Thursday, October 4, 2012

Why do I only write about the Dow Theory?

In German, they have a saying that goes: “Schuster bleibt bei deinen Leisten” which translates into English as “Clobber, stick to you trade." In other words: Stay focused.

For most investors, the Dow Theory is just an extra tool in their toolbox. It looks too simple to be the considered the main tool. Furthermore, since it looks so simple, everyone believes that a cursory reading of the main tenets of Dow Theory makes them experts and, in this fashion, they start to pontificate about the Dow Theory.

Thus, many experts make two errors when applying the Dow Theory:

a) On the one hand, they use Dow Theory just as a “complement." For them, the Dow Theory is not the reference point upon which their investment decisions should be based.

b) On the other hand, such “complementary” use of the Dow Theory is made causally lacking the necessary expertise which leads to errors of judgment.

However, the Dow Theory doesn’t lend itself to be a mere “complementary” tool in the toolbox. It is the main tool in the toolbox when properly understood and applied. At least for me other technical studies are just a complementary tool.

Furthermore, the Dow Theory looks deceptively simple. You can read all its hypotheses and axioms in less than half an hour. After such brief study, one feels that the implementation of Dow Theory is a piece of cake. Wrong! It is not as simple as that. If you really want to learn the Dow Theory go here for the reading list.

It is scarcely surprising that many badmouth the Dow Theory. They use a handicapped version thereof, and they use it out of context.

There aren’t easy shortcuts when it comes to mastering the Dow Theory. The diligent investor has to sweat it out. At least, this is what I’ve been doing for the last 12 years and counting. The reward is great: You will be able to see order among confusion. You will have a compass that will guide you through the roller coaster of the markets.

You will be able long-term to outperform the market by ca. 3% a year while avoiding devastating drawdowns. You will learn the difficult art of letting profits run and cutting losses short.

Thus, if you browse through the web, you will find that almost everyone is claiming that we are in a primary bear market. Everyone is warning of double tops (which, by the way, were to be disregarded according to Dow Theory master Rhea), that the transports are not confirming; they look at divergences but in the wrong time frame, etc. Well, these are half truths, but half truths are more dangerous than outright lies. And, when it comes to investing, half truths can be devastating to your portfolio (as missing the ca. 7.37 % move the S&P has undergone since the signaling of the current primary bull market on June 29, 2012).

The Dow Theorist


  1. I'd be interested in your opinion of whether the Dow Theory could be applied to foreign indexes, such as EAFE. Thanks. I appreciate your work.

  2. Hi Remoc,

    Dow Theorist Hamilton answered your question in 1922. In his book " The Stock Market Barometer" he says:

    "The law that governs the movement of the stock market, formulated here, would be equally true of the London stock exchange, the Paris Bourse or even the Berlin Boerse. But we may go further. The principles underlying that law would be true if those Stock exchanges and our were wiped out of existence...[...]"

    End of Quote.

    As to whether Dow Theory can be applied to gold and other markets, Hamilton said:

    "The averages of South African mining stocks in the Kaffir market, properly complied from the first Transvaal gold rush in 1889, would have an interest all their own [...] The comparison of that average with the movement of securities held for fixed income would be highly instructive to the economist."

    End of quote.

    In other words, Hamilong is telling us that the principles of Dow Theory may be safely applied:

    a) To stock indices outside USA.

    b) To specifics markets different from the broad markets (i.e. bonds, stock miners, etc.).

    Source: William Peter Hamilton, "The Stock Market Barometer." Wiley Edition, pages 14-15.

    Your question has prompted me to write a post in the coming days.

    Regards and thx for following this blog