American economist
John Burr Williams
(November 27, 1900 ? September 15, 1989) was an American
economist
, recognized as an important figure in the field of
fundamental analysis
, and for his analysis of stock prices as reflecting their "
intrinsic value
".
[1]
He is best known for his 1938 text
The Theory of Investment Value
, based on his PhD thesis, in which he articulated the theory of
discounted cash flow
(DCF) based valuation, and in particular,
dividend
based valuation.
Biography
[
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]
Williams studied
mathematics
and
chemistry
at
Harvard University
, and enrolled at
Harvard Business School
in 1923. After graduating, he worked as a
security analyst
, where he realised that "how to estimate the
fair value
was a puzzle indeed... To be a good investment analyst, one needs to be an expert
economist
also."
[2]
In 1932 he enrolled at Harvard for a
PhD
in
economics
, with the hopes of learning what had caused the
Wall Street Crash of 1929
and the subsequent
economic depression of the 1930s
.
[3]
For his thesis,
Joseph Schumpeter
suggested the question of the
intrinsic value
of 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 Press
published
The Theory of Investment Value
in 1938,
[4]
only after Williams had agreed to pay part of the printing cost. The work has been influential since its publication;
Mark Rubinstein
describes it as an "insufficiently appreciated classic".
[5]
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 professor
at the
University of Wisconsin?Madison
; he also wrote many articles for economic journals.
[6]
Today, his privately held investment management company,
Burr and Company, LLC
. is run by his grandson, John Borden Williams.
Theory
[
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]
Williams was among the first to challenge the "
casino
" view that economists held of
financial markets
and
asset pricing
?where prices are determined largely by expectations and counter-expectations of
capital gains
[7]
(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
.
[7]
(
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.
[8]
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 value
of its future net cash flows?in the form of
dividend
distributions and selling price.
[9]
Under conditions of
certainty
,
[5]
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
,
[5]
he substantiated the concept of
discounted cash flow valuation
and is generally regarded as having developed the basis for the
dividend discount model
(DDM).
[10]
[11]
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
.
[8]
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 model
(
Harry Markowitz
and
William F. Sharpe
), or the
arbitrage pricing theory
(
Stephen Ross
) ? is probably the most widely used
stock valuation
method amongst
institutional investors
;
[12]
see
List of valuation topics
. (Nicholas Molodovsky, the former editor of the
Financial Analysts Journal
, was the first to substitute "dividends" in Williams' formula for: earnings times the percentage of earnings paid out in dividends.
[13]
)
Williams also anticipated the
Modigliani?Miller theorem
.
[14]
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
interest
or
dividends
? it "in no [way] 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
arbitrage
opportunity would arise if his Law were to fail.
Publications
[
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]
- 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
[15]
- Interest, Growth and Inflation
1964; 1998 reprint, Fraser Publishing.
ISBN
0-87034-131-6
See also
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]
References
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]
External links
[
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]
John Burr Williams
In context
- Capital Ideas: The Improbable Origins of Modern Wall Street
,
Peter L. Bernstein
. Free Press 1993.
ISBN
0-02-903012-9
- "The Theory of Investment"
. Archived from
the original
on June 21, 2012
. Retrieved
April 8,
2014
.
. Prof. G.L. Fonseca,
New School for Social Research
- A Short History of Investment Forecasting
, Prof. Michael Phillips,
California State University, Northridge
- "Great Moments in Financial Economics I"
. Archived from
the original
on June 28, 2007
. Retrieved
June 29,
2006
.
,
"II"
. Archived from
the original
on June 28, 2007
. Retrieved
June 30,
2006
.
. Prof.
Mark Rubinstein
,
Haas School of Business
- "The Scientific Evolution of Finance"
. Archived from
the original
on February 4, 2003
. Retrieved
July 30,
2007
.
. Prof. Don Chance,
Louisiana State University
, Prof. Pamela Peterson
James Madison University
- Selected Moments in the History of Discounted Present Value
, Prof. Eric Kirzner
Rotman School of Management
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