A conversation between Mr. Charles Dow and Mr. Edward Jones, circa 1896:
Mr. Dow: Mr. Jones, I’ve got this idea for a new stock index. Our goodly nation is entering a new century, and it needs a proper way to measure the wealth that will be generated on Wall Street.
Mr. Jones: Wall Street? What, that little alley off Broadway?
Mr. Dow: It’s a little alley today, but someday everyone will know its name. And if we devise a proper index by which to track Wall Street, someday everyone will know our names as well.
Mr. Jones: Now you’ve got my attention. Let’s talk about the incredibly lucrative Dow Jones & Co. stock options we’re going to grant ourselves.
Mr. Dow: No time for that now, my dear partner. We need to focus on the index. Here’s my concept: We take 12 of the nation’s premier companies, add up their stock prices each day, divide by 12 and--voila!--the Dow Jones industrial average.
Mr. Jones: Wouldn’t ‘Jones Dow industrial average’ roll off the tongue a little easier?
Mr. Dow: Forget about it. Anyway, I think we can make this work. We just need to determine which 12 companies to put in the index.
Mr. Jones: Well, we can start with General Electric. There’s one that will last for the ages. Can you imagine how many lightbulbs they will sell to those emerging-market regions?
Mr. Dow: You mean Oklahoma and Oregon? Yes, I think that business is going to be quite good for Mr. Edison and his company. OK, let’s add some more names. I’d like to suggest two companies whose products, like lightbulbs, will never go out of style: American Tobacco and Distilling & Cattle Feeding.
Mr. Jones: Excellent ideas, Mr. Dow! Tobacco is the leaf that sootheth all of mankind! There will never be an age in which man does not covet a fine smoke. And I frankly believe that the day will come when the pleasure now reserved for men will be extended to women and children as well.
As for Distilling & Cattle Feeding, there, too, is a company for the new millennium. Spirits and red meat--what could be more American?
Mr. Dow: Exactly. Now, what makes the tobacco refining machine and the distillery pump worketh? Energy, Mr. Jones. And the energy of future is natural gas! Therefore I propose including Laclede Gas and Chicago Gas in the index. They both serve the bountiful Midwestern region, which as we both know has more than its share of distilleries.
Mr. Jones: All working for the good of mankind, of course.
Mr. Dow: Of course. Here’s another suggestion: National Lead. Have you seen the beauty of lead-based house paints? Everyone is going to want to decorate their log cabin or tenement house with such paint. National Lead is a true growth stock.
Mr. Jones: I agree. Along the same lines, may I suggest American Sugar? A prosperous nation is a nation that consumes candies and baked goods in mass quantities.
No doubt you’ve heard that the Irish tradition of performing pranks on Allhallows Eve has turned into a ritual of candy-begging in some urban areas.
Mr. Dow: Really? I thought the urchins limited themselves to tipping over outhouses and unhinging fence gates.
Mr. Jones: They did, but that is rapidly giving way to the candy-begging thing. Progress!
Mr. Dow: All right, American Sugar is in. I also like this utility conglomerate, North American. It just sounds too important to leave out of the premier U.S. stock index. Likewise, Tennessee Coal & Iron and U.S. Leather are manly sounding companies that belong in a manly sounding index.
Now the final two stocks I want to suggest for our index may surprise you, but I’m hoping that I can persuade you.
Mr. Jones: Oh no, Mr. Dow! You’re not going to propose those ridiculously speculative new market darlings . . .
Mr. Dow: That’s right, Mr. Jones. I want to include American Cotton Oil and U.S. Rubber.
Mr. Jones: Never did I imagine that you, Mr. Dow, would be caught up in the speculative foolishness of our age! I don’t care what they say about cotton oil’s potential as a foodstuff. Americans want their food cooked in the good old-fashioned fat of the hog, and that applies now and will apply for centuries to cometh!
Mr. Dow: Mr. Jones, I fear that you are blinded by your own predilection for the wondrous taste of lard, which I do not dispute. But I can see a place for cotton oil in the nation’s future. I realize the business is speculative, but what was lard in the beginning? How greatly did the lard lobby have to fight to overcome people’s fondness for cod liver oil?
Mr. Jones: You’ll not convince me on American Cotton Oil, Mr. Dow. Nor will my mind be changed about U.S. Rubber. I know you’ve been reading about that Henry Ford, and I think he has lost his wits. ‘Every family will one day own a motorized vehicle,’ he says. It is simply not possible, Mr. Dow. It is too fantastic to imagine, and therefore it is hogwash.
Mr. Dow: Oh, again with the hog thing! Mr. Jones, our new index should reflect not just what American industry has been, but what it is becoming, and what it will be. Otherwise, it will quickly lose its relevance. Henry Ford just drove his new Quadricycle through the streets of Detroit. What if he’s on to something? Imagine the business that U.S. Rubber might do in the future. Why, every Quadricycle will require four tires. And until someone begins paving roads in this country, imagine the replacement business!
Mr. Jones: All right, Mr. Dow, go ahead--crawl out onto that reedy limb! But 100 years from now it will still appear scandalous to investors that you thought rubber tires--and vegetable oil--had a place in a serious American stock index.
When the stock market opens on Monday the Dow Jones industrial average will include two stocks that many Wall Street pros believe should have been in the index at least five years ago: technology giants Intel and Microsoft.
Two other shares also will be added to the 30-stock index: SBC Communications (the largest local phone company) and Home Depot.
To make room for those stocks four long-time Dow members will be dropped: oil giant Chevron, Goodyear Tire, Sears Roebuck and chemical firm Union Carbide.
You could hear the groans of Wall Street pessimists last Tuesday when Dow Jones announced the changes, the third reshuffling of the index in the 1990s. After a spectacular decade for technology stocks, why put Intel and Microsoft in now--with many tech stocks at their highest and potentially riskiest valuations ever?
The short answer is, Dow Jones couldn’t afford to wait. The Internet economy is here, and Intel and Microsoft represent it very well--not just for their chips and software, respectively, but for the massive direct investment the companies have made in all sorts of up-and-coming technology ventures.
The conversation above is mythical, though the stocks listed are in fact the original Dow index 12. Then, and since, Dow Jones has strived to keep the index representative of the U.S. economy. The index has changed significantly in the 1990s--but then, so has the economy.
So how smart are today’s Dow Jones newspaper editors when it comes to picking big-name stocks that represent the economy’s (and market’s) leading edge? As the accompanying chart shows, the last two rounds of Dow substitutions mostly got rid of what became market deadwood, and added some big names that have since grown much bigger.
Charles Dow would have to be proud.
Tom Petruno can be reached by e-mail at email@example.com
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Dow Substitutions: Recent Changes
Does Dow Jones & Co. know how to pick winners for its Dow industrial average? With one glaring exception, the stocks booted out in 1991 and 1997 have mostly far underperformed the stocks that replaced them:
Dow change: May 6, 1991
Stocks in: Change since: Caterpillar +345% Walt Disney +160 J.P. Morgan +142
Stocks out: Change since: Navistar +20% USX-U.S. Steel -22 Primerica +1,529*
Dow change: March 17, 1997
Stocks in: Change since: Citigroup +135% Hewlett-Packard +33 Johnson & Johnson +81 Wal-Mart +290
Stocks out: Change since: Westinghouse +152%** Texaco +21 Bethlehem Steel -18 Woolworth -69
* Calculated using current price of Citigroup, which Primerica became ** Calculated using current price of CBS, which Westinghouse became Source: Times research