The Intelligent Investor, Ben Graham, 1949

This one is mostly historical, but it has plenty of wisdom. Graham’s other opus, 1934’s Security Analysis (written with David Dodd) is often called the investment world’s Bible, and it’s a gem. But The Intelligent Investor is more useful for our purposes and less antiquated—particularly since he updated it in 1973. Security Analysis is all about stock picking—engrossing, necessary, but less impactful in a diversified portfolio. The Intelligent Investor is more about the market. Mr. Market, to be exact—the stock market in human form, the star of Graham’s parable about volatility. Mr. Market’s whims—overly enthusiastic one day, panicked the next—show how markets really are irrational “voting machines” in the short term, as Graham famously said. This irrational behavior creates our contrarian opportunities in an otherwise efficient market.

Mr. Market is probably the most famous part of this book, but Graham has plenty of treats for you. His discussion of risk reminds us that short-term volatility and actual risk are different animals. His indictment of Dow Theory shows us how and why the academic formulas we discussed in Chapter 7 are limited and mostly pre-priced. And he reinforces that old truism: There is no such thing as a good stock or a bad stock. Companies can be good or bad! But stocks are stocks. These and the other lessons Graham teaches can help you avoid most common blunders.

If you want to read Graham’s Security Analysis, focus on the original 1934 version—the original and classic. The early revised editions are fine, too, but more modern revisions have watered Graham’s classic to a stew where taste is overpowered by modern academic mish-mash and completely unrecognizable relative to Graham’s voice or views.

Common Stocks and Uncommon Profits, Phil Fisher, 1958

Warren Buffett once described his investing philosophy as “85 percent Benjamin Graham and 15 percent Fisher.”¹ “Fisher” is Phil Fisher, my father.

Father taught me how to think. This book can do the same for you by showing how he thought. He was an outside-the-crowd critical thinker through and through. This was the first investment book to be on the New York Times bestseller list. It still sells well today via Amazon.

Most of Common Stocks and Uncommon Profits is company-focused. Father thought diversification was overrated, and he wasn’t much concerned with gaming market cycles. Read this and absorb it anyway—it’s short. You’ll finish it in an afternoon. You’ll see why stock evaluation should be qualitative, not just quantitative. You’ll see, over and over, the importance of knowing you can be wrong and learning from your mistakes—and not letting pride blind you to your own wrongness when it happens. You’ll see events of mass psychology drive investors astray, like the apocalyptic sentiment surrounding the 1949 recession. You’ll see the dangers of letting emotion influence your decisions—and the virtues of being disciplined and not selling because of historical price trends or the recent past, good or bad.

Many of Father’s don’ts for investors are timeless. Don’t fall for company marketing spin. Don’t buy on past performance or earnings over any period, short or long. Father would have hated Robert Shiller’s Cyclically Adjusted P/E (CAPE) ratio—if you don’t believe me, see the below box. Another good one: “Don’t be afraid of buying on a war scare.” And most of all, “Don’t follow the crowd.” I’ll let him speak for himself: “The ability to see through some majority opinions to find what facts are really there is a trait that can bring rich rewards in the field of common stocks. It is not easy to develop, however, for the composite opinion of those with whom we associate is a powerful influence upon the minds of all of us.”²

Reminiscences of a Stock Operator, Edwin Lefèvre, 1923

This is one of my all-time favorite books. In my 1993 book, 100 Minds That Made the Market, I said no one should invest money they deem “important” without reading this book first. That’s still true, decades later. Reminiscences is a fictionalized “autobiography” of Jesse Livermore, which tries to get inside his head and show how he thought. In doing so it shows the utter folly of short-term inning and outing. Everyone can learn from his follies during the Panic of 1901 (more on that later), to name just one example.

Livermore actually wrote his own book, How to Trade in Stocks, published in March 1940 by Duell, Sloan & Pearce. It’s a fine read but a how-not-to guide. He traded on price movement and accumulated pride—tragically false bravado, as the world learned that November when he died broke, killing himself. The genius trader couldn’t hold on to money. He made and lost entire fortunes serially, filing for bankruptcy four times—all chronicled in Richard Smitten’s 2001 biography, Jesse Livermore: World’s Greatest Stock Trader (John Wiley & Sons).

But I’m partial to Reminiscences. We see young Livermore hit Wall Street straight out of grammar school, taking notes on stock price movement from day one. Through Livermore’s rise from clerk to day-trader to the legendary “Boy Plunger” and king of Wall Street, Reminiscences illuminates the highs and lows, and its hero happily shares what he learns along the way. Such pearls of wisdom!

Ironically, the biggest lesson appears early on: “I didn’t always win. My plan of trading was sound enough and won oftener than it lost. If I had stuck to it I’d have been right perhaps as often as seven out of ten times. In fact, I always made money when I was sure I was right before I began. What beat me was not having brains enough to stick to my own game—that is, to play the market only when I was satisfied that precedents favored my play. There is a time for all things, but I didn’t know it. And that is precisely what beats so many men in Wall Street who are very far from being in the main sucker class. There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying and selling stocks daily—or sufficient knowledge to make his play an intelligent play.”

