The Tao of the Dow

Confucianism and Taoism
Final Paper
Autumn, 1999
W. Thomas Grové

In this paper, I will draw a parallel between Taoism and capitalism. This will be accomplished by comparing the origins, ideology and social impact of Taoism with the origins and social impact of the stock market as represented by the Dow Jones Industrial average and the nature of good investment ideology.

Taoism emerged from the sea of philosophy that had been evolving and responding to itself, or its new and refined philosophies, in ancient China. Much of this philosophy was expounded by, and intended for, the literate, governing, and financially advantaged members of society. Out of this chaotic mix, that was attempting to find order in society, arose a sect who wrote down their ideals which would be added to and later given the name of the Lao Tzu or the Tao Te Ching. Taoist thought is some of the first metaphysical thought of China. In that way the Tao Te Ching does not aim to establish social rules and structure in the way that Confucianism did, although it definitely paints actions and personalities that would affect society. The Tao Te Ching instead offers an alternate perspective on the world to those perspectives offered before. Proposing a more passive role in life and an ideal that is more illusive, Taoism encourages the reader to observe the flow of the Tao and, from the later view of Chuang Tzu, to view situations from an impartial and high vantage point. This illusive ideal is perhaps best illustrated in the first chapter of the Tao Te Ching: “always rid yourself of desire in order to observe its secrets; But always allow yourself to have desires in order to observe its manifestations.”

The stock market, at first, was a playing field reserved only for the elite. However, keeping information secret is like holding water in a canvas bag, it’s bound to drip. Before long everyone was playing the stock market, but the information on what a company was worth was still kept only to industry insiders. At this point a man entered the scene whose background was representative of Lao Tzu’s lowly uncarved block. “Charles Dow came from humble origins, yet managed to transform the world of investing more than any high-powered money manager or investment banker.” (TMF).

Charles Dow, who didn’t complete secondary school, worked on a farm performing menial labor jobs from the age of 6 to 18. Dow went on to form a company with two partners in 1882, Dow Jones & Co. They released a daily paper called The Customer’s Afternoon Letter which printed consolidated stock tables and quarterly and annual information regarding company financials. “Dow’s publication leveled the playing field between the Wall Street elite and the individual investor.” (TMF) The Customer’s Afternoon Letter later became the Wall Street Journal, the preeminent publication of capitalism.

“Without stirring abroad, One can know the whole world; (Lao Tzu, XLVII)” By knowing a part, one can have a good idea of what the whole is like. Another aspect to be added to Dow’s publication was “an index that could be used to gauge the activity of the New York Stock Exchange as a whole.” (TMF) Today this index is known as the Dow Jones Industrial average. This index averages the stock prices of 30 companies that are considered to best represent American business. Their performance is used as a gauge to predict the value of the market at large. This information, which is unbiased, is interpreted by investors who use it to make investment decisions.

A good investor is like one who understands Tao and the value of the invaluable. What better time is there to get in on the investment action than the ground floor; the “uncarved” block of a company that has the possibility to grow into something quite valuable. “Adapt the nothing therein to the purpose in hand, and you will have the use of the cart. Knead clay in order to make a vessel. Adapt the nothing therein to the purpose in hand, and you will have the use of the vessel. Cut out doors and windows in order to make a room. Adapt the nothing therein to the purpose in hand, and you will have the use of the room. Thus what we gain is Something, yet it is by the virtue of Nothing that this can be put to use.” (Lao Tzu, XI). But an investor can not be blind. He must have a “Well polished mirror”. His mind must be sharp and he must have the perspective and foresight to know what will be a good investment. He must not be overcome by greed but he must instead use decisions based on reason, and intuition. “Hence the sage is for the belly and not for the eye. Therefore he discards one and takes the other.” (Lao Tzu, XII)

An aspect of the nature of the Tao can be described in a desirable/non desirable model. There are things that a person finds to be desirable. These include furniture, internet stocks with a high value, cars, flowers, books, et cetera. The undesirable things in the world give birth to these desirable things. Raw materials such as dirt, rock, wood, and a market are examples of this undesirable material. Yet, without these raw materials we would not be able to manufacture, grow, or create the desirable. As time passes, desirable things break, die, wear down, and eventually decompose. They once again return to their source and are undesirable. This cycle can be represented as an oscillation of continuous movement… things constantly flowing into and then out of “value” only for the process to repeat again… again… again… This is the Tao. Since the theory of the Tao attempts to describe nature, or the way things are, it only follows that this theory would also describe local, country, imperial, and world economies. This Tao can also describe the Dow Jones, the market, capitalism.

The stock market crash of 1929 is an example of the “flowing of water towards the lowest point” in capitalism. When the ability to purchase stocks in companies became public province, it was not long before purchasing stocks in companies became public practice. While the value of companies did gradually increase, the influx of predominantly unsophisticated investors drove the market higher than the companies’ valuations could support. A frenzy of greed developed in the market. In the years leading up to 1929, everyone got into the act. It is said that “shoeshine boys” were trading stocks on the sidewalks of Wall Street. Speculative buying and selling reached a peak in October, 1929.

