The railroad index consisted of leading rail stocks that exhibited the high average trading volume. Industrial stocks* as defined by Charles H. Dow as:
“…stocks of trust companies and banks are simply industrial stocks... (Dow, Charles H.Wall Street Journal. Review and Outlook. October 12, 1900)."
*See also December 10, 2016 for more on the 1899 definition of industrial stocks.
Posted in Dow Transports, Dow's Value Theory, railroads
On April 16, 2019, Qualcomm (QCOM) and Apple (AAPL) agreed to settle their ongoing disputes. The outcome was significant for Qualcomm.
As Charles H. Dow, co-founder of the Wall Street Journal has said:
“The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end. The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Dow, Charles H. Review and Outlook. Wall Street Journal. February 25, 1902.)."
For many years, the market price of QCOM appeared to be reflecting the neglect of speculators. In the meantime, investors slowly and selectively accumulated shares of QCOM in anticipation of the high risk proposition that QCOM would prevail against AAPL.
As seen in our chart below, QCOM has found its share price at the undervalued level several times since 2016. The September 13, 2018 announcement of the accelerated share buyback seems as though it was at an elevated prices. However, as our updated 10-Year price target indicates, the prospects for QCOM are far in excess of current levels.
In many respects, the price of Qualcomm has been at the mercy of Apple and their ongoing lawsuits. However, Charles H. Dow has the following to say of such conditions:
“The manipulator is all-powerful for a time. He can mark prices up or down. He can mislead investors inducing them to buy when he wishes to sell, and to sell, when he wishes to buy; but manipulation in a stock cannot be permanent, and, in the end, the investor learns the approximate truth. His decision to keep his stock or to sell it then makes a price independent of speculation and, in a large sense, indicative of true value (Dow, Charles H. Review and Outlook. Wall Street Journal. October 18, 1901.).”
We believe that Apple has played into the hands of value investors and we’re thankful for it. Now the test becomes whether Qualcomm will realize the overvalued targets that we have set for the stock, as seen here.
Posted in Charles H. Dow, Dow's Value Theory, qcom, Qualcomm
Price conveys knowledge, that is the conclusion of Russ Roberts in an EconTalk podcast with Don Boudreaux dated October 28, 2013.
More specifically, Roberts was citing the work of F.A. Hayek’s “The Use of Knowledge in Society” dated 1945 and concluded that “price conveys knowledge” is the overall point of the paper.
Additionally, F.A. Hayek says:
“It is more than a metaphor to describe the price system as a kind of machinery for registering change...”
No reputable economist would want to associate their work with the actions or intentions of a speculator or investor. However, Charles H. Dow, co-founder of the Wall Street Journal and namesake of the Dow Jones Industrial Average, has said as much about price only 43 years before the work of F.A. Hayek.
On February 25, 1902, Dow said:
"The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end. The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Dow, Charles H. Review and Outlook. Wall Street Journal. February 25, 1902.)."
This aligns with F.A. Hayek’s claim that:
“…the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.”
As Dow Theorist Richard Russell has repeatedly said, the only constant is change. The work of Charles H. Dow reminds investors that the “special knowledge of circumstances” around price helps to determine values, which are constantly changing. This explains why:
“…the major consideration for the investor is not when he buys or sells but at what price (Benjamin Graham, David L. Dodd, Sidney Cottle. Security Analysis, Fourth Edition. 1962. Page 70.).”
Graham would never tell an investor to time the market. However, a “special knowledge of circumstances” would compel an investor to determine a price (based on values) that is appropriate for consideration. This period for consideration is usually a “fleeting moment not known to [many] others.”
The work of Charles H. Dow covers almost all of the topics discussed by Hayek and Graham and thirty years beforehand.
More:
Posted in Charles H. Dow, Dow's Value Theory, Graham and Dodd, Hayek, values
Charles H. Dow’s version of “Only when the tide goes out do you discover who's been swimming naked.”
"...while good and bad stocks rise and fall together with general conditions, and each stock has its own independent movement, and, as the outcome of a series of advances and declines, will invariably reach an approximation to its true value from the standpoint of an investor or permanent holder (Dow, Charles H. Wall Street Journal. Review and Outlook. May 26, 1900)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
Charles H. Dow says that to understand the stock market study business conditions
"We believe that the stock market as a whole should be regarded always as an effect of general conditions, and that the way to study the stock market, as a whole, is to study general business conditions (May 26, 1900)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
Charles H. Dow on Business Cycles
"These comparisons could be indefinitely increased without changing the essential conclusion, which is that business of all kinds moves in periods of alternating expansion and contraction (Dow, Charles H. Wall Street Journal. Review and Outlook. May 26, 1900)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
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)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
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)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
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)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
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)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
Charles H. Dow discusses reasonable dividend payout ratio:
“Common stocks can hardly be expected to sell up to the same level of return of the greater insecurity of dividends. Union Pacific may earn 5% or more on the common stock, but it does not follow that 5% will be paid, and if it were paid, the price would still reflect the knowledge, that whenever earnings decrease the loss would fall upon the common stock. It would perhaps be fair to reason that a common stock on which 5% was being earned would sell at something like a 3% level of value (Dow, Charles H. Wall Street Journal. Review and Outlook. March 27, 1900).”
