Dow’s theory on Past Performance

Change is the only constant, therefore present value is not future value

"There are a good many former towns in western Kansas which have become even less than villages.  Many dividend-paying investment stocks have, in the course of time, been reorganized out of existence.  Present value does not mean future value unless present conditions are maintained (Dow, Charles H. Wall Street Journal. Review and Outlook. May 26, 1900)."

Dow’s theory on Investment Values

According to Charles H. Dow, a values-based approach to financial data determine future worth

"Values will tell in the long run.  The value of railway stocks can be ascertained to a reasonable extent. If a railway stock is selling below its real value, based not upon hearsay, but upon a careful study of the figures, it will work higher, even if the general market declines (May 19, 1900)."

Dow’s theory on the Shareholder

Charles H. Dow’s view on the role of shareholders

"...some managers look upon the properties which they manage as their own and upon the information which comes to them as personal perquisites, and disregard altogether the fact that they may be merely operating the property for the real owners (Dow, Charles H. Wall Street Journal. Review and Outlook. March 27, 1900)."

National Dairy Products: 1927-1937

The chart below highlights two issues:

1) How long did it take for a stock to get to breakeven?

In the case of National Dairy Products, the stock did not get to breakeven by the 1937 peak. National Dairy declined approximately -90% in price from 1929 to 1933.  From late 1933, National Dairy rose as much as +180% to the 1936 peak. 

2) What happened to the dividend during the stock market crash and "Great" Depression?

In spite of the market decline from the 1929 peak, National Dairy’s earnings continued higher by the end of 1930.  Once earnings started to slide in 1931, the pace of dividends continued to move higher.  In 1932, it became apparent to management that the dividend policy had to be reduced.  The pace of the decline in dividends tracked closely the decline in earnings.  However, when earnings started to increase, the dividend was not pushed higher until two years after the trend reversed in earnings.

The change in dividend policy is a great example of management’s expectation of future prospects.  However, when a policy of cutting the dividend started, in 1932, most dividend investors were probably becoming fearful of the prospects going forward and reacted by selling their stock.  In reality, 1932-1933 was the time to start accumulating shares of the stock.

image

Dow’s theory on Earnings Expectations

Charles H. Dow’s thoughts on the impact of earnings expectations 

"A general belief that a stock is going to earn a given rate is sometimes as effective speculatively as the actual demonstration of such earnings (Dow, Charles H. Wall Street Journal. Review and Outlook. March 27, 1900)."