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The Theory of Investment Value
Why the book is interesting today is that it still is important and the most authoritative work on how to value financial assets. "Williams combined original theoretical concepts with enlightening and entertaining commentary based on his own experiences in the rough-and-tumble world of investment."
Williams' discovery was to project an estimate that offers intrinsic value and it is called the 'Dividend Discount Model' which is still used today by professional investors on the institutional side of markets.
Williams' discovery was to project an estimate that offers intrinsic value and it is called the 'Dividend Discount Model' which is still used today by professional investors on the institutional side of markets.
650 pages, Paperback
First published June 1, 1938
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April 7, 2019The term "the intelligent investor" was used in the preface in this book. I think there's a good possibility it inspired the naming of Ben's The Intelligent Investor.
There are two absolutely wonderful ideas in this book (even though it takes hundreds of pages for John to get it out).
1. The intrinsic value of a business (or any asset) is the discounted value of the cash that will be taken out of it over the rest of its lifetime.
2. A business which can reinvest its earnings at a satisfactory rate of return ought to do so. A business which cannot reinvest its earnings at a satisfactory rate of return ought not do so.
The idea is that $1 is often worth more in the hands of a good business with a good capital allocator than a bad business with a poor capital allocator.
There are two absolutely wonderful ideas in this book (even though it takes hundreds of pages for John to get it out).
1. The intrinsic value of a business (or any asset) is the discounted value of the cash that will be taken out of it over the rest of its lifetime.
2. A business which can reinvest its earnings at a satisfactory rate of return ought to do so. A business which cannot reinvest its earnings at a satisfactory rate of return ought not do so.
The idea is that $1 is often worth more in the hands of a good business with a good capital allocator than a bad business with a poor capital allocator.
April 10, 2015
Williams puts forth the idea that the true Intrinsic value of a business is its payout of dividends throughout its lifetime discounted back to the present value. Great tool for valuation for those seeking fixed income from securities.
Fun Fact: Williams was one of the first to economically explain the idea of discounting a stream of income to the present value which ultimately came to be known as the discounted cash flow model. originally used to value bonds he was the first to apply it to equities.
Fun Fact: Williams was one of the first to economically explain the idea of discounting a stream of income to the present value which ultimately came to be known as the discounted cash flow model. originally used to value bonds he was the first to apply it to equities.
July 2, 2015
Considering it was first published in 1938, it is a classic that describes how to value the securities by looking at their cash flows.
August 14, 2024
a story on Intrinsic Value being a puzzle for Investors
CBNC story on Buffett
4. You have to discount the future.
To “discount” the numbers back, as Buffett remarked, is the third question that proceeds from Aesop’s original “mathematics of investment”:
What’s the right discount rate?
That question is the key to evaluating the value of a company’s cash generation, and it circles back around to Buffett’s example of an investor expecting a farm to generate a 7 percent return, and basing a purchase decision on that return assumption and the current business price. There are essentially two components to the discount rate-based risk modeling: the concept of time value of money, and the additional risk premium for the investment.
The time value of money is typically accounted for using the long-term government rate. It is the way investors contend with the fact that the value of a dollar today will be lower in the future. The additional risk premium, because an investor buying a stock is taking risk versus the purchase of a bond, can be modeled by using a higher, customized discount rate, or by building what Benjamin Graham called a “margin of safety” directly into the cash flows (a concept we will come back to in the next section). For example, an investor believes there is a 90 percent probability of receiving the cash flow, they multiply the cash flow by 90 percent.
In the 1992 Berkshire Hathaway annual shareholder letter, Buffett turned to another writer, and a five-decade old business text, to explain stock value better than he thought he could himself. The text was “The Theory of Investment Value” written by John Burr Williams, a prominent figure in the history of fundamental analysis.
“The value of any stock, bond or business today is determined by the cash inflows and outflows — discounted at an appropriate interest rate — that can be expected to occur during the remaining life of the asset.”
