From Tokyo, Japan and Changsha, China – this is Down to Business English. With your hosts Skip Montreux and Dez Morgan.
Hello Dez. Good to be talking with you.
And you too Skip.
And if I’m not mistaken, this is going to be the last time we speak before you go on summer vacation.
That’s right. I’m off to Scotland for a few weeks at the end of July.
Good for you.
I’m looking forward to it. It will be nice to be home for a bit and visit family. Although I do have a ton of things to finish at my University before I get on my plane.
Well I appreciate you taking the time to report one more time for Down to Business English before you depart.
You know I wouldn’t miss it.
So, what are you reporting on today? Some newfangled piece of technology or maybe some cutting edge use of Artificial Intelligence?
No, nothing like that. In fact the origin of my business report today dates all the way back to 1896.
1896? I can’t think of many things that were around a hundred and thirty years ago that are still making business headlines today. Maybe the invention of the car?
Interesting guess. Karl Benz, the founder of Mercedes-Benz patented what is credited as the first automobile in 1886, a decade earlier.
Only 10 years off. Well, I’m pretty close on the date.
Not bad. However, my report is connected more to the financial world.
And what would that be?
The Dow Jones Industrial Average, which debuted on May 26th, 1896.
The Dow Jones Industrial Average. Isn’t it just usually referred to as the Dow?
That’s right. The Dow is perhaps the most watched stock market index globally and is a key indicator of US economic performance.
You always hear financial reporters on Bloomberg or CNBC talking about the Dow’s gains or losses.
And there's a good reason for that.
I’d like to hear more about why that is.
Great. So let’s do it. Let’s get D2B … Down to Business with the Dow Jones and the tenets of Dow Theory.
Even though the Dow Jones Average is often discussed in business news, I had no idea that it dates all the way back to 1896.
Actually, the story starts 14 years earlier in 1882. That is when three financial reporters, Charles Dow, Edward Jones, and Charles Bergstresser set up the Dow Jones and Company in New York City, which focused on providing financial news and information.
There was no internet around in the 19th century.
That’s for sure.
So, how did they report financial news? Through a newspaper?
They started publishing a daily financial bulletin called “The Customer's Afternoon Letter," which included stock market news and analysis. This newsletter eventually evolved into The Wall Street Journal.
The Wall Street Journal — the go to newspaper for stock tips and analysis.
Along with the Financial Times or FT in the UK, another go to source for investors.
That is very true.
Anyway, in 1884 Charles Dow created his first stock average which was published in The Customer’s Afternoon Letter.
Before we go any further Dez, let me ask a simple question. What exactly is a stock average?
A stock average is a basket of stocks that are often seen as a benchmark in a particular industry or sector of the market.
Okay. So, in other words, it is a group of stocks whose average share prices are used as a performance indicator.
Yeah, that’s the basic idea. A stock average is also used to gauge the overall health of an economy.
And Charles Dow created his first stock average in 1884.
That’s right. Initially, the index consisted of nine railroad companies and two industrial companies for a total of 11 stocks. At one point it grew to 14 stocks, but Dow, with the help of Edward Jones, dropped a few of them. Eventually they settled on 12 stocks — the Dow Dozen as it was known. The index was renamed as the Dow Jones Industrial Average, or DJIA, and was first published in May 1896.
Very interesting. Are any of those original Dow Dozen stocks still a part of the Dow Jones? I mean, are those companies still around?
Many of the original companies have been either taken over by other companies or have been sold off. But two companies of the original dozen are still operating today. Although they are no longer key components of the Dow Jones Average.
And which two companies would those be?
The American Sugar Company is one.
Hm. I have never heard of it.
Well, over the years it morphed into Domino Sugar and then finally Domino Foods in 2001.
Okay, I have heard of Domino Sugar.
And then there is General Electric, which has retained its original name.
Oh, of course. I know General Electric, a very big conglomerate. I would have assumed it would still be on the Dow.
It was removed from the index in 2018.
Is that right? What prompted its removal?
The decision makers who choose which companies belong on the average decided that GE was no longer as influential as it had once been.
Uh huh. So it was not as good of an indicator of the market.
Precisely.
How many companies are on the DJIA today? I am sure it has grown from the original 12.
And you would indeed be right. In 1928 the Dow Jones expanded to 30 companies.
Any names that I might know?
I think so. General Motors, Paramount Pictures, and Sears Roebuck are three names which jump out from that 1928 iteration.
Household names, although Sears Roebuck is now simply Sears.
And here’s another one you should have heard of — Standard Oil.
Oh, of course. The forerunner of today’s ExxonMobil.
Indeed. But keep in mind that even though the number of stocks listed on the index has stayed at 30 since 1928, the actual companies that are a part of the average do change.
So not all of those companies on the 1928 list are still on it?
None of them.
Wow. How often does that list change?
