John Burr Williams | |
|---|---|
| Died | September 15, 1989(1989-09-15) (aged 88) |
| Academic background | |
| Alma mater | Harvard University |
| Influences | Joseph Schumpeter |
| Academic work | |
| Discipline | Finance |
| Institutions | University of Wisconsin–Madison |
| Notable ideas | Intrinsic value Fundamental analysis of stock prices Discounted cash flow valuation Gordon model |
John Burr Williams (November 27, 1900 – September 15, 1989) was an Americaneconomist, recognized as an important figure in the field offundamental analysis, and for his analysis of stock prices as reflecting their "intrinsic value".[1]
He is best known for his 1938 textThe Theory of Investment Value, based on his PhD thesis, in which he articulated the theory ofdiscounted cash flow (DCF) based valuation, and in particular,dividend based valuation.
Williams studiedmathematics andchemistry atHarvard University, and enrolled atHarvard Business School in 1923. After graduating, he worked as asecurity analyst, where he realised that "how to estimate thefair value was a puzzle indeed... To be a good investment analyst, one needs to be an experteconomist also."[2] In 1932 he enrolled at Harvard for aPhD ineconomics, with the hopes of learning what had caused theWall Street crash of 1929 and the subsequenteconomic depression of the 1930s.[3] For his thesis,Joseph Schumpeter suggested the question of theintrinsic value of acommon stock, for which Williams' personal experience and background would serve him in good stead. He received his doctorate in 1940.
Williams sentThe 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 specificmathematical models; it also contains a second section devoted to case studies. Various publishers refused the work since it containedalgebraic symbols, andHarvard University Press publishedThe 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 inthe management of privateinvestment portfolios andsecurity analysis. He taught economics and investment analysis as avisiting professor at theUniversity 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.
Williams was among the first to challenge the "casino" view that economists held offinancial markets andasset pricing—where prices are determined largely by expectations and counter-expectations ofcapital gains[7] (seeKeynesian beauty contest). He argued that financial markets are, instead, "markets", properly speaking, and that prices should therefore reflect an asset'sintrinsic 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 acommon stock, the intrinsic, long-term worth is thepresent value of its future net cash flows—in the form ofdividend distributions and selling price.[9] Under conditions ofcertainty,[5] the value of a stock is, therefore, the discounted value of all its future dividends; seeGordon model.
While Williams did not originate the idea ofpresent value,[5] he substantiated the concept ofdiscounted cash flow valuation and is generally regarded as having developed the basis for thedividend discount model (DDM).[10][11]Through his approach to modelling and forecastingcash flows—which he called "algebraic budgeting"—Williams was also a pioneer of thepro forma modeling offinancial 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 anasset appropriate discount rate – usually derived using thecapital asset pricing model (Harry Markowitz andWilliam F. Sharpe), or thearbitrage pricing theory (Stephen Ross) – is probably the most widely usedstock valuation method amongstinstitutional investors;[12] seeList of valuation topics. (Nicholas Molodovsky, the former editor of theFinancial 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 theModigliani–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 – whetherinterest ordividends – it "in no [way] depends on what the company's capitalization is".Modigliani andMiller show that Williams, however, had not actuallyproved this law, as he had not made it clear how anarbitrage opportunity would arise if his Law were to fail.
John Burr Williams
In context
