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, only after Williams had agreed to pay part of the printing cost. The work has been influential since its publication, and is described as an "insufficiently appreciated classic"
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
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 Under conditions of certainty , 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 , he substantiated the concept of discounted cash flow valuation and is generally regarded as having developed the basis for the dividend discount model (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 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 ; see List of valuation topics.
Williams also anticipated the Modigliani-Miller theorem 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.
John Burr Williams
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