- John Burr Williams
name = John Burr Williams
birth_date = 1899
death_date = 1989
University of Wisconsin-MadisonPrivate portfolio management
known_for = Intrinsic value
Fundamental analysisof stock prices Discounted cash flow valuation Gordon model
John Burr Williams (1899 - 1989), one of the first
economists to view stock prices as determined by “intrinsic value”, is recognised as a founder and developer of fundamental analysis[http://cepa.newschool.edu/het/schools/finance.htm#williams] . He is best known for his 1938 text " The Theory of Investment Value", based on his Ph.D. thesis, which was amongst the first to articulate the theoryof Discounted Cash Flow(DCF) based valuation, and in particular, dividendbased valuation [http://www.finance-and-physics.org/Library/Articles3/scienceandfinance/science.htm] .
mathematicsand chemistryat Harvard University, and enrolled at Harvard Business Schoolin 1923. After graduating, he worked as a security analyst, where he realised that "how to estimate the fair valuewas a puzzle indeed... To be a good investment analyst, one needs to be an expert economistalso. [http://www.numeraire.com/theory.htm] " In 1932 he enrolled at Harvard for a Ph.D.in economics; for his thesis, Joseph Schumpetersuggested the question of the intrinsic valueof a common stock, for which Williams' personal experience and background would serve him in good stead. He received his doctorate in 1940.
Williams sent "The Theory of Investment Value" for publication before he had won faculty approval for his doctorate. The work discusses Williams' general theory, as well as providing over 20 specific
mathematical models; it also contains a second section devoted to case studies. Various publishers refused the work since it contained algebraic symbols, and Harvard University Presspublished "The Theory of Investment Value" in 1938, only after Williams had agreed to pay part of the printing cost. The work has been influential since its publication, and is described as an "insufficiently appreciated classic" [http://www.in-the-money.com/artandpap/I%20Present%20Value.doc] .
From 1927 until his death, Williams worked in the management of private investment portfolios and
security analysis. He taught economics and investment analysis as a visiting professorat the University of Wisconsin-Madison; he also wrote many articles for economic journals [http://query.nytimes.com/gst/fullpage.html?res=950DE3DA173FF93AA2575AC0A96F948260] .
Williams was among the first to challenge the "
casino" view that economists held of financial marketsand asset pricing- where prices are determined largely by expectations and counter-expectations of capital gains[http://cepa.newschool.edu/het/schools/finance.htm] (see Keynesian beauty contest). He argued that financial markets are, instead, " markets", properly speaking, and that prices should therefore reflect an asset's intrinsic value [http://cepa.newschool.edu/het/schools/finance.htm] . ("Theory of Investment Value" opens with: "Separate and distinct things not to be confused, as every thoughtful investor knows, are real worth and market price...".) In so doing, he changed the focus from the time series of the market to the underlying components of asset value. Rather than forecasting stock prices directly, Williams emphasized future corporate earnings and dividends [http://roundtable.informs.org/public-access/min061a.htm] .
Developing this idea, Williams proposed that the value of an asset should be calculated using “evaluation by the rule of present worth”. Thus, for a
common stock, the intrinsic, long-term worth is the present valueof its future net cash flows - in the form of dividenddistributions and selling price [http://www.numeraire.com/books0.htm#Williams] . Under conditions of "certainty" [http://www.in-the-money.com/artandpap/I%20Present%20Value.doc] [http://www.ulb.ac.be/cours/solvay/farber/PhD/1.2%20%20PhD%202004-2005%2001.ppt] , the value of a stock is, therefore, the discounted value of all its future dividends (see Gordon model).
While Williams did not originate the idea of
present value[http://www.in-the-money.com/artandpap/I%20Present%20Value.doc] , he substantiated the concept of discounted cash flow valuation and is generally regarded as having developed the basis for the dividend discount model(DDM) [http://www.cfainstitute.org/cfaprog/university/pdf/EquityPromo.pdf] , [http://www.finance-and-physics.org/Library/Articles3/scienceandfinance/science.htm] . Through his approach to modelling and forecasting cash flows - which he called “algebraic budgeting” - Williams was also a pioneer of the "pro forma" modeling of financial statements [http://roundtable.informs.org/public-access/min061a.htm] . Here, Williams ("Theory", ch. 7) provides an early discussion of industry lifecycle. Today, “evaluation by the rule of present worth”, applied in conjunction with an asset appropriate discount rate — usually derived using the capital asset pricing modelof modern portfolio theory( Harry Markowitzand William Sharpe), or the arbitrage pricing theory(Stephen Ross) — is probably the most widely used stock valuationmethod amongst institutional investors [http://www.investopedia.com/articles/03/011403.asp] ; see List of valuation topics.
Williams also anticipated the
Modigliani-Miller theorem[http://www.in-the-money.com/artandpap/II%20Modigliani-Miller%20Theorem.doc] . In presenting the "Law of the Conservation of Investment Value" ("Theory", pg. 72), he argued that since the value of an enterprise is the "present worth" of all its future distributions - whether interestor dividends - it "in no wise depends on what the company’s capitalization is". Modigliani and Miller show that Williams, however, had not actually proved this law, as he had not made it clear how an arbitrageopportunity would arise if his Law were to fail.
*"The Theory of Investment Value". Harvard University Press 1938; 1997 reprint, Fraser Publishing. ISBN 0-87034-126-X
*"International trade under flexible exchange rates". 1954
*"Interest, Growth & Inflation" 1964; 1998 reprint, Fraser Publishing. ISBN 0-87034-131-6
Intrinsic theory of value
External links and references
John Burr Williams
* [http://store.fraserpublishing.com/thinva.html Theory of Investment Value] , fraserpublishing.com
* [http://www.numeraire.com/theory.htm John Burr Williams, The Theory of Investment Value] , numeraire.com
* [http://query.nytimes.com/gst/fullpage.html?res=950DE3DA173FF93AA2575AC0A96F948260 Obituary] ,
* [http://beginnersinvest.about.com/b/2007/12/13/john-burr-williams-on-dividends.htm John Burr Williams on dividends] , beginnersinvest,
* [http://findarticles.com/p/articles/mi_m1094/is_n2_v27/ai_12255972/print "Capital Ideas: The Improbable Origins of Modern Wall Street"] ,
Peter L. Bernstein. Free Press 1993. ISBN 0-02-903012-9
* [http://cepa.newschool.edu/het/schools/finance.htm Finance Theory] , The History of Economic Thought Website,
The New School
* [http://roundtable.informs.org/public-access/min061a.htm A Short History of Investment Forecasting] , Prof. Michael Phillips,
California State University, Northridge
* [http://www.in-the-money.com/artandpap/I%20Present%20Value.doc Great Moments in Financial Economics I] , [http://www.in-the-money.com/artandpap/II%20Modigliani-Miller%20Theorem.doc II] , Prof.
Mark Rubinstein, Haas School of Business
* [http://www.finance-and-physics.org/Library/Articles3/scienceandfinance/science.htm The Scientific Evolution of Finance] , Prof. Don Chance,
Louisiana State University; Prof. Pamela Peterson James Madison University
* [http://www.rotman.utoronto.ca/icpm/The%20Search%20for%20Intrinsic%20Value_Eric%20Kirzner.ppt#335 Selected Moments in the History of Discounted Present Value] , Prof. Eric Kirzner
Rotman School of Management
* [http://www.moneychimp.com/articles/valuation/dividend_discount.htm Dividend Discount Model] , moneychimp.com
* [http://www.capital-flow-analysis.com/investment-theory/discounted-cash-flow.html Stock Valuation using John Burr Williams Formula] , capital-flow-analysis.com
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