10/5/09 - the dow jones averages

In today's excerpt - the Dow Jones Industrial Average, first published in 1896, at a time when railroads and even the emerging utility market overshadowed the importance of 'industrial' companies on the New York Stock Exchange:

"Recipes for predicting stock prices were in urgent demand on Wall Street throughout [in the late 1800s]. By far the most famous was the Dow Theory, developed by Charles Dow, co-founder of Dow Jones & Co. in 1882 and the first editor of the company's flagship publication The Wall Street Journal, launched in 1889. ...

"Dow, [his old newspaper friend] Eddie Jones and a friend named Charles Milford Bergstrasser soon decided to go into the news-distributing business themselves. ... 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. ...

"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. ...

"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. ...

"The first Dow Jones Average appeared in their 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. ...

"In 1882, Dow predicted that 'The industrial market is destined to be the great speculative market of the United States.' 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 & Cattle Feeding, Laclede Gas, National Lead, North American, Tennessee Coal, Iron & Railroad, U.S. Leather Preferred, and U.S. 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. 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."


Peter L. Bernstein


Capital Ideas: The Improbably Origins of Modern Wall Street


John Wiley & Sons, Inc.


Copyright 1992 by Peter L. Bernstein


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