Customer Reviews

The Theory of Investment Value (Contrary Opinion Library)

5 star:		(8)
4 star:		(2)
3 star:		(1)
2 star:		(0)
1 star:		(0)

 

 

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.

This truly is a fantastic book on stock and bond investing. It's one of the best investing books I've ever read. Toss out your mass-market Peter Lynch books, this one really gets down to what determines how much a stock is worth, which most ordinary investors probably don't understand at all. It shows you how to calculate intrinsic value and is full of math. Trust me, I'm no mathematician but I still loved it.

This is one of the books that influenced Warren Buffett. However, I would recommend this over Benjamin Graham's Security Analysis or Philip Fisher's Common Stocks and Uncommon Profits, which also influenced Buffett. There's a reason why "The Theory of Investment Value" is still in print almost seven decades after it was first published.

Amazon.com lists the length of this book as 240 pages, but it is really 564 pages long.

The Theory of Investment Value is clearly an important work, as reflected in Benjamin Graham's citations to it and the prevalence of the dividend discount model in valuing stocks. The theories expounded in this book are of particular import to those to seek to by stock at a value less than the intrinsic value of a company as they determine it to be.

The book itself initially appears intimidating, as there are a lot of mathematical equations, but in reality, the math is nothing more than simple algebra, mostly different models related to computing dividend values going forward.

I found the book to be an interesting read, but it is highly theoretical in nature. The central theme of the book is that stocks are worth the present value of their dividends, paid in perpetuity. It does not discuss earnings manipulation, effect of dilution, securities with superior or inferior claim to payment, etc. Moreover, as Graham points out in Security Analysis, companies that have a high return on invested capital would be well advised to reinvest their profits, while less successful companies would be better off paying higher dividends (relative to book value). This would, of course, tend to make the practical application Williams' theory somewhat complicated, insofar as it makes computing future dividends more difficult.

Readers looking for a more practical guide to valuing stocks might be better served reading Securities Analysis by Benjamin Graham, or any number of more "practical" books related to stock market analysis, particularly as those analyzing financial statements to determine the intrinsic value of a company. Some readers might also find "The Aggressive Conservative Investor" by Marty Whitman and Martin Shubik to be a good read for a competing view, since the authors of that book take the position that, with respect to non-controlling shareholders, a company's stock is worth the net after-tax cash that they expect to realize in the future, whether from dividends, liquidating events, etc. However, if a reader is truly interested in obtaining an understand of how dividends affect stock prices, the book is a worthy read.

This is probably one of the oldest, if not the first, serious academic works on valuation. The coverage is highly theoretical compared to the more practical valuation books of today (dividends are used instead of free cash flow, continuous time is used instead of discrete time, and "cookie cutter" product cycle scenarios are presented instead of more complex business forecasting).

The real value of this dissertation-turned-book though is its general insights. Although Warren Buffett doesn't tout this book as often as Graham's "Intelligent Investor", you will find that he utilizes the insights from this book almost as frequently.

Robert Stephenson-Padron
MSc student (economics & finance)
University of Navarra, Spain

Helpful book for a Fundamental Value Investor since it layed the groundwork on DCF methodology (1934). Helped me to understand how the DCF or Dividend Discount Model was derived but a good undderstanding of economics is required to follow the author's concept. The two case studies are a bit dry but very interesting both from a historic and Value Investing perspective.

This book laid the foundation of business valuation for making investment decisions using the technique we now call Discounted Cash Flow. The fundamental idea of the book is that a business is worth the dividends it will pay in its entire lifetime, discounted at an appropriate interest rate. This idea of true or intrinsic investment value was proposed earlier by other authors, but it was developed and matured in this book. These days many companies do not pay dividends but the underlying principle of valuation is the same.

I found this book interesting because it is a rigorous derivation of the mathematical formulas used in valuation. I also consider it a masterpiece because of the intense insight of the author, which goes way beyond most of the modern day economists and investors. In fact, this is probably the most impressive book on investing I have studied. But it takes effort to read, requires good mathematical skills, and as it is posed as a scientific thesis it does not lend itself well to practitioners looking for a quick how-to guide.

So in spite of this book being an impressive intellectual achievement I have deducted one star in its rating, because it is certainly not for everyone and there are more recent books which will serve the general investor audience better.

What a classic! No wonder Warren Buffett was influenced by it. This book teaches investors how to value stocks with the discounted cash flow model. In this model, it is assumed that a stock is worth the net present value of all future dividends. I found this book extremely important and relevant even though it was written in 1937. Investors benefit from knowing what a stock is worth in order to determine whether it is worth buying at the trading price. The book also contains case studies of companies such as General Motors, United States Steel and Phoenix Insurance.

Although this book does not require readers to understand calculus, it does help to understand algebra pretty well. I liked this book very much and I would recommend it.

- Mariusz Skonieczny, author of Why Are We So Clueless about the Stock Market? Learn how to invest your money, how to pick stocks, and how to make money in the stock market

A fantastic accomplishment. All investors should study this book to learn the real value of a stock.

Warren Buffet mentioned this as one of the most important works in investment and finance. It is an amazing read though one needs to go very slow.It has lots of details on investment, dividends, interest rates and correlation of all the factors in order to arrive at an intrinsic valuation. The concepts of marginal opinion, dividend discount model valuations, economics of dividends & interests as well as the detailed idea of impact of taxation are amazing. Indeed as John Burr Williams defines this book himself as a work for scientist & economists rather than a maxim for speculators. This book has been a foundation of investment philosophies of Markowitz, Buffet and many others.

This is an excellent copy of an investment classic. VERY happy with the seller, the shipping and packaging were superb. Thanks again!