By John Maxfield | September 13, 2012
We at the Motley Fool have dedicated ourselves to getting back to the basics this month, culminating on Sept. 25 with Worldwide Invest Better Day. To this end, my Foolish colleagues and I have launched a veritable blitzkrieg espousing the fundamentals of investing. Our goal, quite simply, is to help the world invest. Better.
Perhaps nothing is more important in this regard than a knowledge of financial history. Not only does it provide context and courage to make the right investment decisions, but it also just makes you a wiser and more interesting human being. Borrowing a reference from fellow Fool John Reeves, Charlie Munger is famous for saying: "In my whole life, I have known no wise people (over a broad subject matter area) who didn't read all the time -- none, zero. You'd be amazed at how much Warren [Buffett] reads -- at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out."
With this in mind, I plundered my personal library in search of the best books on financial history dating back to the Gilded Age. I avoided long, sweeping histories, choosing instead to focus on more tailored and entertaining accounts of distinct periods in time. The result is the following list of 10 books, all of which are fantastic reads and bound to make you both wiser and richer.
Ralph Waldo Emerson opined that "there is properly no history; only biography." If this is true -- and I believe there's something to be said for it -- then Matthew Josephson's The Robber Barons is the quintessential history of the Gilded Age, spanning roughly the second half of the nineteenth century.
Writing in the early 1930s, though in timeless prose, Josephson traces the lives of America's first and greatest industrialists: John D. Rockefeller, Andrew Carnegie, Cornelius Vanderbilt, Jay Gould, and J.P. Morgan, founder of the eponymous JPMorgan Chase (NYSE - JPM). The book is a page-turner and an essential addition to any investor's and/or historian's library.
Tasked by then-President elect Woodrow Wilson in 1913 to explain the harm associated with the massive money trusts operated by the Morgan and Rockefeller families, future Supreme Court Justice Louis Brandeis went on to pen this short but elegant essay on the virtue of competition and vice of monopoly.
According to Brandeis:
The goose that lays golden eggs has been considered a most valuable possession. But even more profitable is the privilege of taking the golden eggs laid by somebody else's goose. The investment bankers and their associates now enjoy that privilege. They control the people through the people's own money.
It isn't often that a first-time author wins the Pulitzer Prize for history. But such is the case with Liaquat Ahamed, a former investment banker and current advisor to hedge funds.
Not unlike Josephson, Ahamed tells the history of the period between the world wars through the biographies of the world's most powerful central bankers: Benjamin Strong Jr. of the Federal Reserve Bank of New York, Montagu Norman of the Bank of England, and Hjalmar Schacht of Germany's Reichsbank. Ahamed's thesis is that both the Great Depression and Second World War are traceable to these men's decisions to reinstate the gold standard and stand firm on Germany's war reparations.
Among American economists, John Kenneth Galbraith is considered a giant among men. In this short and highly readable history of the stock market crash that preceded the Great Depression, Galbraith retraces both the causes and immediate consequences of the debacle.
In a passage that remains particularly relevant today, Galbraith noted:
[N]ow, as throughout history, financial capacity and political perspicacity are inversely correlated. Long-run salvation by men of business has never been highly regarded if it means disturbance of orderly life and convenience in the present. So inaction will be advocated in the present even though it means deep trouble in the future. Here, at least equally with communism, lies the threat to capitalism. It is what causes men who know that things are going quite wrong to say that things are fundamentally sound.
The Go-Go Years is the only book of the bunch I haven't read. I nevertheless included it for two reasons. First, because it covers an important decade, the so-called go-go years of the 1960s, which, like the roaring '20s, exemplifies the euphoria that invariably precedes a crash and is purportedly only obvious in hindsight. For instance, when the inevitable crash occurred, Brooks tells how the then-newly-rich Ross Perot lost $450 million in a single day, an amount reputed to be more than J. P. Morgan was worth at the time of his death in 1913.
And second, because Michael Lewis authored the foreword. According to Lewis:
The Go-Go Years is not to be read in the usual manner of Wall Street classics. You do not read this book to see our present situations reenacted in the past, with only the names changed. You read it because it is a wonderful description of the way things were in a different time and place.
