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Review of "The Theory of Investment Value" by

Posted on 12 July 2010 but originally written on 11 August 1998

This book has a special place in my heart, as it holds the record for the longest delay between my buying a book and reading it.

I purchased a copy in 1976 from Foyles in London, in my mid twenties, as I was keen to learn about investment appraisal. However, the cover and the print looked dull, and I let it just sit on the shelf unread. A chance reference to it in another book made me pick it up in 1998, and once I started reading it I could not put it down. After reading it, I checked and was delighted to see that it was still in print, as it is today. The review below is the first review of any book that I posted on the Amazon website.

Original 1998 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.

John Burr Williams 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 three 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 own opinion; as to what price really is right, time only will 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 commend this book to every investor or student of finance.

 

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