The Theory Of Investment Value Pdf

[Ophelia Gurin]

Justas Benjamin Graham is considered to be the father of value investing, John Burr Williams rightfully deserves to be recognized as the progenitor of dividend investing. The influence of his seminal work, first published in 1938, has been widespread, and today the book remains as relevant as ever.

Politics aside, Williams and The Theory of Investment Value offer timeless lessons on the concept of intrinsic value, the importance of dividends, and the value of a long-term perspective. In an era of heightened volatility and low investment returns, these lessons are more important than ever.

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Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

Benjamin Graham, the father of value investing, recommended buying stocks when they were priced at two-thirds or less of their liquidation value. This was the margin of safety he felt was necessary to earn the best returns while minimizing investment downside.

Common sense and fundamental analysis underlie many of the principles of value investing. The margin of safety, which is the discount a stock trades at compared to its intrinsic value, is one leading principle. Fundamental metrics, such as the price-to-earnings (PE) ratio, for example, illustrate company earnings in relation to their price. A value investor may invest in a company with a low PE ratio because it provides one barometer for determining whether it is undervalued or overvalued.

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 based valuation.

Williams studied mathematics and chemistry at Harvard University, 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 was a puzzle indeed... To be a good investment analyst, one needs to be an expert economist also."[2] In 1932 he enrolled at Harvard for a PhD in economics, with the hopes of learning what had caused the Wall Street Crash of 1929 and the subsequent economic depression of the 1930s.[3] For his thesis, Joseph Schumpeter suggested 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.

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,[4] only after Williams had agreed to pay part of the printing cost. The work has been influential since its publication; Mark Rubinstein describes it as an "insufficiently appreciated classic".[5]

Specifically with regard to the stock market, the Greater Fool Theory becomes relevant when the price of a stock goes up so much that it is being driven by the expectation that buyers for the stock can always be found, not by the intrinsic value (cash flows) of the company. Under this assumption, any price (no matter how high) can be justified since another buyer presumably exists who is willing to pay an even higher price.

So as a financial professional, should you ever try to implement a greater fool strategy? How do you recognize a client that wants to play the greater fool game? What should you do if your client wants to buy an overpriced stock?

There is abundant evidence that, with respect to investors, greater fools actually exist. However, this is a very risky strategy that is not recommended for long-term investors. Successfully implementing a greater fool strategy is labor intensive and time intensive. One must pay an excessive amount of attention to markets, because price trends can reverse in minutes. Most clients (and financial professionals) do not have the time and resources to do that. The greater fool strategy usually is not a feasible or sustainable one for investors who do not have the speculation and market trend expertise of full-time day traders.

Moreover, while speculation based on a belief in The Greater Fool Theory has the potential to make money, there is significant risk that your client(s) could turn out to be the greater fool. When the bubble bursts and the music stops, you do not want your client left standing without a chair.

Greater fools generally are impatient investors who are attracted to stocks that are popular or "hot". They are not interested in the steady, consistent returns, or value stocks. When markets begin to twitch, these types of clients will want to move on to the next "hot" stock.

It has been well-documented by academics and finance professionals that stock returns are what we call "mean-reverting" (which is to say that stock prices move around but they eventually move back to their mean/average price). When the price of a "hot" stock rises too far above its average, the price will eventually decline. In these situations, it can be useful to remind your client that no one has a crystal ball to predict exactly when a market bubble will burst or when a particular stock's mean-reversion will happen. Let them know that a greater fool strategy is a form of speculation and that they do not want to be holding the bag when there are no more greater fools left to sell to at a higher price.

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