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
In this piece, Dow is a leading advocate for frequent and full disclosure for greater clarity to all investors. This was a concept that was relatively unheard of at the time.
"It is in a high degree important for all interests that this market should be made as fair for the outsider as possible. Nothing will promote fairness so much as reasonable frequency in the publication of the profits which the company decides belong to stockholders. It is to the interest of every investor, every speculator and every broker that this should be done. It may possibly lessen the business of some houses to be obtained from insiders, but their loss will be more than made good by the breadth and permanency of a market in which outsiders have a fair chance (Dow, Charles H. Wall Street Journal. Review and Outlook. March 7, 1900)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world.”
Posted in Dow's Value Theory
Charles H. Dow says companies with wide moats are difficult to duplicate
“It will always be easier to duplicate an industrial plant than a railway plant, and on this account industrial profits cannot be quite as stable as railroad profits (Dow, Charles H. Wall Street Journal. Review and Outlook. October 12, 1900)."
Who was Charles H. Dow?
“Charles Henry Dow was an American journalist who co-founded Dow Jones & Company with Edward Jones and Charles Bergstresser. Dow also founded The Wall Street Journal, which has become one of the most respected financial publications in the world. He also invented the Dow Jones Industrial Average as part of his research into market movements. He developed a series of principles for understanding and analyzing market behavior which later became known as Dow theory, the groundwork for technical analysis (source: Wikipedia.org).”
Posted in Dow's Value Theory
The core of Dow Theory is the emphasis of value investing, anticipating investor behavior and knowing when to accept fair profits. This posting outlines the basic premise of these core concepts.
On September 14, 2015, we posted a Quick Take of Helmerich & Payne (HP) with the following thoughts:
“If HP were to achieve a similar –77% decline as the period from June 23, 2008 to December 4, 2008, HP would fall to the $27.29 level. We advise that investors consider HP at the ascending $39.43 level or below.”
“The dividend payout ratio is a decent indication of the best times to consider a stock. Whenever the dividend payout ratio exceeded 80% [of] the price, Helmerich & Payne was at a relative low. Already, HP is at a payout ratio of 91.67% based on estimated 2015 earnings of $3.00 per share.”
This commentary is essential as investing is really about values. As Charles H. Dow has said:
"The one sure thing in speculation is that values determine prices in the long run. Manipulation is effective temporarily, but the investor establishes price in the end. The object of all speculation is to foresee coming changes in values. Whoever knows that the value of a stock has run ahead of price and is likely to be sustained can buy that stock with confidence that as its value is recognized by investors, the price will rise (Dow, Charles H. Review and Outlook. Wall Street Journal. February 25, 1902.)."
Unfortunately, most writers on the topic of Dow Theory fixate on chart patterns while ignoring values and then call it Dow’s Theory. Suffice to say, we made a purchase of Helmerich & Payne on January 12, 2016 and on January 20, 2016, Helmerich & Payne achieved a new 52-week low, nearly –7% below our purchase price.
Our purchase was predicated on the belief that:
“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 ten to twenty points above present prices (Dow, Charles H. Review and Outlook. Wall Street Journal. July 20, 1901.).”
On July 2, 2016, we reviewed the price performance of Helmerich & Payne with the following commentary:
“As can be seen in Edson Gould’s Speed Resistance Line (SRL), Helmerich & Payne did decline below the ascending $39.43 level on January 20, 2016, nearly 3 months after the initially posted article.”
“…the most pressing level to watch for is Dow Theory’s 50% Principle which measures the rise (or fall) of a stock at the halfway point between the prior major move. In the case of Helmerich & Payne, the halfway point of the last major move (July 2014 to January 2016) is at $79.16 which is illustrated below.”
Achieving our target of $79.16 based on Dow’s 50% Principle (which front-loads investor expectations) prompts the following thoughts from Charles Dow:
Posted in Dow's Value Theory, Helmerich & Payne
Recent stock market action warrants the review of Dow Theory. On December 8, 2016, the Dow Jones Transportation Average increased above the previous peak set in December 2014. This change in the Transportation Average confirms the new highs established by the Dow Jones Industrial Average.
We’ve canvassed various articles referring to the recent Dow Theory signal and have pointed out the myths and facts.
Posted in Dow's Value Theory