Livermore would spend his entire career re-learning this lesson and fighting his destructive instincts. Winning with stocks, blowing it all on land schemes, winning it back, losing, lather, rinse, repeat. In the end, his suicide note said it all: “I am tired of fighting.”⁴ Reminiscences captures a happier Livermore, breezily sharing his triumphs and blunders, occasionally bragging but always teaching. Let him teach you.

Contrarian Investment Strategy: The Psychology of Stock-Market Success, David Dreman, 1980

Another old favorite and hugely impactful on me, personally. In some ways, it shows its age. It’s grounded in late-1970s sentiment, when folks were grappling with “stagflation” and other woes. Much of the commentary on valuations is now widely known and widely used—not much use if you’re trying to be un-crowdlike. But those are small drawbacks in an otherwise excellent discussion of investing groupthink and the futility of following the crowd. Some parts are sort of a prequel for this book, like the chapter showing how professional forecasters’ poor track record dates all the way to the 1960s (and probably before). Other parts show how technical analysts and fundamentalists form their own (usually wrong) crowds—just like we discussed in Chapter 1—by using the same models, theories and assumptions. Dreman shows outright the danger of crowd-chasing by chronicling investors’ behavior in old euphoric episodes like the Mississippi Scheme and 1962 bull market peak. Overall, this book shows contrarian thinking in action—and in doing so, teaches a thought process you can apply to problems and situations today.

David, of course, wrote a regular column in Forbes, starting shortly before I did. It was called “The Contrarian,” and for decades he and I alternated appearances in every other issue. He still writes in Forbes, but rarely now, and I fondly miss our counterpoint but often parallel arguments. Forbes, of course, has always been a great source of contrarian inputs.

Where Are the Customers’ Yachts?, Fred Schwed, 1940

This is another short, sweet classic you’ll breeze through in an afternoon—150 pages with big print. In some regards, it too shows its age. It assumes stocks entered a permabull market after the Depression, and it was written before the Investment Advisers Act of 1940 separated investment sales from service. But it drives home some very old, true basics in simple language anyone can relate to. Short parables show us past performance never predicts future returns. For every buyer there is a seller. Anyone claiming to predict ultra-short-term returns is just guessing.

Schwed’s classic also shows behavioral errors, like the danger of assuming the trend is your friend—otherwise known as momentum investing. He also reminds us anti–Wall Street sentiment and banker bashing have existed forever and are often a behavioral error—regret shunning. When The Great Humiliator (TGH) gets us, we’d much rather blame someone else than admit the market won or we made a mistake. This robs us of a chance to learn and is a dangerous trap.

Customers’ Man, Boyden Sparkes, 1931

This strange little curiosity is more about the structure of Wall Street than investing—just as important for market participants to understand. Customers’ Man is fiction, a parable written after the 1929 Crash to prepare brokers (then called “customers’ men”) for new regulations—the Securities Act of 1933, Securities Exchange Act of 1934 and Investment Advisers Act of 1940. The hero was a musician who went to Wall Street to make enough money to earn his sweetheart’s hand in marriage—an honorable fellow who was disgusted by the conflicts of interest in his trade and his colleagues’ unscrupulous behavior. The tale shows why rules separating investment sales from service were vital. This line has blurred in recent decades to investors’ detriment. Politicians, regulators and investors could all use a refresher on why letting sales and service seep together is dangerous and invites conflicts of interest.

That Which Is Seen and That Which Is Not Seen, Frédéric Bastiat, 1850

We explored Bastiat’s broken-window fallacy in Chapter 5—this is where it came from. That Which Is Seen is a 12-part essay warning nineteenth-century French politicians of the danger of intervening in free markets. As part of the French Liberal school, Bastiat believed prosperity comes from free people and free commerce, and government meddling was the road to ruin. The French ignored it. Modern France is often proof Bastiat was right.

That Which Is Seen is a short and sweet lesson on the law of unintended consequences. On normal paper, it’s about 40 pages. It’s also free—you can find it at Bastiat.org and other places. As you’d expect of text translated from mid-nineteenth-century French to English, the language is a bit stilted, but the logic is simple and clear, and the topics are timeless. For example: Should countries keep huge militaries to boost employment? Do high taxes and public investment spur growth? Would the fine arts die without government support? Is public infrastructure spending really stimulus or efficient? Will automated manufacturing displace workers and be society’s downfall? Would governments allocate credit better than banks?

Our politicians and populace still struggle with these. They probably will always and all ways. Understanding how Bastiat thinks and why will help you weigh the risks whenever Congress tries to “fix” something.

