The Theory of Investment Value

Rating:
Summary: Truly one of the most amazing finance books I have ever read
Review: A book like this will continue to be a valuable investment for as long as there stock markets

Rating:
Summary: Unrated...too dated...
Review: This book is really the doctorate thesis for John Burr Williams. It was written in the 1930's and weighted heavily on the 1929 crash and depression experience. The term "sucker" is first used in market investing here.

JBW's premise is sound. Cash on cash investment is real and can be measured. Reality is, wall street is not rational and the greater fool buys my position.

The book is old school and very difficult to read. Financial formulas are best suited for what this book is, a PHD paper on investing. Too bad the market participants forgot to read it.

Last I looked, 2004, cash dividends were nil. I guess stocks are overvalued. Wanna buy some???

Rating:
Summary: Still relevant after sixty years
Review: This book is still in print sixty years after it was written, despite never having been updated or revised. That testifies to its classic status, in a field, financial analysis, which generally changes rapidly.

The author defines the "Investment Value" of a stock to be the net present value of all its future dividends. This definition provides a measure of intrinsic value which is independent of stock market prices, enabling the investor to assess whether the current market price is high or low compared with the Investment Value of the stock.

A calculation of Investment Value inevitably requires estimation of factors such as future growth of earnings, the proportion of earnings that can be paid as dividends, and an appropriate discounting rate. The author does not shy away from making such estimates, and the book includes practical case studies for three current (in 1938) valuations, General Motors, United States Steel and Phoenix Insurance, as well as thr! ee retrospectives to 1930, AT&T, Consolidated Gas (Con Ed) and American and Foreign Power.

While the facts of these valuations are long ago, the methods are still applicable today. A great self discipline for investors would be to always prepare their own estimate of Investment Value before buying any stock.

The book is accessible to any general reader. A casual glance will show some apparently off putting algebra. This should be manageable to anyone who has finished high school, and arises only because in 1938 the author did not have the benefit of computer spreadsheets for doing growth projections and discounting calculations. The reader should find it straightforward to apply the author's methods with modern computing resources.

While the above comments imply a book that is worthy but dull, the book is in fact anything but dull. The author writes grippingly well, illustrated by this extract:

"Concerning [a stock's] true worth, every man will cherish his o! wn opinion; as to what price really is right, time only wil! l tell. Time will not give its answer all at once, though, but only slowly, word by word, as the years go by; nor will the last word be spoken till the corporation shall have closed its books for ever and ever. Those who bought their stock long ago will know their answer in the main by now, but those who buy now will hear theirs only in the future. "

I would commend this book to every investor or student of finance.