# John Burr Williams : biography

**John Burr Williams** (1900 – September 15, 1989), one of the first economists to view stock prices as determined by “intrinsic value”, is recognised as a founder and developer of fundamental analysis.http://cepa.newschool.edu/het/schools/finance.htm#williams 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.

## 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 http://cepa.newschool.edu/het/schools/finance.htm (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.http://cepa.newschool.edu/het/schools/finance.htm (*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.http://roundtable.informs.org/public-access/min061a.htm

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.http://www.numeraire.com/books0.htm#Williams Under conditions of *certainty*,http://www.in-the-money.com/artandpap/I%20Present%20Value.doc, http://www.ulb.ac.be/cours/solvay/farber/PhD/1.2%20%20PhD%202004-2005%2001.ppt 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,http://www.in-the-money.com/artandpap/I%20Present%20Value.doc he substantiated the concept of discounted cash flow valuation and is generally regarded as having developed the basis for the dividend discount model (DDM).http://www.cfainstitute.org/cfaprog/university/pdf/EquityPromo.pdf, http://www.finance-and-physics.org/Library/Articles3/scienceandfinance/science.htm 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. 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 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;http://www.investopedia.com/articles/03/011403.asp 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.*Dreman D. (1979). *Contrarian Investment Strategy: The Psychology of Stock-Market Success* p. 37.)*

Williams also anticipated the Modigliani-Miller theorem.http://www.in-the-money.com/artandpap/II%20Modigliani-Miller%20Theorem.doc 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.