The Wealth of Nations, Adam Smith, 1776

The year 1776 was a banner year for humanity. America declared independence. Adam Smith declared capitalism. You can decide which means more for American freedom and prosperity. But don’t decide until you read The Wealth of Nations, published in the year of our great country’s birth.

When the good Scot made his Inquiry Into the Nature and Causes of the Wealth of Nations (the full title), Britain was nearing its boiling point. The Colonies had just declared King George a tyrant, and Brits were awakening to the notion of individualism after centuries of living under nearly all-powerful mercantilistic monarchs. Smith took center stage in what we now call the Enlightenment with a simple, radical idea: If allowed to, the self-interests of every human being will collide and create wealth and progress for all of society, guided by the “invisible hand” of the market—competition and a self-driven quest for wealth and profits. Self-interested sellers will never stop creating newer, better goods, services and technology as they constantly one-up each other, while self-interested buyers will pick and choose the best, reject the rest, demand bargains and pull prices down to their natural level. Everyone wins.

The Wealth of Nations drives this home again and again in 1,000 pages. Adam Smith showed how self-determination drove prosperity in the Colonies—and how the Crown’s out-of-sight, out-of-mind de facto laissez-faire allowed the Colonies to flourish. (King George got greedy and went for a bigger slice of the pie after they got rich.) He showed how big government and high taxes can sap the life from economies. He showed how specialization and division of labor can drive productivity through the roof—he didn’t live to see the industrial revolution’s heyday, but he sure imagined it. He showed how fiat money could work as long as people had confidence in the bankers—no gold standard required.

Adam Smith knew his audience, too. He wrote for the masses. This is the most readable 1,000-page tome on economic philosophy on the planet. It won’t put you to sleep. It will make you wiser and help you understand why free economies do best—and why markets hate true socialist creeping.

How Capitalism Will Save Us, Steve Forbes and Elizabeth Ames, 2009

One of the greatest titles and subtitles ever: “Why Free People and Free Markets Are the Best Answer in Today’s Economy.” Says it all! In Chapter 5, I mentioned that capitalism (i.e., supply-side thinking) fell from fashion after 2008’s crisis—Forbes uses clear logic and simple economics to remind us why free markets are morally right and with volatility can be counted on still—and almost regardless of what we confront—to raise living standards for all who have them, just as they have for centuries in America and Britain.

Though this isn’t an investing how-to book, anyone who has ever owned a stock or plans to own a stock should read it. Understand free markets, and you’ll fathom how and why companies and individuals continue creating, driving growth and rendering rewards to shareholders many times over—making once-scarce goods abundant and improving quality of life for all in the process. And all of that happening without benefit of any grand master plan but human self-interest run amok. Understand the unseen force of capitalism, and you’ll gain faith in markets’ ability to overcome all issues—economic and sociological—the media frets continually. That faith helps us all invest better by providing a valuable long-term perspective the media generally won’t cover.

A New Radical’s Guide to Economic Reality, Angus Black, 1970

Angus Black is the pseudonym of Roger Leroy Miller, whom I encountered when I was a student at Humboldt State—and who changed my life. I’d taken most (if not all) of Humboldt’s Economics classes, and I’d done very well, but I still didn’t quite get the big picture. It was as if I’d taken a car apart, studied all the parts, had a great understanding of each and the theory of how they all fit together, but I couldn’t get the dynamics of how they could all work real-time to make the car go.

Then Miller gives a talk at my school, promoting this slender, lively free-market manifesto. I’m in the audience, and in walks this young University of Chicago–trained economist with long flowing hair and black boots—radical! If you aren’t familiar with Humboldt, it’s way up in rural, forested Northern California—pot–smoking liberal hippie heaven then and now. Miller stood up and said, “If you have liberal views, and you think liberal policies work for all these causes you care about, this book will show you the truth.” Back then, I’m a 19-year-old liberal thinking, “Boy, my professors are gonna rip this guy apart.” And I’m delighted for it! But when Q&A time comes, they all ask timid questions—he knows his stuff better than they do, and they know it, and they don’t want him ripping them apart in public.

That’s when the wheels in my brain gained traction—in 45 minutes, I knew how the whole car worked, and I became a libertarian. Miller had proved—with facts, theory and common sense—that more government was usually the problem, not the solution. Free choice and free markets could accomplish more than politicians and radical regulations ever could. When I got home, my new wife, Sherrilyn, was stunned—even startled and alarmed—at how much I’d changed. The arguments in Miller’s book changed my views on almost everything as a young man. They turned me into someone who understood how neoclassical economics worked and how the entire academic discipline would work. But most important, I learned to apply, with limitations, the neoclassical model to forecasting—of economics and markets.

The book can do the same for you. It’s a great way to learn the basics of neoclassical economics in a jiff. Full disclosure (and only so you’re free to choose fully informed!), it really is radical—occasionally obscene and politically incorrect. It uses language most readers will find offensive and that I certainly do not endorse. But these are a relic of his time and audience, and may explain why the book has become so unknown. I overlook all of it and hope you will, too. The substance is necessary and timeless.