The following article by Mark Underwood describes how this flow back to the valley occurred:

The rapid increase in industrialization was fueling growth in the economy, and technology improvements had the leading economists believing that the uprise would continue. During this boom period, wages increased along with consumer spending, and stock prices began to rise as well. Billions of dollars were invested in the stock market as people began speculating on the rising stock prices and buying on margin.
The enormous amount of unsecured consumer debt created by this speculation left the stock market essentially off-balance. Many investors, caught up in the race to make a killing, invested their life savings, mortgaged their homes, and cashed in safer investments such as treasury bonds and bank accounts. As the prices continued to rise, some economic analysts began to warn of an impending correction, but they were largely ignored by the leading pundits. Many banks, eager to increase their profits, began speculating dangerously with their investments as well. Finally, in October 1929, the buying craze began to dwindle, and was followed by an even wilder selling craze.
On Thursday, October 24, 1929, the bottom began to fall out. Prices dropped precipitously as more and more investors tried to sell their holdings. By the end of the day, the New York Stock Exchange had lost four billion dollars, and it took exchange clerks until five o’clock AM the next day to clear all the transactions. By the following Monday, the realization of what had happened began to sink in, and a full-blown panic ensued. Thousands of investors — many of them ordinary working people, not serious “players” — were financially ruined. By the end of the year, stock values had dropped by fifteen billion dollars.
Many of the banks which had speculated heavily with their deposits were wiped out by the falling prices, and these bank failures sparked a “run” on the banking system. Each failed bank, factory, business, and investor contributed to the downward spiral that would drag the world into the Great Depression.

All things eventually flow back to the valley.

This market crash came as a huge shock to the thousands of “blind” investors caught up in the craze. Something had caught their eye and they had ignored their bellies, investing money that they didn’t have. “Rather than fill it to the brim by keeping it upright, Better to have stopped in time; Hammer it to a point and the sharpness cannot be preserved for ever; There may be gold and jade to fill a hall, But there is none who can keep them. To be overbearing when one has wealth and position is to bring calamity upon oneself. To retire when the task is accomplished is the way of heaven.” (Lao Tzu, IX) You have to know when to buy and when to sell. If an investor knows the Tao then they know that “The Way is to the world as the River and Sea are to rivulets and streams”(Lao Tzu, XXXII) and a company’s value is to its stock price.. “That towards which they flow” (Zipporyn)

If an investor pulls back to this birds eye Taoist perspective, not only will they have a better idea of stock value, but also of market trends. If you examine a stock’s price on a graph that covers one month you may see a steep increase or decline in said stock’s market value. However, if you pull back, to say… one year, you may see that the stock has slowly been rising in value for the past 3 fiscal quarters. This gradual rise may have many sub peaks and valleys but the average stock value has continued to perform in a somewhat predictable way. Now, pull back even further on the graph to the company’s past 20 years of performance. You’ll most definitely see multiple instances when the stock rose slowly in value and then declined in value. If the company had a steep rise then the decline was probably likewise steep. If it was gradual, then perhaps the decline was also gradual. Knowing this kind of information, or seeing a company from this perspective, would help an investor to be comfortable with a company’s stock valuation corrections and even larger scale market corrections.

“The spirit of the valley never dies. This is called the mysterious female. The gateway of the mysterious female is called the root of heaven and earth. Dimly visible, it seems as if it were there, yet use will never drain it.” (Lao Tzu, VI) The valley in the stock market are the blue chip, good quality stocks. These are the companies who, year after year return good investment results, but who do not double overnight. The current speculation in the sector of the market represented by the internet stocks is a reason for major concern. Companies are valued at many times their revenue, if they even have any revenue. These are the mountains, and eventually all the money invested in these companies will flow back to the valleys. The blue chip companies.

Trees don’t grow to the sky… rivers don’t run uphill. The frenzy in the market will eventually always return to the Dow. Sometimes it appears to be bloated, other times it looks as though in a drought. But the long term investor knows that it’s just part of the cycle and that Dow is like the Tao in that, so long as people are doing business then, use will never drain it. That is the Tao of the Dow.

References

Quoted Material:

Lau, D. C., translator. Lao Tzu / Tao Te Ching.
Penguin Books, first published 1963

Befumo, Randy & Schay, Alex. The Motley Fool. History of the Dow
< http://www.scribe.fool.com/school/dowinvesting/HistoryOfTheDow.htm>

Underwood, Mark. Home page. < http://sac.uky.edu/~msunde00/hon202/p4/>

Ziporyn, Brook. Commentary taken from class lecture.

Additional Knowledge Referenced From:

Watson, Burton, translator. Chuang Tzu: Basic Writings.
New York. Columbia University Press. © 1964, 1996

Grové, William T.: Father and Investment Advisor.

Ziporyn, Brook: Teacher of Philosophy and Religion, Northwestern University.