As the US economy changes and evolves, companies are listed or delisted from the index. In fact, the Dow Jones Average has changed a total of 58 times since 1896.
Well, that makes a lot of sense.
It does. As you would expect, today lots of tech companies, like Apple, Microsoft, Intel, and Cisco are components of the DJIA.
And what about other, non-tech stocks.
Well there are several retail and fashion companies, especially Nike and Walmart, they’re on the list. And the online retail giant Amazon was just added in February of this year.
Is that right? It would seem to me that Amazon would have been on the Dow Jones for quite some time.
Nope, they are indeed a new addition.
So how does a company get included on the Dow Jones Average? Is it just a matter of being profitable?
Being added to the Dow is not simply based on a company's market value or prominence. The index aims to be representative of the broader U.S. economy. Any changes to its components or composition are a reflection that the fundamental drivers of the US economy have changed.
Right. So back in 1896 there were a lot of railroad companies, in the 1930s there were automotive, retail, and entertainment companies, and today the economy is dominated by technology companies.
That is a good synopsis, yes. Recently, there has been speculation on whether Nvidia — the dominant player in the AI market — will be added to the Dow.
With the way AI is headed, I’m sure they will be at some point. Who exactly is responsible for deciding which companies are included on the Dow Average?
That is a good question. Over its history, the owners of the Dow Jones & Company made those decisions.
So whoever owned the Dow Jones & Company maintained the Dow Index.
That was the case. However, the Dow Jones & Company is currently owned by Rupert Murdoch’s NewsCorp and they sold their stake in the Dow Jones Average to the CME Group in 2007. Ever since then, the Dow average has not had any connection to Dow Jones & Company.
Oh, you know I think that came up in our episode on Rupert Murdoch last year.
It may have. Currently the Dow Jones Industrial Average is owned and managed by S&P Dow Jones Indices LLC. And they are the ones who decide which companies are added to or taken out of the index.
It is interesting that the company that gave birth to the Dow Jones Average is no longer involved in the index their founders created.
I’m sure Charles Dow would be okay with that. After all, the Dow Jones Average was just a tool he created to help investors, who were ultimately his customers, understand the stock market.
Right. He was just a financial journalist and the Dow Jones index was just one way to attract readers.
Precisely. But Charles Dow's contributions to finance went beyond just creating this influential index.
Is that right?
In fact, he developed a set of six tenets investors could use as a framework for analyzing financial markets. These six principles became known as Dow Theory.
Mm. Sounds very technical.
I will try to explain it as simply as possible but Dow Theory is good to know because it is fundamental investing analysis.
Okay, I will try to follow.
The first tenet is that the market knows everything.
Everything?
Yep. Stock prices represent all available information. Even future events are reflected in the price of the stocks.
Future events? How is that possible?
Point is that investors have analyzed stocks and have made predictions for the future and have bought and sold stocks accordingly.
Okay. The market knows everything.
The next tenet, or principle of Dow Theory is that there are three types of market trends.
And they would be?
They would be short, mid, and long term trends. With the long term trend being the only one that’s important to long term investors.
Long term investors should ignore daily, weekly and even monthly fluctuations if the longer term trend remains intact.
Correct. With that in mind, we come to the phases of the long term trend. The first of these phases is the Accumulation Phase.
The Accumulation Phase.
Yep. This is when informed investors are buying or selling against the prevailing market sentiment.
Mmm. In other words, smart investors are buying stocks when everyone else is still bearish.
That’s right.
Okay, what is the next phase?
Then comes the Public Participation phase. This is when the news is out about the stock, and everyone has started to buy.
Which pushes the price up I suppose.
That could be the result, yes. And finally — there is the Distribution phase. When the smart money is getting out or selling off their stock because the trend is about to change downward.
Hm. The hard part is timing I guess.
True enough. The fourth tenet of Dow Theory is that the trend needs to be confirmed across more than one index. In addition to the Dow Jones Industrial Average there is also the Dow Transport average which charts the price of logistics companies.
Why is that important, to confirm the trend across indexes?
The idea is that if the Industrial Average has risen but the Transport Average hasn’t, then the rise is not based on real goods being shipped. If companies are booming the transportation sector should also be rising.
Okay, that makes sense for companies that create real, physical goods. But does it hold true for software companies or companies that provide services. Their economic activity would not be reflected on the Dow Jones Transport Average.
And that’s a very good observation, Skip. That is why confirmations or non confirmations by the two indices are indeed less reliable indicators than they used to be.
Confirmations and non confirmations? What are those?
In Dow Theory if both indices are rising it's called a confirmation. But if only the Industrial Average is rising it's a non confirmation.
This Dow Theory stuff is pretty interesting. Which principle are we on now?
That was the fourth tenet.
Okay, what is the fifth?
The fifth principle states that rises in prices must be accompanied by an increase in volume.
And by volume you mean the number of shares being traded, not the volume of production.