Business Barometers Used in the Accumulation of Money, Roger W. Babson, 1905–1930

The date range isn’t an error—Babson updated his text dozens of times over the years. You can’t go wrong with any of them and needn’t read them all, as the core doesn’t change much. You can find reprints easily, and some editions have been digitized and are available freely online. A Google search will turn them up in half a second.

The Business Barometer series is one of the original works on fundamental economic analysis for long-term investors. Babson knew short-term timing would get you nowhere, but longer cycles—bull markets and bear markets, or “periods of decline” and “periods of prosperity”—were possible to identify and forecast. His Business Barometers sought to teach us how.

Every edition started with a short chapter called “Two Classes of Statistics,” which drew an uncrossable line between “comparative statistics” like earnings and revenues, and “fundamental statistics,” which showed underlying economic conditions. Comparative statistics are useful, he explained, but not inherently predictive. He argued investors should and could forecast cycles based on fundamental conditions—a revolutionary concept back then. Some of his preferred metrics, like railroad earnings, are antiquated but have viable descendants, like air freight traffic and intermodal land freight volumes—statistics have evolved. Others, like broad money supply, are timeless. (Although the specific ways to measure the quantity of money evolve as we create ever more “near money,” like credit cards, that Babson couldn’t have envisioned.)

Babson called Business Barometers an applied economics textbook for investors, but that makes it sound dry. It isn’t dry! It doesn’t even read like a textbook. Dry textbooks don’t have parables showing why buying stock on a broker’s hot tip is fruitless. This heavy economic analysis comes with plenty of palate cleansers.

Business Cycles, Wesley Clair Mitchell, 1913

I mentioned Mitchell’s magnum opus back in Chapter 5. I love it so much, I’m giving it a cameo here, too—it’s that good! In my mind, simply, Mitchell was a god of economics, statistics, cycles and forecasting.

When Mitchell wrote Business Cycles in 1913, most assumed booms and busts just happened. Kind of like weather. Few fathomed they could be part of an actual cycle, created by the occasional excesses naturally accompanying capitalism. Few fathomed busts were the invisible hand’s way of self-correcting these excesses, keeping us all on the capitalist road to heaven if we let it. (Politicians never seem to want to let it.)

Mitchell fathomed it, and Business Cycles is his theory and proof. No grandstanding—just the scientific method. He gathered a treasure trove of data and observed, analyzed, tested and deduced. Always entertaining, never dry, he walks us all through an entire economic cycle, explaining the how and why at every step. We see businesses overextend, overestimating potential profits, and getting squeezed when they can’t control costs. We see credit costs rise as banks—the market—get wary. Then panic when firms can’t pay the piper. We see credit freeze as panic climaxes, and we see the need for liquidity—enter the Federal Reserve that same year. And then we see prices reset, business improve, and an expansion begin anew.

Business Cycles will show you how Wall Street and Main Street are intertwined—never one versus the other, always working in tandem. It is as vital today as it was a century ago. After it you might try his 1927 publication for the National Bureau of Economic Research, Business Cycles: The Problem and Its Setting, another tour de force book for those who want to root deeply into the origins of global forecasting.

How to Lie With Statistics, Darrell Huff, 1954

As Mark Twain claims Benjamin Disraeli said, “There are three kinds of lies: lies, damned lies, and statistics.” Huff’s delightful read shows us how and why that’s true. Complete with fun illustrations!

It’s a short read, and I won’t belabor this blurb—don’t need to. The title speaks for itself. Huff shows how statistical analysis is easily skewed to yield a desired outcome, support a certain bias, or perform whatever evil little task the author desires. Anyone can make numbers lie.

Why read it? Think about all the wild claims about the economy, markets, and policies that are underpinned with data! A lot of it is bogus, as we saw with Piketty and Saez. It’s easy to test and pick apart if you know how, and Huff teaches you how. You can’t think outside the crowd without this book in your brain. I consider it mandatory for anyone considering himself or herself educated—even if you studied statistics extensively in school, as I did. I learned a lot when I got to Huff. But the best part is you don’t need the classes to squeeze the juice out of Huff. It’s squeezy.

The Rothschilds, Frederic Morton, 1961

According to financial folklore, it was Nathan Mayer Rothschild who first said: “The time to buy is when there’s blood in the streets.” Some historians claim that’s apocryphal, and maybe it is. Read The Rothschilds anyway. Even if Nathan didn’t utter that famous line, he sure lived it.

As the title suggests, this is the 200-year saga of Nathan and the entire House of Rothschild, starting with patriarch Mayer Rothschild in the Jewish ghetto of 1760s Frankfurt. It’s blessedly short, at about 300 pages.

