20 THE WARREN BUFFETT WAY
through the heady days of the 1920s and the disastrous crash of 1929 and
its aftermath. That experience convinced him that to be a good investor,
one also needs to be a good economist.^9
So, in 1932 at the age of 30 and already a good investor, he enrolled
in Harvard’s Graduate School of Arts and Sciences. Working from a
f irm belief that what happened in the economy could affect the value of
stocks, he had decided to earn an advanced degree in economics.
When it came time to choose a topic for his doctoral dissertation,
Williams asked advice from Joseph Schumpeter, the noted Austrian
economist best known for his theory of creative destruction, who was
then a member of the economics faculty. Schumpeter suggested that
Williams look at the “intrinsic value of a common stock,” saying it
would f it Williams’s background and experience. Williams later com-
mented that perhaps Schumpeter had a more cynical motive: The
topic would keep Williams from “running afoul” of the rest of the
faculty, “none of whom would want to challenge my own ideas on in-
vestments.”^10 Nonetheless, Schumpeter’s suggestion was the impetus
for Williams’s famous doctoral dissertation, which, as The Theory
of Investment Value,has inf luenced f inancial analysts and investors
ever since.
Williams f inished writing his dissertation in 1937. Even though he
had not yet defended it—and to the great indignation of several profes-
sors—he submitted the work to Macmillan for publication. Macmillan
declined. So did McGraw-Hill. Both decided that the book had too
many algebraic symbols. Finally, in 1938, Williams found a publisher in
Harvard University Press, but only after he agreed to pay part of the
printing cost. Two years later, Williams took his oral exam and, after
some intense arguments over the causes of the Great Depression, passed.
The Theory of Investment Valueis a genuine classic. For sixty
years, it has served as the foundation on which many famous econo-
mists—Eugene Fama, Harry Markowitz, and Franco Modigliani, to
name a few—have based their own work. Warren Buffett calls it one of
the most important investment books ever written.
Williams’s theory, known today as the dividend discount model,or
discounted net cash-f low analysis, provides a way to put a value on a
stock or a bond. Like many important ideas, it can be reduced to a very
simple precept: To know what a security is worth today, estimate all the