Deciding that Providence was now too small a town for him, Dow moved to New York City with an old newspaper friend, Eddie Jones. Lloyd Wendt, the historian of Dow, Jones & Co., describes Jones as “a tall, lean, red-haired man with smiling blue eyes and a dimpled chin,” far more extroverted and sociable than Dow.34 Dow also was tall and thin, but he had dark eyes and a full black beard. Slow to anger, he was a man of few words.

      The two young men soon found positions at Kiernan’s at 2 Broad Street, close to the site where the New York Stock Exchange would open its doors many years later. Kiernan, one of the publishers of the tissue-and-carbon news bulletins, owed his success to his friendship with many of the major players in Wall Street.

      Kiernan was delighted to hire Dow and Jones. Jones had a nose for news and, according to Wendt, could read and understand a financial report faster than anyone else. Dow wrote the news bulletins with skill and clarity. He wanted to write a more analytical daily report as well, but Kiernan was not interested.

      Dow, Jones, and a friend named Charles Milford Bergstrasser soon decided to go into the news-distributing business themselves. Bergstrasser, small, gregarious, and excitable, was working for Drexel, Morgan & Company, a banking house. Deciding that Bergstrasser’s name was less than euphonious, they called their new company Dow, Jones & Co. (the comma did not disappear for almost fifty years). They opened for business in November 1882 at 15 Wall Street, down wooden stairs to a small, unpainted room next to a soda-water establishment.

      Two years later they acquired their first hand-cranked printing press. By 1887, the company had grown so large that clients were complaining that deliveries were too slow and competitors were getting a jump on them. The partners responded by installing an electronic news ticker. Now known as “the broad tape,” such tickers are still used on Wall Street.

      Early in 1885, Dow, Jones converted its Afternoon News Letter into The Wall Street Journal, whose format and coverage have changed little over the years. As editor for thirteen years, Dow seldom missed writing the paper’s daily editorial until his death in 1902. In his commentaries Dow expressed his ideas about the stock market and economic conditions and provided an original, sophisticated analysis of the business cycle, a field of study then in its infancy.

      At heart Dow was a scholar rather than a speculator. He was more interested in interpreting the history of the stock market than in devising a system for predicting its future. The world has read his interpretation otherwise.

      Underlying the so-called Dow Theory is the assumption that trends in stock prices, once under way, will tend to persist until the market itself sends out a signal that these trends are about to lose their momentum and go into reverse. Dow’s best-known statement on the subject appeared in a Journal article in 1901:

      Recognizing turns in the tide is less simple on Wall Street than it is on the beach. The market does fluctuate. Dow theorists boast that they can identify the very moment when what appears to be only a slight fluctuation is actually the first sign of the reversal of a major trend. They do not always agree among themselves, however. Disputes often arise over whether a slight fluctuation away from a trend is just a temporary setback – a “correction,” in market patois – or the onset of a new trend. Sometimes the signal appears so late that the main trend has almost exhausted itself, and stock prices are about ready to turn around and start a new trend headed in the other direction.

      Even people who have never heard of the Dow Theory are familiar with the Dow Jones Averages, Charles Dow’s most lasting contribution to finance. This was the first attempt to create some sort of aggregate indicator of stock-market trends. Although other averages have since appeared, notably those from the Associated Press, the New York Times, and Standard & Poor’s, the Dow Jones Averages are still what most people turn to when they want to know “How’s the market doing?”

      The first Dow Jones Average appeared in the Afternoon News Letter on July 3, 1884. It consisted of the closing prices of eleven companies: nine railroads and two industrials. Dow’s idea was to provide an overall measure of the performance of active companies, at a time when an average day’s activity on the New York Stock Exchange was about 250,000 shares. Although today’s average volume is over 100,000,000 shares a day, 250,000 shares represented at the time a higher level of activity relative to the number of shares listed on the Stock Exchange and available for trading.

      In 1882, Dow predicted that “The industrial market is destined to be the great speculative market of the United States.”36 He recognized that his list of companies would change as time passed. After twelve years of constant revision of the composition of the Dow Jones Average, he published the first strictly industrial list on May 26, 1896.

      Of twelve industrials included in that list, only one still appears in the Industrial Average: General Electric. The other eleven were American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling and Cattle Feeding, Laclede Gas, National Lead, North American, Tennessee Coal & Iron, US Leather preferred, and US Rubber. Later listings included such diverse items as Victor Talking Machine, Famous Players Lasky, and Baldwin Locomotive.

      The twelve stocks in the first industrial list included all the industrial companies then traded on the New York Stock Exchange. The other companies listed consisted of fifty-three railroads and six utilities. Shares of banks and insurance companies then traded over-the-counter rather than on the floor of the New York Stock Exchange.

      The term “industrial” is really a misnomer, because not all of the companies listed as industrials were industrial companies. They were simply all the companies that were neither railroads nor utilities.37 Dow Jones published separate averages for the railroads and the utilities.

      The sparseness of industrials relative to rails in the list is evidence of the boldness of Dow’s foresight about the industrial market, as well as an indication of the importance of railroads to the American economy in the late nineteenth century. It reflects something else as well: Most industrial companies did not need as much capital as the rails, which required huge financing for their rolling stock and right-of-way.

      In those days, industrial companies tended to rely on a combination of debt and their founders’ wealth to finance their growth. This was partly a matter of choice, as incorporation did not offer major benefits to owners at that time. But it was partly because, as one historian of the period has noted, “the securities of industrial corporations were regarded as peculiar, unstable, and speculative. Even the largest and most visible firms were not ‘public’ corporations.”38 For example, two industrial giants of the period, the Singer Manufacturing Company and McCormick Harvesting Machine (later International Harvester), were still closely held corporations.

      Dow died at his home in Brooklyn in 1902, just nine months after Dow, Jones & Co. had been sold to Clarence Barron for $130,000 – only $2,000,000 in today’s purchasing power. About a year later, Samuel Nelson, publisher of Nelson’s Wall Street Library, published several of

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