The House of Rothschild was the world’s first modern private bank. It was also effectively the world’s central bank, funding governments and wars as well as industry. All the Rothschilds played their part, but Nathan was the leader and gifted speculator. He made a killing during the Napoleonic Wars, literally buying when there was blood in the streets. He bailed out the Bank of England in 1826, a precursor to JP Morgan in 1893. He pioneered international credit, introducing a paper system to spare borrowers the hassle of moving physical collateral as proof of deposit.

You’ll learn plenty from their story. One of the most timeless lessons comes early on, when we witness the family’s escapades during the Napoleonic Wars. Nathan’s speculating then is legendary, but also key was the family smuggling business. Shady? Heck yeah! But they knew, from the start, that war doesn’t stop commerce and normal life. People still want to eat and shop, and the Rothschilds made sure they could. Remember that the next time you hear war is a surefire economic downer. And if you care to know how important this book is to me, after reading it, I named my second son after Nathan Rothschild—for a fact.

The House of Morgan: An American Banking Dynasty and the Rise of Modern Finance, Ron Chernow, 1990

This is the story of a bank—JP Morgan—but also the story of a man. Legendary financier John Pierpont Morgan, without whom modern banking and capital markets might not exist as we know them. Heck, America might not exist as we know it, considering it was Morgan who personally bailed out Uncle Sam in the Panic of 1893. They don’t make ’em like Morgan anymore: flinty tough, visionary, multifaceted, cut-throat yet kind. He was one of a kind.

At over 800 pages, this isn’t for the faint of heart. But it is an absorbing history of America’s financial system and four generations of Morgans. The House of Morgan was America’s later equivalent of the House of Rothschild, right down to emergency government funding. You’ll witness Morgan (the man) wheel and deal to end the Panics of 1893 and 1907. You’ll be a fly on the wall at the secret Jekyll Island getaway and congressional hearings that eventually gave rise to the Fed. You’ll see how banker bashing from Ferdinand Pecora and other politicians during the Great Depression led to Glass-Steagall and the separation of retail and investment banking. Across 150 years of the Morgans’ history, you’ll see everything markets saw, and it’s a rip-roaring tale.

James J. Hill and the Opening of the Northwest, Albro Martin, 1991

The Rothschilds and Morgans were key players in my book, 100 Minds That Made the Market. Our next three characters were, too—starting with the great Northwestern titan, James J. Hill.

Roger Babson called James J. Hill “a great student of fundamental statistics.”⁵ The nineteenth-century railroad baron was a great thinker, business leader and investor, too. He was also a classic up-by-the-bootstraps self-made titan, spurring growth and industry throughout the Northwest as he built his railroad empire—without land grants, eminent domain, political favors or a dime of government assistance. Living proof the private sector spurs development far better than the government could dream of.

Hill went to Wall Street late in life, so the bulk of this book chronicles his empire building. But even his business decisions carry wisdom for investors—his analysis of economic conditions and focus on profits translate directly to security analysis today. His Wall Street adventures are where things really start cooking, though. When Hill hit the Street he became greed personified (as in: Greed is good), cornering the competition in an effort to turn his Great Northern railroad into a transcontinental empire. And he showed a strong contrarian streak. He snapped up the Northern Pacific line after it failed in the Panic of 1893. His bid for the Chicago, Burlington and Quincy line drove rival Ed Harriman mad with jealousy, sowing the seeds of the Panic of 1901. Through Great Northern, he spent 4 million for land containing iron ore deposits in Minnesota’s Mesabi range in 1898 and sat on it for eight years before contracting US Steel to mine it. Observers scratched their heads, but that 4 million became 425 million by 1906—a huge win for Hill’s shareholders. That group included his employees, after he finagled a way for them to buy shares at half price—an early pioneer of employee stock options, innovation at its finest.

Hill’s exploits also contributed to the evolution of securities law and antitrust rules. This book gives a fine overview, but it might leave you wanting more of the drama. Fear not—I have another treat for you later in this chapter.

Dark Genius of Wall Street: The Misunderstood Life of Jay Gould, King of the Robber Barons, Edward J. Renehan Jr., 2005

First, though, if it’s drama you want, Jay Gould is your man. Universally hated, Gould made the rest of the Gilded Age’s “robber barons” look like kittens. Unless you were related to him, he was a nasty guy. He was also one of our most creative, innovative financiers. I’ve always kind of liked him for his chutzpah, and it’s clear Renehan likes him, too. That’s a compliment—this is a zippy, engrossing tale of a true outsider contrarian.

I don’t recommend imitating every move Gould ever made. Manipulating a company’s financial figures to run its price up will land you in jail. But his inimitable skill and discipline ring true today. He was hated because he was ruthless, and that forced him outside the crowd. He probably wanted to be there anyway—circumstance and instinct made him a contrarian.

