The ABC of Stock Speculation
by S. A. Nelson, published 1903
First published in 1903, this little book is renowned for the inclusion of the actual Wall Street Journal editorials written by its founder, Charles Dow, during the turn of the century. Dow passed away in 1902, before his “Dow Theory” became famous and certainly before it became an accepted way of analyzing the stock market. It is to be said here that the Dow Theory as initially written by Charles Dow emphasized values above everything else (his theory about a primary trend in the stock market should also be acknowledged here). In fact, he discourages the day-to-day watching/trading of the stock market – a fact which some of today’s so-called Dow Theorists has chosen to ignore. Says Dow: “The main purpose of this study is to enable the trader to determine, first, the value of the stock he is in; whether it is increasing or decreasing and, second, when the time to buy seems opportune.” And from another editorial: “The best way of reading the market is to read from the standpoint of values. The market is not like a balloon plunging hither and thither in the wind. As a whole, it represents 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. The thought with great operators is not whether a price can be advanced, but whether the value of property which they propose to buy will lead investors and speculators six months hence to take stock at figures from 10 to 20 points above present prices.” The seventeen editorials by Dow in this book form the basis of a new, modern way of thinking about the stock market which has become universally accepted today.
The Stock Market Barometer
by William P. Hamilton, published 1922
The Dow Theory, as interpreted by William P. Hamilton (Dow’s understudy and the fourth editor of the Wall Street Journal) forms the basis of all modern technical analysis today. Hamilton wrote the Wall Street Journal editorials for over 20 years, and kept on writing until his death in December 1929. First published in 1922, this book is the accumulation of all of Dow’s and Hamilton’s knowledge up until that time – all the more impressive since there were only about 30 years worth of Index data available at that point. Both Dow’s and Hamilton’s observations and theories remain true to this day – reinforced continuously with each successive bull or bear market. I believe that any true student of the stock market needs to read this book – preferably at least once a year. There are many observations in his book, among them are:
The Averages discount everything: the only example of when an Average did not have a discounting ability was during 1919 to 1920, when the government temporarily took control of the nation’s railroads because of World War I (which in retrospect, turned out to be a very bad idea and actually turned some of the nation’s best railroads into slow, inefficient and unprofitable enterprises – which the government always does). The Dow Rails subsequently lost its discounting ability of the economy soon before the government took control of the railroads.
No single man or group of men can successfully manipulate the stock market today.
Both the Industrials and Rails (the modern day Transports) must confirm each other in order for the bull or bear signal to have authority.
Hamilton puts it best in the following quote: “The price movement represents the aggregate knowledge of Wall Street and, above all, its aggregate knowledge of coming events … Nobody in Wall Street knows everything. I have known what used to be called the “Standard Oil crowd,” in the days of Henry H. Rogers, consistently wrong on the stock market for years together. It is one thing to have “inside information” and another thing to know how stocks will act upon it. The market represents everything everybody knows, hopes, believes, anticipates, with all that knowledge sifted down to what Senator Dolliver once called, in quoting a Wall Street Journal editorial in the United States Senate, the bloodless verdict of the market place.”
However, one of Hamilton’s best contributions and which were not included in this book was his “eulogy” to the great secular bull market of 1921 to 1929, written on October 25, 1929 -- just days before the Great Crash and the subsequent secular bear market and Depression. This book is, again, a truly great and timeless work.
The Dow Theory
by Robert Rhea, published 1932
One of the five great Dow Theorists who ever lived (the others being Charles Dow, William P. Hamilton, E. George Schaefer, and Richard Russell), Robert Rhea made his mark trading the stock market during the 1910s to the 1930s. This book was initially published (and so were his newsletters) in 1932 – right at the bottom of the Great Depression. Rhea, in his initial attempt to find a “theory” to successfully trade the stock market and in his later attempt to disapprove the Dow Theory, became a convert. The Dow Theory formed the basis of all this technical analysis and he successfully utilized it – getting out of stocks in late 1928 and not buying them again until July 1932 – right at the bottom with the DJIA at approximately 40.
