Money Machine

SPECULATION VERSUS INVESTING

Separate and distinct things not to be confused,as every thoughtful investor knows, are real worth and market price.

—JOHN BURR WILLIAMS

Decades ago, investing was haphazard. Investors figured that a stock was worth whatever people were willing to pay, and the game was to guess what people will pay tomorrow for a stock you buy today. Then John Burr Williams unleashed a revolution by arguing that investors could use something called present value to estimate the intrinsic value of a company’s stock.

Think of a stock as a machine that generates cash every few months—cash that happens to be called dividends. The key question ...