The more successful Gould became, the more society derided him. The New York of the Vanderbilts and Astors couldn’t abide this new-money man who gained fame and fortune through speculating. He got rich the wrong way, they said! He didn’t deserve it! A New York Times profile from 1892 pegged his fortune at 70 million (roughly 1.2 billion today), then seethed at his selfish tactics—he didn’t create prosperity like the Astors or Vanderbilts, said the Times. He was a leech and borderline criminal, in their view.⁶

The irony? Gould was no leech! He drove prices down to buy companies on the cheap, but he didn’t raid and ruin. He raided and ran the companies, usually improving them. That creates prosperity, folks. He pioneered what private equity firms do all the time today (without the fees).

You’ll get all that and more from this tale. Including a panic! Specifically, the Panic of 1869, which Gould caused. He tried to corner gold and came darned close. He also tried to coerce his crony’s brother-in-law, President Grant, to prop up the price. Grant declined, releasing 5% of the Treasury’s gold reserves, which sent the price reeling. Speculators were crushed! But not Gould—he had an inside tip from Grant’s wife and sold high. (Like I said, you shouldn’t imitate everything he did.) There are many other delights, but I won’t spoil them for you.

Hetty Green: A Woman Who Loved Money, Boyden Sparkes and Samuel Taylor Moore, 1930

Newer biographies of the “Witch of Wall Street” have made the rounds, but none capture her market savvy and methods quite like this volume—they spend too much time on her oddball quirks and tabloid gossip, not enough on her buys and sells. Hetty hated gossip. This book, published 14 years after her death, is a straightforward account of her life and mad genius.

Hetty shattered the glass ceiling in Wall Street’s nineteenth- century old boys’ club—the only female bigwig in the age of Gould, Hill and Morgan. She outfoxed the speculators, bailed out New York City at least twice and (legend has it) pulled a gun on rival railroad tycoon Collis Huntington when he threatened to throw her son in jail during their battle for Texas railroads. She hated losing money and chucked her husband after he fizzled her funds on a bad bank deal. Sentimentality? To Hetty that was for the weak. Enjoying wealth through consumer items or services was for the profligate. To save money and avoid taxes, she lived a vagrant’s life, shuffling her children from room to rented room in Brooklyn and low-rent Manhattan quarters.

Her frugality bordered on insanity, but her refusal to spend allowed her wealth to compound many, many times over. She turned a 6 million inheritance into 100 million by the time she died, just by targeting 6% a year and letting it compound. She loved buying bonds and mortgages, and if the mortgage defaulted, she kept the house. And she never missed a chance to buy stocks cheap—particularly railroad stocks. After she got caught long in the Panic of 1873, her strategy was simple: “I buy when things are low and no one wants them. I keep them, just as I keep a considerable number of diamonds on hand, until they go up and people are anxious to buy. That is the general secret of business success. I never speculate. … Such stocks as belong to me were purchased simply as an investment, never on a margin.”⁷

Hetty played the market’s sentiment lifecycle like a piano. She always bought at the depth of panics and had a knack for getting out near the top. She sold out of Knickerbocker Trust in 1907 because the men working there were “too good-looking.” Must be euphoria! Then she turned around and lent her winnings to distressed banks and financiers—a quieter, humbler JP Morgan—but always judiciously and never usuriously (and ever the Quaker). Hetty knew how to weigh risk and didn’t shoot for the stars. Get to know this marvelous lady, and learn from her disciplined, crowd-beating ways and love of compound growth. You needn’t adopt her miserly ways to learn and benefit from her life.

Templeton’s Way With Money, Jonathan Davis and Alasdair Nairn, 2012

Sir John Templeton wrote, but mostly about his faith, science and personal philosophy. This gem and other biographies fill the void, showing the rise and tactics of the greatest-ever mutual fund manager.

As I mentioned in Chapter 6, Templeton pioneered global investing. He was the first! He put some money in Japan shortly after World War II, when most foreigners were scared off by Japan’s capital controls. But not Sir John! He studied the country and its culture, learned how its economy and political system worked and made his play. He was one of the first to eye South Korea in the early 1980s, when it was still heavily restricted after the fall of Park Chung-hee’s military dictatorship. You’ll learn plenty from these and all his global adventures.

You’ll also get your Sir Johnisms. Most know Templeton’s legendary quote: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” This book has a treasure trove of such wisdom. Here’s a teaser: “If you want to produce the best results in twenty or thirty years, you have to be flexible. A flexible viewpoint is a matter of avoiding a peculiar trait of human nature, which is to buy the things that you wish you had bought in the past, or to continue to buy the things that did well for you in the past.”

And you’ll see how he lived another Sir Johnism: “Never follow the crowd.” He loved buying in times of “maximum pessimism.” He shunned headlines and thought for himself, exploring facts. He bought at the depths of our savings and loan crisis—when everyone screamed, “Sell!”—by scrutinizing bank balance sheets one by one. His picks went down a bit more after he bought in, but he accepted that timing bottoms (and tops) with precision is impossible. His thesis remained intact, so he hung on—the right decision! You can learn a lot from his tactics and mindset in this and many other situations. I met him a few times, and he was a marvelous human—farsighted, humble, brave, frugal, business-savvy and flexible.

