Until the early 1950s, investing - and, indeed, the whole area of finance - was an art. There was no conceptual basis for the discipline and no way existed for valuing assets/securities. The approach was to favour securities that were expected to deliver higher expected returns, with there being an intuitive understanding that there should be some diversification in a portfolio.

A major step forward came with the work of John Burr Williams (1938) who gave us the dividend discount model - quite simply, that the value of a security was the discoun...