That’s right. If a stock is drifting higher without any significant increase in volume this rise cannot be considered an indicator of economic growth.
And what is the last tenet?
The final principle of Dow Theory states that trends persist until definitive signals indicate otherwise. This spawned a saying in trading circles “The trend is your friend until the end”.
“The trend is your friend until the end”. What does that mean?
Simply, investors should stay in a stock if the trend is heading higher and not sell till the trend has definitely changed.
Okay, that is all very interesting theory. But tell me Dez, what is Dow Theory telling us about the US economy today?
Earlier this year in May, the Dow average broke above the magic 40,000 point resistance line. But it quickly fell back below that and trading volume is pretty flat.
Okay, and what does all of that mean?
Hey, I’m certainly no expert but it looks as though the upward trend is stalling. The question is whether the trend is taking a short breather or is it about to head south.
Will the Dow start rising again, or will it fall?
And you know what, I really don’t have an answer to that.
I’m sure you are not the only one without an answer to that question. And on that note, I think it is time for you and I to get D2V … Down to Vocabulary. Let’s start D2V today with the verb debut. When something debuts, it appears in public for the first time.
You often hear this word used in the context of the film or TV industry. It indicates the first time an actor or an actress appears on a film.
That’s true. It often refers to an initial performance of someone or something. In the introduction to today’s episode, Dez told us that the Dow Jones Average debuted in 1896.
I was saying that the Dow first appeared in 1896. I used the word ‘debut’ to indicate that this was an important first appearance that had a lasting significance.
We should also point out that ‘debut’ can also be used as a noun. For example, The Dow Jones Average’s debut was revolutionary.
Good example. Another one would be the debut of the MP3 encoder software for music on the 7th of July 1994. At that time, no one could have anticipated how that debut would have revolutionized the way we listen to music and distribute audio files.
You are right that it was a significant debut. Podcasting certainly depends on the MP3 format.
Our next item is the compound adjective ‘go to’ which describes a person or a source of information that is so reliable that it, or he or she, is regularly sought out.
Someone or something that is reliable and trustworthy.
In my report, Skip described The Wall Street Journal as the go to publication for stock tips and financial analysis.
And Dez mentioned The Financial Times is also a go to publication.
We were saying that both of these newspapers are reliable and sought out by investors looking for accurate financial information.
I once had a colleague in my office who was the go to person for all things Microsoft. She knew Excel inside and out and created the most amazing spreadsheets.
This colleague is no longer there to help out with Excel?
No, unfortunately she isn’t. And she is sorely missed.
We have a similar go to guy in our office, especially for PowerPoint. He knows all of its features and is really good at explaining how to use it to others. I would hate to think what we would do if he decided to leave.
I suppose you and I could take an Excel or PowerPoint course.
Yeah, that would be a solution I guess.
Our final word for D2V today is the noun tenet. A tenet is a main principle or belief in something. In today’s report Dez explained the six tenets of Dow Theory to us. In other words, he told us about the main principles that Dow Theory is based on.
I want to point out that many people confuse the word ‘tenet’ with the similar sounding word ‘tenant’.
That is very true. Tenet, t - e - n - e - t, is a principle or belief. Tenant, t - e - n - a - n - t, is a person who rents an apartment or a company that leases office space.
Similar sounding words, but completely different meanings.
Dez, can you give us an example using tenet in a business situation?
Sure. A core tenet for successful businesses is to always prioritize customer satisfaction above short-term profits.
I would hope so.
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Thank you Dez, for that report on the Dow Jones Industrial Average and Dow Theory. It’s nice to know the history behind this very common financial tool.
No problem, Skip. I hope our listeners enjoyed it.
So you are now off for a summer holiday to Scotland?
In a few days, yes. But I’ll be back near the end of August if everything goes as planned.
Well you enjoy yourself, and stay out of trouble.
I’ll do my best.
D2B Members and Apple Podcast subscribers, the Bonus vocabulary episode for today’s report will be out to you very shortly.
Apple Podcast subscribers?
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And is there any difference?
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But both options get you the Bonus D2V and the Member-only episodes.
That’s right. And the words and phrases we will focus on in the next Bonus D2V episode will be — newfangled, to morph, the smart money, to be definitive, and to take a breather.
So, if you are a D2B member that will be released on your Members-only RSS feed so you want to be sure to visit your Member’s account on the D2B website and get that RSS feed. If you are an Apple Podcast subscriber?
If you are an Apple Podcast subscriber you don’t need to do anything. Bonus episodes will appear automatically in your Apple Podcast app as soon as they are released.
Got it.
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Very easy.
Very easy indeed.
Thanks for listening everyone. See you next time.
Bye bye.
Have a comment or question about today’s show? Don’t be shy… visit the D2B website or Facebook page, and post any comments or questions there. Skip, Dez, or Samantha will be sure to leave a reply. Down to Business English... Business News, to improve your Business English.