As I blurbed on the book’s back cover, this is a great book about one of the greats. Investors young and old, amateur and professional will benefit hugely from reading and soaking this in. You shouldn’t make another trade until you do.

Catching Lightning in a Bottle, Winthrop H. Smith Jr., 2013

This is the biography of a company—a complete history of Merrill Lynch, capturing the firm’s many innovations. Merrill was the king of investment banking and brokerage firsts in the twentieth century, driven by Charlie Merrill’s goal of bringing Wall Street to Main Street. (Wesley Mitchell would approve.) The first to use investor education as a promotional tool, bettering the investment world and empowering normal people. The first to recognize the existence of an army of female investors—and court them. The first big brokerage to court small retail investors—mom and pop—and not just Big Money. The first to use computers. The first brokerage to issue an annual report. The first to offer cash accounts—complete with check writing and credit cards—so clients could sweep trading proceeds into money market funds in-house, sparing them the hassle of a bank transfer. Merrill became the first one-stop financial services shop. (Alas, it was the second to go public. Can’t win ’em all!)

Merrill Lynch’s history is really the history of American financial services. The subtitle, “How Merrill Lynch Revolutionized the Financial World,” isn’t an understatement. Merrill took Wall Street by storm back when Helen Slade was throwing dinner parties. Everything Merrill did first is standard today, and Win Smith was there through all of it. The author’s father, the first Winthrop H. Smith, was Charlie Merrill’s office gopher straight out of college, in 1916. By 1940 he was in charge. Win Jr. grew up hearing his dad’s stories and signed on in 1974. He stayed for 28 years, most of them as an executive. No one can tell the tale better.

I recommend this book with one grain of salt: The latter parts are a bit trite in their heavy-handedness against Stan O’Neal, whom he rightly sees as tarnishing the legacy and driving the bank’s decline in the run-up to 2008. That’s true, relatively contemporary and covered very widely elsewhere, hence not unique. It’s the book’s first two-thirds that make it a phenomenal, informative read.

Extraordinary Popular Delusions and the Madness of Crowds, Charles Mackay, 1841

By 1841, the history of financial bubbles already spanned centuries. Mackay captures them here, albeit in stodgy prose—the Mississippi Scheme, South Sea Bubble, Dutch Tulipmania and many other pre-industrial precursors to the modern bubbles we all know and love to hate.

Why bother? Bubbles are near-universally misunderstood. Pundits always see them where they don’t exist and miss them when they do exist. We’re regularly told bull markets are bubbles, almost from their start. Rising bond, gold, silver, real estate, you name it—all were wrongly deemed bubbles in the last two decades. True bubbles are rare and usually missed.

Bubbles are events of mass psychology. When we’re in one, nearly everyone gets caught up in it (hopefully not you, after reading this book!). Even the smartest people in the world! Sir Isaac Newton lost a fortune in the South Sea Bubble. He looked smart at first, getting in early and out after nearly doubling his money, but then he saw his pals make fabulous gains. He got swept up, got greedy, got jealous, and went nearly all-in near the peak. And rode it all the way down, losing £20,000—over 3 million in today’s dollars. It nearly bankrupted him.⁸ Legend has it he remarked: “I can calculate the movement of the stars, but not the madness of people.”⁹

In real bubbles, sensible people chuck reason to the wind to explain why this time it’s different. Supply and demand no longer matter. Profits don’t matter as long as your sexy dot-com initial public offering (IPO) gets clicks. The few who do identify the bubble are mocked in all corners.

This is what Mackay’s work shows us—the psychology and mind traps folks fall into as bubbles inflate. The phenomena he describes easily translate to the 1929 Crash, 1980s gold bubble and 1999–2000 tech bubble. The setting is different, but the story never changes. The media tells us it’s different this time, but as I wrote when summarizing Mackay’s book in Forbes in 1985, “Despite what the media says, nothing really important has changed in the financial markets in centuries.”¹⁰ Still true! Still routinely forgotten. And still this book is the classic bubble book.

A Monetary History of the United States, 1867–1960 or The Great Contraction, Milton Friedman and Anna Jacobson Schwartz, 1963

This is one of the greatest, most comprehensive and important economic history texts ever. If its size intimidates you, start with The Great Contraction, the book version of their long chapter on the Great Depression. It shows, painstakingly, how ill-advised Fed policy drove the downturn. It will suck you in fast, and you won’t even mind Friedman and Schwartz’s tendency to write extensively in the footnotes.

If The Great Contraction is required reading for anyone who wants to understand the Depression, the mother ship is vital for anyone who wants to understand America. It spans a century from the post–Civil War Greenback Era to the steady, even money supply growth of the late 1940s and 1950s. Every shock, panic, boom, bank run, recession, depression and expansion in between—all from a monetarist standpoint. But it isn’t all charts and tables. Friedman and Schwartz also tell the stories of banks, bankers, policies, politicians, debt and so much more.

