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John Burr Williams

January 01, 1970

For other people named John Williams, see John Williams (disambiguation).

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]

John Burr Williams
DiedSeptember 15, 1989(1989-09-15) (aged 88)
Weston, Massachusetts
NationalityAmerican
Academic career
InstitutionUniversity of Wisconsin–Madison
FieldFinance
Alma materHarvard University
InfluencesJoseph Schumpeter
ContributionsIntrinsic value
Fundamental analysis of stock prices
Discounted cash flow valuation
Gordon model

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 edit

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 edit

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 edit

  • 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 edit

References edit

  1. ^ . cepa.newschool.edu. Archived from the original on 2006-07-02.
  2. ^ "Value Investing Theory and Practical Models".
  3. ^ "John Burr Williams's Lament | Seeking Alpha".
  4. ^ Graham, Benjamin (April 1939). "Review of The Theory of Investment Value by John Burr Williams". Journal of Political Economy. 47 (2): 276–278. doi:10.1086/255367.
  5. ^ a b c . Archived from the original on 2007-07-13. Retrieved 2007-06-28.
  6. ^ "John Burr Williams, 88, Economist, Dies". The New York Times. 19 September 1989.
  7. ^ a b . Archived from the original on 2006-07-02. Retrieved 2006-06-28.
  8. ^ a b Michael Phillips (2006). (presentation)
  9. ^ "Value Investing Special Books".
  10. ^ John D. Stowe, et. al. (2002).
  11. ^ Don Chance and Pamela Peterson (1997).
  12. ^ [citation needed]
  13. ^ Dreman D. (1979). Contrarian Investment Strategy: The Psychology of Stock-Market Success p. 37.
  14. ^ Mark Rubinstein (2003). . Archived from the original on 2007-06-28. Retrieved 2007-06-28.
  15. ^ Harberger, Arnold C. (1955). "Reviewed work: International Trade Under Flexible Exchange Rates, John Burr Williams". The American Economic Review. 45 (4): 704–705. JSTOR 1811669.

External links edit

John Burr Williams

  • , fraserpublishing.com
  • John Burr Williams, The Theory of Investment Value, numeraire.com
  • Obituary, NY Times
  • John Burr Williams on dividends, beginnersinvest, about.com

In context

January 01, 1970
john, burr, williams, other, people, named, john, williams, john, williams, disambiguation, november, 1900, september, 1989, american, economist, recognized, important, figure, field, fundamental, analysis, analysis, stock, prices, reflecting, their, intrinsic. For other people named John Williams see John Williams disambiguation 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 John Burr WilliamsDiedSeptember 15 1989 1989 09 15 aged 88 Weston MassachusettsNationalityAmericanAcademic careerInstitutionUniversity of Wisconsin MadisonFieldFinanceAlma materHarvard UniversityInfluencesJoseph SchumpeterContributionsIntrinsic valueFundamental analysis of stock pricesDiscounted cash flow valuationGordon model 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 Contents 1 Biography 2 Theory 3 Publications 4 See also 5 References 6 External linksBiography editWilliams 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 editWilliams 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 editThe 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 6See also editBenjamin Graham Warren Buffett Irving Fisher Philip Fisher Value investing Corporate finance Investment and project valuation Financial economics Corporate finance theory Valuation using discounted cash flowsReferences edit Finance cepa newschool edu Archived from the original on 2006 07 02 Value Investing Theory and Practical Models John Burr Williams s Lament Seeking Alpha Graham Benjamin April 1939 Review of The Theory of Investment Value by John Burr Williams Journal of Political Economy 47 2 276 278 doi 10 1086 255367 a b c Great Moments in Financial Economics I Present Value Archived from the original on 2007 07 13 Retrieved 2007 06 28 John Burr Williams 88 Economist Dies The New York Times 19 September 1989 a b Finance Theory New School Archived from the original on 2006 07 02 Retrieved 2006 06 28 a b Michael Phillips 2006 A Short History of Investment Forecasting presentation Value Investing Special Books John D Stowe et al 2002 Analysis of Equity Investments Valuation Don Chance and Pamela Peterson 1997 The Scientific Evolution of Finance citation needed Dreman D 1979 Contrarian Investment Strategy The Psychology of Stock Market Successp 37 Mark Rubinstein 2003 Great Moments in Financial Economics II Modigliani Miller Theorem Archived from the original on 2007 06 28 Retrieved 2007 06 28 Harberger Arnold C 1955 Reviewed work International Trade Under Flexible Exchange Rates John Burr Williams The American Economic Review 45 4 704 705 JSTOR 1811669 External links editJohn Burr Williams Theory of Investment Value fraserpublishing com John Burr Williams The Theory of Investment Value numeraire com Obituary NY Times John Burr Williams on dividends beginnersinvest about com 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 Retrieved from https en wikipedia org w index php title John Burr Williams amp oldid 1163211397, wikipedia, wiki, book, books, library,

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