"The principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale." --Thomas Jefferson

Tuesday, October 7

Who's this Dow Jones fellow and why is he always on the news?

I find all of the reporting "hoopela" surrounding the current state of our economy fascinating. It invariably reverts back to, or begins with what the "Dow" did today. If you've seen charts of it lately, it resembles a slip and slide.
So what in the world is the Dow and why is its reference so commonplace?

Here's a little history

In 1653, the Dutch settlers in new York erected a 12 foot high wood stockade to protect themselves from savage Indians and the British and their bad teeth. In 1685 a street was erected following the wall. This became Wall Street. The investment markets were born around 1790 when the US government refinanced all of it's Revolutionary War debt by issuing $80 Million in government bonds. These became the first publicly traded securities.

In the late 1880's when trading stocks for the average American was a relatively new thing and very few people in the country actually participated, it was a very central activity to the Wall Street District in New York. There was no central report on how the markets performed, on who was selling, buying or what the prices of the stocks even were at that point. Apparently they never heard of a Blackberry!

Anyway, three reporters named Edward Davis Jones, Charles Henry Dow and Charles Milford Bergstresser founded a benchmark to measure the markets performance. In the beginning, it was complied of 11 stocks. 9 Railroads and 2 industrial companies. The average stock price of each company was added and then divided by the number of stocks in the index. Any analyst cringes at the many flaws this strategy has in skewing numbers. (A magic divisors has since been added to the math to account for stock splits etc.)

The index was founded in 1884 and was published in the "Customers' Afternoon Letter" and sold on Wall Street. Market gossip along with other news of the day would accompany the index reading. The first reading of the DJIA was 40.74. Five years later in 1889, this "Customers' Afternoon Letter" developed into what is now know as the "Wall Street Journal." Ever hear of it? It is now a subsidiary of News Corporation which owns everything you read and see.

It is now compiled of 30 of the country's largest companies. GE is the only company on the original Dow Jones Industrial Average list that remains today.

The Dow, Jones & Company also helped innovate and improve upon the first magnetic "ticker tape" telling the traders on the floor what price the stocks were and what the intra-day movement was. This was eventually superceded by a mechanical ticker tape and then the ever powerful computer. This enabled those who didn't spend all day on Wall Street to know what the current prices were.

You may also recognize the name Edward D. Jones as many investment professionals work for the company that bears his name.

So is the Dow a good thing? It was when most every stock being traded was on the index and was nearly the same price. Say you have a stock worth $10 per share. It gains $1 for the day. (10%) Then, say a stock worth $100 loses $1. (-1%) These two transactions are very different yet they negate each other in the overall index totals. Many believe that because the Dow Jones Industrial Average is price-weighted that it provides a narrower view of the market and it does because it holds only 30 companies. You may get a better picture of the broader market performance from the float-adjusted market-value weighted indices like the S&P 500 or the Dow Jones Wilshire 5000 (which includes all domestic securities with readily available prices.
So why do we always reference the DOW if it only has 30 companies in it? Drama my friends.....it makes for exciting news-And everyone likes to know how Wal-Mart is doing. Kraft foods is the newest member of the 30. They took the place of our favorite insurance company AIG.

Hope it was an interesting read anyway.

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