“The intrinsic value of a security is the present value of all future dividends, discounted at an appropriate rate of interest.”John Burr Williams · The Theory of Investment Value · 1938 · Chapter 1, 'Introduction'
Intrinsic value is the discounted sum of all future dividends of an asset.
Williams introduced the concept of intrinsic value, calculated by discounting all future income an investor can receive from an asset. For a stock, this income is dividends. The discount rate reflects risk and inflation. If the market price is much higher than this intrinsic value, the asset is overvalued; if lower, it is undervalued. In practice, this theory underpins fundamental analysis. For example, a company with stable profits and consistent dividends will have a higher intrinsic value than one with volatile earnings, even if their market prices are temporarily similar.
Williams argued that an asset's fair price is the sum of its future income, discounted. But how do we know what that income will be? For example, when you buy a share in an energy company, you cannot predict exactly the dividends in 10 years. This is where the margin of error comes in. Williams did not ignore uncertainty; he suggested that the investor must estimate realistically. If the market ignores these estimates and moves only on emotion, bubbles form. The next step is to see how you apply this logic in your daily choices.
Why it matters The volatility spikes at INFINITY and SOCEP, in the absence of fundamental news, suggest a disconnect between price and intrinsic value, exactly what Williams theorizes.