NationMaster - Encyclopedia: John Burr Williams

John Burr Willams (1899 - 1989) was a founder and developer of the "fundamentalist theory of asset valuation" [1], and was one of the first economists to view stock prices as determined by “intrinsic value”. 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 theory of Discounted Cash Flow (DCF) based valuation, and in particular, dividend based valuation. 1899 (MDCCCXCIX) was a common year starting on Sunday (see link for calendar). ... 1989 (MCMLXXXIX) was a common year starting on Sunday of the Gregorian calendar. ... Fundamental analysis is a security or stock valuation method that uses financial and economic analysis to predict the movement of security prices such as bond prices, but more commonly stock prices. ... Theory has a number of distinct meanings in different fields of knowledge, depending on the context and their methodologies. ... In finance, a discounted cash flow or DCF is the value of a cash flow adjusted for the time value of money and is a form of present value analysis. ... A dividend is the distribution or sharing of parts of profits to a companys shareholders. ...

Biography

Willams studied mathematics and chemistry as an undergraduate at Harvard University. After graduating in 1923, he went to Harvard Business School. He then took a job as a security analyst. There, he realised that "[h]ow to estimate the fair value was a puzzle indeed... To be a good investment analyst, one needs to be an expert economist also". Euclid, a famous Greek mathematician known as the father of geometry, is shown here in detail from The School of Athens by Raphael. ... Chemistry (derived from alchemy) is the science of matter at or near the atomic scale. ... Harvard University campus (old map) Harvard University (incorporated as The President and Fellows of Harvard College) is a private university in Cambridge, Massachusetts. ... 1923 (MCMXXIII) was a common year starting on Monday (link will take you to calendar). ... HBS, as seen from across the Charles River. ... A financial analyst (or securities analyst, research analyst, equity analyst) works with financial analysis. ... Definition Fair value, also called fair price, is a concept used in finance and economics. ... An economist is an individual who studies, develops, and applies theories and concepts from economics, and writes about economic policy. ...

In 1932 he enrolled at Harvard for a Ph.D. in economics. For his thesis, Joseph Schumpeter suggested that Williams study 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. 1932 (MCMXXXII) was a leap year starting on Friday (the link will take you to a full 1932 calendar). ... Doctor of Philosophy (Ph. ... Buyers bargain for good prices while sellers put forth their best front in Chichicastenango Market, Guatemala. ... Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 â€“ January 8, 1950) was an Austrian economist (though not an Austrian economist in the sense of being a member of the Austrian School of economics) and a giant in the history of economic thought. ... Intrinsic value can refer to: Intrinsic value (finance), of an option or stock. ... Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ... 1940 (MCMXL) was a leap year starting on Monday (the link is to a full 1940 calendar). ...

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; Harvard University Press published The Theory of Investment Value in 1938, only after Williams had promised to pay part of the printing cost. The work has been influential since its publication, and is described as an "insufficiently appreciated classic" [2]. A mathematical model is an abstract model that uses mathematical language to describe the behaviour of a system. ... The Harvard University Press is a publishing house, a division of Harvard University, that is highly respected in academic publishing. ... 1938 (MCMXXXVIII) was a common year starting on Saturday (link will take you to calendar). ...

In his last five decades, 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. He also wrote many articles for economic journals. In finance, a portfolio is a collection of investments held by an institution or a private individual. ... A professor is a senior teacher and researcher, usually in a college or university. ... The University of Wisconsinâ€“Madison is a public university located in Madison, Wisconsin. ...

Theory

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 [3]. He argued that financial markets are, instead, "markets", properly speaking, and that prices should therefore reflect an asset's "intrinsic value" [4]. 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 [5]. The Trump Taj Mahal in Atlantic City, New Jersey. ... In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... Valuation is the process of estimating the value of an asset or liability. ... In finance, a capital gain is profit that is realized from the sale of an asset that was previously purchased at a lower price. ... Chichicastenango, Guatemala traditional market Market stall in internally displaced persons camp in Kitgum, northern Uganda Mercado dos Lavradores, Funchal (Madeira Islands) A market is a mechanism which allows people to trade, normally governed by the theory of supply and demand. ... Intrinsic value can refer to: Intrinsic value (finance), of an option or stock. ...

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 [6]. Under conditions of certainty, the value of a stock is, therefore, the discounted value of all its future dividends [7]. Common stock, also referred to as common shares, are, as the name implies, the most usual and commonly held form of stock in a corporation. ... The present value of a future cash flow is the nominal amount of money to change hands at some future date, discounted to account for the time value of money. ... A dividend is the distribution or sharing of parts of profits to a companys shareholders. ...

While Williams did not originate the idea of present value [8], he substantiated the concept of discounted cash flow valuation and is generally regarded as having developed the basis for the dividend discount model (DDM) [9]. Through what he called “algebraic budgeting”, Williams was also a pioneer of the pro forma modeling of financial statements [10]. The present value of a future cash flow is the nominal amount of money to change hands at some future date, discounted to account for the time value of money. ... A method for determining the current value of a company using future cash flows adjusted for time value. ... Many companies report pro forma earnings, in addition to normal earnings calculated under the Generally Accepted Accounting Principles (GAAP), in their quarterly and yearly financial reports. ... Financial statements (or financial reports) are a record of a business financial flows and levels. ...

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 of modern portfolio theory (Harry Markowitz and William Sharpe), or the arbitrage pricing theory (Stephen Ross) — is probably the most widely used stock valuation method amongst institutional investors [11]; see List of valuation topics. The capital asset pricing model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well-diversified portfolio, given that assets... The capital asset pricing model (CAPM) is used in finance to determine a theoretically appropriate required rate of return (and thus the price if expected cash flows can be estimated) of an asset, if that asset is to be added to an already well-diversified portfolio, given that assets... Capital Market Line Modern portfolio theory (MPT) proposes how rational investors will use diversification to optimize their portfolios, and how an asset should be priced given its risk relative to the market as a whole. ... Harry Max Markowitz (born August 24, 1927) is an influential economist at City University of New York and winner of the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1990. ... William Forsyth Sharpe (born June 16, 1934) is Professor of Finance, Emeritus at Stanford Universitys Graduate School of Business and the winner of the 1990 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel. ... Arbitrage pricing theory (APT) holds that the expected return of a financial asset can be modelled as a linear function of various macro-economic factors or theoretical market indices, where sensitivity to changes in each factor is represented by a factor specific beta coefficient. ... Stephen A. Ross is the Franco Modigliani Professor of Finance and Economics at the MIT Sloan School of Management. ... It has been suggested that this article or section be merged into Fundamental analysis. ... What follows is a list of over 250 Wikipedia articles on finance topics. ...

Williams also anticipated the Modigliani-Miller theorem [12]. 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 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 arbitrage opportunity would arise if his Law were to fail. The Modigliani-Miller theorem (of Franco Modigliani, Merton Miller) forms the basis for modern thinking on capital structure. ... In finance, interest has three general definitions. ... A dividend is the distribution or sharing of parts of profits to a companys shareholders. ... Franco Modigliani (June 18, 1918 – September 25, 2003) was an Italian-American economist at the MIT Sloan School of Management, and winner of The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1985. ... Merton Howard Miller (May 16, 1923 - June 3, 2000) won the Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1990, along with Harry Markowitz and William Sharpe. ... Look up proof in Wiktionary, the free dictionary. ... In economics, arbitrage is the practice of taking advantage of a state of imbalance between two or more markets: a combination of matching deals are struck that capitalize upon the imbalance, the profit being the difference between the market prices. ...

Publications

Contents

Biography

Theory

Publications

See also

External links and references