If you have any interest in learning about how the Federal Reserve works and/or what motivates its leaders, then you should read this book. While Greider's account of the Fed's history extends to the bank's inception, it places particular emphasis on the late 1970s and early 1980s, when domestic inflation rivaled that of many Central and South American economies.
The book is notable for a number of reasons. First, as the title suggests, it introduces readers to the sometimes inexplicable machinations of the central bank. Second, it provides context and a wider arch through which to understand and appreciate past, present, and future interest rates. And third, it familiarizes readers with Paul Volcker, the much-despised Fed chairman at the time and more recently a close advisor to President Obama.
The 1980s represents to me the high-water mark for popular business writing. As a result, I struggled to choose only one book that best exemplified the decade. I settled on Michael Lewis' Liar's Poker not only because it's a great book, but also because it predated many others and blazed the trail for the now-familiar genre.
The book tells of Lewis' time at Salomon Brothers, then one of Wall Street's premier investment banks infamous for its unrivaled mastery of fixed-income trading. Not only does it introduce readers to the raucous and testosterone-fueled culture prevailing on Wall Street at that time, but it also unwittingly places you at the proverbial birth of our most recent crisis, when a handful of traders at Salomon Brothers and First Boston figured out how to securitize and trade residential mortgages.
If you then want to read more about this decade, two additional books that come to mind most immediately are Barbarians at the Gate by Bryan Burrough and John Helyar, which traces the now-infamous takeover battle for RJR Nabisco, and Den of Thieves by James Stewart, a thriller about the massive insider-trading scandal that brought down not only Michael Milken but also the fabled investment bank Drexel Burnham.
When Genius Failed is less a history of Wall Street than it is of Greenwich, Conn. In it, Lowenstein tells of the rise and devastating fall in 1998 of Long-Term Capital Management, an enormous Greenwich-based hedge fund founded by a former Salomon Brothers trader and staffed by some of the brightest financial minds from Wall Street and academia.
Although LTCM's reign will ultimately go down as a nonevent in the wider scheme of financial history, this highly entertaining book fills a pivotal void by introducing readers to the methods and madness of hedge funds. For a more thorough history of these now-commonplace investment vehicles, check out More Money Than God by Sebastian Mallaby, which traces the history of hedge funds from their modern founding through to the present day.
Bethany McLean is simply one of the finest business writers today. The Smartest Guys in the Room, McLean's first book, co-written with Peter Elkind, tells of the lies and obfuscations that built Enron and concomitantly brought it down.
On its face, Enron's story is that of a handful of bad apples such as Ken Lay, Andy Fastow, and Jeffrey Skilling. But on a deeper level, it explains the widespread culture of corporate deceit and self-enrichment that prevailed at the turn of the century and most certainly continues today. A laundry list of scandals followed in its wake, including WorldCom, Tyco, Qwest, Global Crossing, and Adelphia, to name only a few. Indeed, even seemingly upstanding companies like Halliburton (NYSE - HAL), Merck (NYSE - MRK), and Xerox (NYSE - XRX) weren't immune from the taint.
Quite simply, after reading McLean and Elkind's excellent book, investors will think twice before ever again taking an executive's comments at face value.
Last but not least, I'd be remiss to exclude a book on the most recent financial crisis. While there's already a large selection to choose from, many of which I've read and enjoyed, the one that shines through is All the Devils Are Here.
There are two reasons for this. First, as readers have now come to expect from the aforementioned McLean, joined this time by the equally talented Joe Nocera, it's incredibly well-written and exhaustively researched. Second, and perhaps most important, it addresses what I believe to be the single largest cause of the crisis: the securitization of residential mortgages. While this may sound boring, trust me, in McLean's and Nocera's hands it is not.
Whether you read any or all of these books, you'll be better off for doing so. All of them are excellent and deserve a place in every investor's library. In addition, because there are many others that I didn't include, I encourage you to add any that you recommend below.
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