John Burr Williams (November 27, 1900 – September 15, 1989) was an American

economist An economist is a professional and practitioner in the social science discipline of economics. The individual may also study, develop, and apply theories and concepts from economics and write about economic policy. Within this field there are ...

, recognized as an important figure in the field of

fundamental analysis Fundamental analysis, in accounting and finance, is the analysis of a business's financial statements (usually to analyze the business's assets, liabilities, and earnings); health; and competitors and markets. It also considers the overall sta ...

, and for his analysis of stock prices as reflecting their " intrinsic value". 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 A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a portion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-i ...

based valuation.

Biography

Williams studied mathematics and chemistry at

Harvard University Harvard University is a private Ivy League research university in Cambridge, Massachusetts. Founded in 1636 as Harvard College and named for its first benefactor, the Puritan clergyman John Harvard, it is the oldest institution of high ...

, 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 In accounting and in most schools of economic thought, fair value is a rational and unbiased estimate of the potential market price of a good, service, or asset. The derivation takes into account such objective factors as the costs associated wi ...

was a puzzle indeed... To be a good investment analyst, one needs to be an expert

also." In 1932 he enrolled at Harvard for a PhD in

economics Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyzes ...

, with the hopes of learning what had caused the

Wall Street Crash of 1929 The Wall Street Crash of 1929, also known as the Great Crash, was a major American stock market crash that occurred in the autumn of 1929. It started in September and ended late in October, when share prices on the New York Stock Exchange coll ...

and the subsequent economic depression of the 1930s. For his thesis,

Joseph Schumpeter Joseph Alois Schumpeter (; February 8, 1883 – January 8, 1950) was an Austrian-born political economist. He served briefly as Finance Minister of German-Austria in 1919. In 1932, he emigrated to the United States to become a professor at H ...

suggested the question of the intrinsic value of a

common stock Common stock is a form of corporate equity ownership, a type of security. The terms voting share and ordinary share are also used frequently outside of the United States. They are known as equity shares or ordinary shares in the UK and other Comm ...

, 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 Harvard University Press (HUP) is a publishing house established on January 13, 1913, as a division of Harvard University, and focused on academic publishing. It is a member of the Association of American University Presses. After the retir ...

published ''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;

Mark Rubinstein Mark Edward Rubinstein (June 8, 1944 – May 9, 2019) was a leading financial economist and financial engineer. He was ''Paul Stephens Professor of Applied Investment Analysis'' at the Haas School of Business of the University of California, Be ...

describes it as an "insufficiently appreciated classic". From 1927 until his death, Williams worked in the management of private investment portfolios and

security analysis Security analysis is the analysis of tradeable financial instruments called securities. It deals with finding the proper value of individual securities (i.e., stocks and bonds). These are usually classified into debt securities, equities, or som ...

. He taught economics and investment analysis as a

visiting professor In academia, a visiting scholar, visiting researcher, visiting fellow, visiting lecturer, or visiting professor is a scholar from an institution who visits a host university to teach, lecture, or perform research on a topic for which the visitor ...

at the

University of Wisconsin–Madison A university () is an institution of higher (or tertiary) education and research which awards academic degrees in several academic disciplines. Universities typically offer both undergraduate and postgraduate programs. In the United Stat ...

; he also wrote many articles for economic journals. Today, his privately held investment management company
Burr and Company, LLC
is run by his grandson, John Borden Williams.

Theory

Williams was among the first to challenge the "

casino A casino is a facility for certain types of gambling. Casinos are often built near or combined with hotels, resorts, restaurants, retail shopping, cruise ships, and other tourist attractions. Some casinos are also known for hosting live entertai ...

" view that economists held of

financial markets A financial market is a market in which people trade financial securities and derivatives at low transaction costs. Some of the securities include stocks and bonds, raw materials and precious metals, which are known in the financial ma ...

and asset pricing—where prices are determined largely by expectations and counter-expectations of

capital gains Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares ...

(see

Keynesian beauty contest A Keynesian beauty contest is a concept developed by John Maynard Keynes and introduced in Chapter 12 of his work, '' The General Theory of Employment, Interest and Money'' (1936), to explain price fluctuations in equity markets. It describes a be ...

). He argued that financial markets are, instead, "

market Market is a term used to describe concepts such as: *Market (economics), system in which parties engage in transactions according to supply and demand *Market economy *Marketplace, a physical marketplace or public market Geography *Märket, an ...

s", properly speaking, and that prices should therefore reflect an asset's intrinsic value. (''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. 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

, the intrinsic, long-term worth is the

present value In economics and finance, present value (PV), also known as present discounted value, is the value of an expected income stream determined as of the date of valuation. The present value is usually less than the future value because money has inte ...

of its future net cash flows—in the form of

distributions and selling price. Under conditions of ''

certainty Certainty (also known as epistemic certainty or objective certainty) is the epistemic property of beliefs which a person has no rational grounds for doubting. One standard way of defining epistemic certainty is that a belief is certain if and o ...