The “remaining life of the asset” makes it difficult to specify an exact period of time for this calculation, though in an example laid out by a Berkshire Hathaway shareholder to Buffett in an exchange back in 1999 (and which we will come to later) Buffett did say that the shareholder’s model for intrinsic value looking out 20 years into the future was stated well.
Buffett went on to explain a few key differences between a discount rate for bonds and stocks. Bonds have a coupon and maturity rate that define its future cash flows. Stocks, on the other hand, are subject to cash flow estimates that even the best analysts can mess up, and, in addition, the performance of company management.
Buffett has been clear about the discount rate he prefers to use, saying at the 1996 shareholder meeting that he doesn’t think he can be very good at predicting interest rates and so he thinks in terms of “the long-term government rate,” as long as the business being considered first meets another requirement: it is one that the investor can understand. A higher discount rate is justified for riskier businesses, he said. Pertinent to the current market environment, he added: “And there may be times, when in a very — because we don’t think we’re any good at predicting interest rates, but probably in times of very — what would seem like very low rates — we might use a little higher rate.”
But this doesn’t mean Buffett is not also factoring a risk premium into his models. A “margin of safety” is likely built directly into his models so the additional risk premium is not required as a separate discount modeling rate.
CBNC story on Buffett
4. You have to discount the future.
To “discount” the numbers back, as Buffett remarked, is the third question that proceeds from Aesop’s original “mathematics of investment”:
What’s the right discount rate?
That question is the key to evaluating the value of a company’s cash generation, and it circles back around to Buffett’s example of an investor expecting a farm to generate a 7 percent return, and basing a purchase decision on that return assumption and the current business price. There are essentially two components to the discount rate-based risk modeling: the concept of time value of money, and the additional risk premium for the investment.
The time value of money is typically accounted for using the long-term government rate. It is the way investors contend with the fact that the value of a dollar today will be lower in the future. The additional risk premium, because an investor buying a stock is taking risk versus the purchase of a bond, can be modeled by using a higher, customized discount rate, or by building what Benjamin Graham called a “margin of safety” directly into the cash flows (a concept we will come back to in the next section). For example, an investor believes there is a 90 percent probability of receiving the cash flow, they multiply the cash flow by 90 percent.
In the 1992 Berkshire Hathaway annual shareholder letter, Buffett turned to another writer, and a five-decade old business text, to explain stock value better than he thought he could himself. The text was “The Theory of Investment Value” written by John Burr Williams, a prominent figure in the history of fundamental analysis.
“The value of any stock, bond or business today is determined by the cash inflows and outflows — discounted at an appropriate interest rate — that can be expected to occur during the remaining life of the asset.”
The “remaining life of the asset” makes it difficult to specify an exact period of time for this calculation, though in an example laid out by a Berkshire Hathaway shareholder to Buffett in an exchange back in 1999 (and which we will come to later) Buffett did say that the shareholder’s model for intrinsic value looking out 20 years into the future was stated well.
Buffett went on to explain a few key differences between a discount rate for bonds and stocks. Bonds have a coupon and maturity rate that define its future cash flows. Stocks, on the other hand, are subject to cash flow estimates that even the best analysts can mess up, and, in addition, the performance of company management.
Buffett has been clear about the discount rate he prefers to use, saying at the 1996 shareholder meeting that he doesn’t think he can be very good at predicting interest rates and so he thinks in terms of “the long-term government rate,” as long as the business being considered first meets another requirement: it is one that the investor can understand. A higher discount rate is justified for riskier businesses, he said. Pertinent to the current market environment, he added: “And there may be times, when in a very — because we don’t think we’re any good at predicting interest rates, but probably in times of very — what would seem like very low rates — we might use a little higher rate.”
But this doesn’t mean Buffett is not also factoring a risk premium into his models. A “margin of safety” is likely built directly into his models so the additional risk premium is not required as a separate discount modeling rate.