This book is a summary and analysis of what Charles Dow and William P. Hamilton has written in their 252 editorials for the Wall Street Journal over a period of more than 20 years. The foreword was written by Mr. Hugh Bancroft in May 1932 – the editor of the Wall Street Journal and Barron’s at the time – who whole-heartedly endorsed his work (again, I would like to point out the sad fact that probably not a lot of people working at the Wall Street Journal or Barron’s today even know about the Dow Theory, let alone have a good understanding of it). The appendix of this book contains the full text of every editorial by William P. Hamilton – so that students of the Dow Theory may undertake the same study that Rhea has done, if they would like to. Rhea was also a brilliant trader, and deserves as much credit as Dow and Hamilton for his work in extending the study of the Dow Theory.
How I Helped More than 10,000 Investors to Profit in Stocks
by E. George Schaefer, published 1960
Robert Rhea succumbed to illness in 1939, and for the next ten years, the Dow Theory floundered – the more so given the confusing and emotional movements of the stock market during that time. At the same time, students tried to apply the Dow Theory purely by a mechanical method – ignoring the original teachings of values and the primary trend by Charles Dow. E. George Schaefer began publishing his weekly Dow Theory analyses in 1948. He was utterly convinced that a huge secular bull market was developing. He proved to be correct, and he and his subscribers were rewarded in spades by strictly following his buy-and-hold philosophy during a secular bull market (which was not a popular idea at the time).
First published in 1960, this book (despite its corny title) is the culmination of what Schaefer has written and learned over the 1948 to 1960 period – and is certainly a highly recommended work. Schaefer has always emphasized that William Hamilton and Robert Rhea strayed away from Dow’s original principles of values and the primary trend, and that they have sought to reduce the Dow Theory to a mechanical “system” of trading and interpreting the stock market. This book goes back to Dow’s original principles, and further emphasizes that some of the strict rules that Hamilton and Rhea adopted during the 1900 to 1939 period do not necessarily apply today (such as that secondary reactions tend to retrace one-thirds to two-thirds of their prior movements) – mainly because the market was more emotional than ever – but also because of the persistence of government intervention in the financial markets during the 1950s to 1960s.
This book is now out-of-print. I had a very difficult time finding the book but I did find it – even though I ended up paying a hundred dollars for a used copy that I found on the internet.
The Dow Theory Today
by Richard Russell, published 1961
First published in 1961, this book consists of a collection of Barron’s articles written by Richard Russell during the December 1958 to December 1960 period. In the articles, Russell gives a good introduction and history of the Dow Theory – he also writes a lot on the state of the market at the time and gives his opinions based on what he has learned from the Dow Theory and other stock market analyses. In one of the articles, Russell poses the rhetorical question of why no one follows or understands the Dow Theory. Says Russell:
“… if the Dow Theory can call the turns accurately, why doesn’t everybody follow it? The answer is largely greed. Laziness, lack of knowledge, and wishful thinking. When prices are advancing, the public, holding large amounts of stock, wishes to be reassured. Investors like nothing better than bullish counsel during a bull market. Caution does not mix with greed, and the Dow Theorist grows cautious as the market climbs. As to ignorance, Wall Street is not immune. Moreover, it is easier to follow another’s advice than to form one’s own conclusion … Lastly, the Dow Theory suffers from that prejudice which afflicts all technical market studies; it does not answer the question, “why?” The Dow Theorist has learned not to question the validity of a bear market signal which predicts a turn in the economy, nor does he deny the probability of an advance after industrials and rails [transports today] better their previous highs. For him it is sufficient that the Theory has been tested and that it works.”
I tend to agree. Keep in mind that the market is a discounting mechanism. Usually, it may take weeks or even months to find out the real reason behind the latest decline in the market (or in the individual stocks). But the Dow Theorist would respond: “Who cares why? What difference does it make if you end up losing your money anyway? When in doubt, just get out!”