Wednesday, September 2, 2009

Dow Theory Unplugged

There were few review copies I looked forward to receiving more than Dow Theory Unplugged: Charles Dow’s Original Editorials & Their Relevance Today, edited by Laura Sether (W&A Publishing, 2009). High expectations are often dashed, but not in this case. This is one of those rare times I can put a book on my conviction buy list. At $39.95 for 391 pages of seminal thoughts about markets this book is a real value play. And, an added bonanza for anyone who cares about book design in an era of cookie-cutter templates, a lot of thought went into the production of this book. So put away your Cliff Notes understanding of Dow theory as promulgated, systematized, and expanded by followers such as Hamilton and Rhea and relish Dow’s own Wall Street Journal columns written between 1899 and 1902. Sometimes it’s in the interstices of generally accepted theory that real gems can be mined.

This is not a book you breeze through in one sitting. Dow’s columns usually start with market reports—“The market drags along” [March 10, 1900], “The market has taken bad news and disappointments in the last few days comparatively well” [May 2, 1900]. Sometimes they comment on rumors (Will the Morgan interests take over the Carnegie Company?, Is the Vanderbilt interest trying to secure control of the Reading Railroad and merge Reading, Erie, and Lehigh Valley into one corporation?). They deal with commodities, bank reserves, and international trade. All in all, a wide range of timely topics.

Dow was far more than a commentator on daily events, however. He also wrote about the art and science of speculation and is, of course, best known for his work on the general movement of markets. Here are just a few snippets. When the “experts” on CNBC pontificate, let us not forget that some of what they say appeared in the Wall Street Journal more than a century ago. For instance, “When the market will not go down on bad news or unfavorable conditions, it usually has some advance shortly afterwards.” (p. 230) Or, commenting on sentiment, “It is hard to find anybody who is willing to express a bearish view of the stock market. This of itself has at times been a bearish argument. Ordinary trading rules, however, have been upset so often in the last two years that even professional traders are becoming more and more inclined to buy stock than to sell them.” (p. 234)

There are some wonderful images invoked in Dow’s book. Let me quote only two here, both dealing with market shifts from equilibrium to disequilibrium. “In the game called the tug-of-war a score of men, an equal number being at each end of a rope, pull against each other to see which party is stronger. In the game called stock exchange speculation, the speculators are at liberty to take sides and the side which they join invariably wins because, in stock exchange parlance, ‘everybody is stronger than anybody.’” (p. 304) Or, citing what the editor claims was a common reference at the time and what would no longer pass muster, “The market may be compared to Mahom[e]t’s coffin, which the faithful allege-to-be suspended between earth and heaven. Assume further that some portions of the community are trying to get this coffin down to the ground, while others are trying to get it higher in the air; also that the workers frequently change places, as they think one side or the other has the easier job, and the analogy is complete. When the pressure is unequal the market responds to the preponderating force; when the market stands still, it may be assumed that the forces are about equal.” (p. 250)

This book should appeal to investors, speculators, historians of the markets, and market theorists. I for one am extraordinarily grateful that the collection was published.

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