'', the value of a stock is, therefore, the discounted value of all its future dividends; see

Gordon model In finance and investing, the dividend discount model (DDM) is a method of valuing the price of a company's stock based on the fact that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In ...

. While Williams did not originate the idea of

, he substantiated the concept of discounted cash flow valuation and is generally regarded as having developed the basis for the

dividend discount model In finance and investing, the dividend discount model (DDM) is a method of valuing the price of a company's stock based on the fact that its stock is worth the sum of all of its future dividend payments, discounted back to their present value. In ot ...

(DDM). 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 statement Financial statements (or financial reports) are formal records of the financial activities and position of a business, person, or other entity. Relevant financial information is presented in a structured manner and in a form which is easy to un ...

s. 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 Harry Max Markowitz (born August 24, 1927) is an American economist who received the 1989 John von Neumann Theory Prize and the 1990 Nobel Memorial Prize in Economic Sciences. Markowitz is a professor of finance at the Rady School of Management ...

and

William F. Sharpe William Forsyth Sharpe (born June 16, 1934) is an American economist. He is the STANCO 25 Professor of Finance, Emeritus at Stanford University's Graduate School of Business, and the winner of the 1990 Nobel Memorial Prize in Economic Sciences. ...

), or the

arbitrage pricing theory In finance, arbitrage pricing theory (APT) is a multi-factor model for asset pricing which relates various macro-economic (systematic) risk variables to the pricing of financial assets. Proposed by economist Stephen Ross in 1976, it is widely beli ...

( Stephen Ross) — is probably the most widely used

stock valuation In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit fr ...

method amongst institutional investors; see List of valuation topics. (Nicholas Molodovsky, the former editor of the ''

Financial Analysts Journal The ''Financial Analysts Journal'' is a quarterly peer-reviewed academic journal covering investment management, published by Routledge on behalf of the CFA Institute. It was established in 1945 and , the editor-in-chief is William N. Goetzman ...

'', was the first to substitute "dividends" in Williams' formula for: earnings times the percentage of earnings paid out in dividends.) Williams also anticipated the

Modigliani–Miller theorem The Modigliani–Miller theorem (of Franco Modigliani, Merton Miller) is an influential element of economic theory; it forms the basis for modern thinking on capital structure. The basic theorem states that in the absence of taxes, bankruptcy c ...

. 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 In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

s — it "in no aydepends on what the company's capitalization is". Modigliani and

Miller A miller is a person who operates a mill, a machine to grind a grain (for example corn or wheat) to make flour. Milling is among the oldest of human occupations. "Miller", "Milne" and other variants are common surnames, as are their equivalent ...

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

* ''The Theory of Investment Value''. Harvard University Press 1938; 1997 reprint, Fraser Publishing. * ''International trade under flexible exchange rates''. 1954 * ''Interest, Growth and Inflation'' 1964; 1998 reprint, Fraser Publishing.

References

External links

John Burr Williams
Theory of Investment Value
fraserpublishing.com

numeraire.com

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John Burr Williams on dividends
beginnersinvest,

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In context
''Capital Ideas: The Improbable Origins of Modern Wall Street''
Peter L. Bernstein. Free Press 1993. *. Prof. G.L. Fonseca, New School for Social Research
A Short History of Investment Forecasting
Prof. Michael Phillips, California State University, Northridge * , . Prof.

Haas School of Business The Walter A. Haas School of Business, also known as Berkeley Haas, is the business school of the University of California, Berkeley, a public research university in Berkeley, California. It was the first business school at a public university i ...

* . Prof. Don Chance,

Louisiana State University Louisiana State University (officially Louisiana State University and Agricultural and Mechanical College, commonly referred to as LSU) is a public land-grant research university in Baton Rouge, Louisiana. The university was founded in 1860 nea ...

, Prof. Pamela Peterson

James Madison University James Madison University (JMU, Madison, or James Madison) is a public research university in Harrisonburg, Virginia. Founded in 1908 as the State Normal and Industrial School for Women at Harrisonburg, the institution was renamed Madison Coll ...

Selected Moments in the History of Discounted Present Value
Prof. Eric Kirzner

Rotman School of Management The Joseph L. Rotman School of Management (commonly known as the Rotman School of Management, the Rotman School or just Rotman) is the University of Toronto's graduate business school, located in Downtown Toronto. The University of Toronto has b ...

{{DEFAULTSORT:Williams, John Burr 1900 births 1989 deaths American economics writers American finance and investment writers American money managers Financial economists Corporate finance theorists 20th-century American economists Harvard Business School alumni 20th-century American non-fiction writers 20th-century American businesspeople 20th-century American male writers American male non-fiction writers

Biography

Theory

Publications

See also

References

External links