Want to read
January 16, 2014Is ok
Want to read
July 21, 2016hi
January 1, 2018
I think this is pretty much the only book one needs on how to value an investment. Nothing I've seen published after that has improved too much on it, and many writing actually regressed. It's a long read and there is some math, but the basic concepts are easy to grasp:
1. An investment is worth the discounted value of the dividends it delivers until the end of time.
2. The discount rate is not based on "equity risk premium", but either a desired return or the risk-free alternative (depending on the purpose of valuation).
3. The prediction of earnings and dividends is based on analytical approach of breaking down and studying the business.
4. It's enormously important what a company will do with its earnings and whether they choose to retain them or pay them out as dividends. And it all depends on the return a business can get on a dollar of retained earnings.
1. An investment is worth the discounted value of the dividends it delivers until the end of time.
2. The discount rate is not based on "equity risk premium", but either a desired return or the risk-free alternative (depending on the purpose of valuation).
3. The prediction of earnings and dividends is based on analytical approach of breaking down and studying the business.
4. It's enormously important what a company will do with its earnings and whether they choose to retain them or pay them out as dividends. And it all depends on the return a business can get on a dollar of retained earnings.
January 7, 2019
Timeless classic to the art of investment analysis as the founder of the discounted cash flow model. Formulas are dated and can be discarded with fundamental understanding of TVM and financial modeling in Excel or other programming languages used as a modern substitute. Principles and theory are still as relevant today as in 1938 when this book was published. Users of this theory would not have been caught severly in either the 2001 bust or 2008 crash. Case studies are thought provoking and applicable to even the modern economic world of today. Read for the theory and take the concepts for use with modern tools and application.
February 1, 2021
Chapter XV: A Chapter for Skeptics
(1) Are formulas too intricate?
- By making all heretofore implicit assumptions explicit (e.g. growth, leverage, etc), one is better able to assess the absolute and importantly relative merits of investments;
(2) Are LT forecasts too uncertain?
- Good forecasting is not impossible and can be useful
- Market prices can be used to deduce implied expectations of the duration of growth and margins and whether these valuations are plausible
(3) Is the theory too impractical?
- Discounted cash analysis forms the basis on which fully rational investors (i.e. entire business owners) would behave and prices should converge on those values in the LT
(4) Is the theory corroborated by experience?
- there is no reason to expect the market to ever converge on the right price; if it gets it wrong today of course it may get it wrong tomorrow
(1) Are formulas too intricate?
- By making all heretofore implicit assumptions explicit (e.g. growth, leverage, etc), one is better able to assess the absolute and importantly relative merits of investments;
(2) Are LT forecasts too uncertain?
- Good forecasting is not impossible and can be useful
- Market prices can be used to deduce implied expectations of the duration of growth and margins and whether these valuations are plausible
(3) Is the theory too impractical?
- Discounted cash analysis forms the basis on which fully rational investors (i.e. entire business owners) would behave and prices should converge on those values in the LT
(4) Is the theory corroborated by experience?
- there is no reason to expect the market to ever converge on the right price; if it gets it wrong today of course it may get it wrong tomorrow
This entire review has been hidden because of spoilers.
June 13, 2017
Got about 2/3 of the way through and didn't finish, ultimately put back on the bookshelf.
November 23, 2020
A great book when written in 1938, but outdated now. Perhaps someone may consider writing a major update.
May 27, 2022
A must read if you're interested in the historical origins of value investment. Also I believe just reading in depths analysis of markets in different time periods may make you a better investor.
October 15, 2025
A highly useful book that I've come to appreciate more. One of the rare occasions where theory can be applied quite quickly with a little thought. I truly believe that for a mature/maturing company the value to the shareholder is the present value of expected dividends.
However, it's trickier for growing companies who are either paying no dividend or paying a small percentage out to shareholders. At that point, discounting earnings is probably your best bet but it's trickier.
However, it's trickier for growing companies who are either paying no dividend or paying a small percentage out to shareholders. At that point, discounting earnings is probably your best bet but it's trickier.
August 21, 2013
How to open this book..please help me out
March 27, 2025
One is only as good as one’s dividends
July 9, 2017
You have to read it to know how important this book is.
Displaying 1 - 17 of 17 reviews