I sometimes joke that my entrance into the financial-advice business was the best thing that's ever happened to the Dow Jones Industrial Average. Indeed, fresh out of Northwestern University, I started my investment career on Monday, August 16, 1982. I took a job with Dow Theory Forecasts, Inc., working on the firm's flagship investment publication by the same name. What's so significant about the week of August 16, 1982, is that it is the week that many market watchers peg as the beginning of the longest bull market in history. On August 17 - my second day on the job, mind you - the Dow Jones Industrial Average rose nearly 39 points. That doesn't sound like much by today's standards. In 1982, however, that was a huge move. Remember - the Dow Jones Industrial Average traded at only 792 on August 16, so that 39-point move the next day amounted to a nearly 5% increase in the Dow Industrials in a single day. That move on August 17 proved to be a launching pad that would send the Dow to levels unimagined at that time.

Now fast-forward to today. I'm still with the same firm (now called Horizon Publishing and still the publisher of Dow Theory Forecasts investment newsletter). But the Dow is a far cry from 792. Indeed, since that day in August of 1982, the Dow Jones Industrial Average has increased more than twelve fold to approach the 10,000 milestone. To put the magnitude of that 17-year move in the Dow in perspective, you need to understand what the Dow did prior to 1982. From the day the Dow Jones Industrial Average was born In 1896 to August 16, 1982 - a period of 86 years - the Dow rose 792 points.

From August 16, 1982, until its recent assault on Dow 10,000 - a period of roughly 17 years - the Dow advanced more than 9200 points. Clearly, the last 17 years have been special times for the Dow.

Charles Dow and His Average The Dow Jones Industrial Average was the brainchild of Charles Dow, the founder and first editor of The Wall Street Journal. The genesis of the Dow was Charles Dow's work explaining price fluctuations in the stock market. Dow's examination of the market pointed to an overall market trend.

Individual stocks may show divergent price movements, but the great body of stocks moves more or less in unison. To measure the movement of the overall market trend, in 1896 Charles Dow devised a market index - the Dow Jones Industrial Average. This index consisted of 12 industrial stocks (only General Electric still remains today from the original 12 Dow Industrials stocks). Today, the Dow Industrial Average is comprised of the 30 stocks.

Keep in mind that when Charles Dow developed his average more than 100 years ago, the fastest computer was a brain and pencil. Thus, the easiest way to construct and track the index was to just add up the prices of the stocks each day. That is how the average is still computed today. To determine the Dow, the closing prices of the 30 components are added together and divided by a divisor. The divisor is adjusted to reflect stock splits, spin-offs, and other capitalization changes.

It's important to understand that the Dow Industrial Average is price-weighted. In other words, higher-priced Dow stocks carry greater weight in the index than lower-priced stocks. That the Dow Industrial Average is price-weighted is a bone of contention with many market watchers who prefer indexes that are weighted by market capitalizations, such as the S&P 500. (A company's market capitalization is the number of outstanding shares times the stock price.) Surprisingly, despite being price-weighted, the Dow Industrials generally track quite closely with indexes consisting of many more stocks and computed based on market capitalizations.

A couple of quirks about the Dow are worth noting. First, because higher-priced stocks carry greater weight in the index, stock splits among Dow components are significant events. That's because a stock split reduces that stock's clout in the Dow. For that reason, it seems that Dow components are a bit slower to split their shares than other issues. In 1998, for example, only one Dow stock - Walt Disney - split. This year, however, has been rather atypical in that six Dow components - ATT&T, Alcoa, IBM, McDonald's, Merck & Co., and Wal-Mart Stores, have either split or announced splits.

Oddly, a bevy of splits among Dow components, especially those that have been doing well, may serve to hamper future gains of the Dow since the average's best stocks now carry less impact.

Another quirk is that the divisor, because it is less than 1.0, is in effect a multiplier. In other words, with every adjustment in the divisor, the price movements of the Dow become more exaggerated. For example, if each Dow Industrial stock rises one point in a day, the total gain in the index is 133.20 points (30 divided by the divisor, which is 0.2252). Should the divisor drop, say, to 0.2000, a one-point move in each of the Dow components would translate to a 150-point advance in the Dow. Given the drop in the divisor over the last five years, it's not surprising that the Dow Industrials have seen a significant increase in the number of 100-point days to the upside and downside.

Dow Still Relevant Today

A common criticism of the Dow today is its relevancy. Many market watchers believe an average that has just 30 components cannot represent the entire stock market. Certainly, if you own a lot of small- or mid-cap stocks or international stocks, the Dow's performance in recent years would have had very little correlation with your own portfolio. However, the Dow still holds an important place in the lexicon of investors. Indeed, the Dow is still synonymous with "the market" as far as media coverage of Wall Street goes. As for being a barometer of economic activity, the Dow certainly is relevant. Indeed, the Dow's march to 10,000 coincides with perhaps the longest economic expansion in U.S. history. The Dow may not be perfect, but it still matters.