You’ll meet colorful personalities like William Jennings Bryan, champion of the Free Silver movement and, believe it or not, the lion in L. Frank Baum’s original monetary allegory disguised as children’s book, The Wizard of Oz—all detailed in my 2006 book, The Only Three Questions That Count. You’ll go inside the Fed during its early days and meet the men who shaped it. You’ll see why the New Deal isn’t all it was hyped up to be. When you’re done, you’ll wish Friedman and Schwartz had published a second edition before they passed on. A chapter on Nixon’s price controls would have been dynamite.

Growth and Welfare in the American Past, Douglass North, 1966

This book is an intellectual cousin of Monetary History and about 650 pages shorter. But no less informative! Using what was then new statistical information about America’s economy from Colonial times on, North re-examines popular perceptions about the past and investigates whether data back the claims. For instance: Did the British really hold us back after 1763? Was the railroad really responsible for dynamite growth in the first half of the nineteenth century? Did the Gilded Age’s allegedly evil “robber barons” exploit workers with unlivable wages and unspeakable working conditions as the industrial revolution took flight? In the process, he shows how our market economy, technological savvy, competitive drive and strong education (in the classroom and on the job) collided to produce centuries of growth and better standards of living.

While the history here is great, most useful for our purposes is the historical mythbusting. Why? I’ll let North speak for himself: “Many of the major issues that confront the economic historian concern the real or alleged improvement or deterioration in the income position of a segment of society. The standard of life of the worker during the industrial revolution, the discontent of the farmer in the late nineteenth century, or the antipoverty campaign in modern times are a small sample of such issues. Accurate quantitative data are necessary to measure the actual change in income status of any group, and economic analysis will provide an explanation.” True today! The specifics are different, but we’re still bombarded with claims about how, why and for whom the economy is growing. North’s approach and thought process still apply and will remain relevant as long as capital markets exist. He wanted to find the disconnect between historical perception and reality. Just what we’ve explored how to do in this book!

Harriman vs. Hill: Wall Street’s Great Railroad War, Larry Haeg, 2013

We met James J. Hill a few pages ago. He’s back here, in this story of the Panic of 1901, an event his biography spends but one chapter on.

The Panic of 1901 was basically collateral damage in a grudge match between Hill and his archrival, Ed Harriman—railroad barons driven by jealousy and greed. Each sought to make his line a transcontinental empire—Harriman with the Union Pacific, Hill with the Great Northern and Northern Pacific—and they competed fiercely to take over regional lines. Hill won the battle for Chicago, Burlington and Quincy, snatching it right under Harriman’s nose. Harriman retaliated by trying a hostile takeover of the Northern Pacific. Through Kuhn, Loeb, he sought to buy 90 million in Northern Pacific shares. Hill caught wind and bought furiously to thwart him. Within days, they’d near-cornered the stock, driven the price from 110 per share to over 1,000, lifting the other railroads and most of the market with them. Panic set in as short-sellers were squeezed left and right. Brokerage houses imploded when they couldn’t cover. Stocks reeled—the New York Stock Exchange’s first crash and stocks’ then-biggest decline on record. They bounced fast, too.

The story doesn’t end there. After jointly cornering the Northern Pacific, Hill and Harriman were stuck with each other. They formed a joint holding company, Northern Securities, effectively merging their lines (still hating each other). Teddy Roosevelt hated it, and the federal government sued under the Sherman Antitrust Act. Northern Securities lost but appealed all the way to the Supreme Court. It lost there, too, but Justice Oliver Wendell Holmes Jr. dissented, passionately defending property ownership as a moral right. His dissent curbed Roosevelt’s corporate meddling and rings through US property rights and antitrust law to this day.

The above is an unpardonably brief synopsis of a tale of market mayhem, intrigue and capitalist triumph. Do yourself a favor. Read it.

The Jacksonian Economy, Peter Tremin, 1969

Pop quiz: What happened when our seventh President destroyed the central bank, pushed hard money and paid off all our national debt?

The way many pundits talk today, you’d be forgiven for thinking prosperity reigned and heaven came to Earth! But reality was near-opposite. The western land sales and fiscal havoc that followed led directly to the Panic of 1837 and a six-year depression, the longest and arguably worst ever. It’s hard to find a good history that tells it like it was. Biographies of Jackson focus on the man and the legend of Old Hickory, largely ignoring the economic havoc he created. The legendary Diary of Philip Hone 1828–1851 doesn’t give broad perspective or terribly accurate economics, but it is a drilling attack on Jackson and his lunacy. North and Friedman and Schwartz pay reference to the events objectively, but briefly. And I encourage you to read Hone for his colorfully acrid vision.

But Tremin’s book is probably your best bet if you want an objective, detailed accounting of that period. It plays fair, hitting both sides of the argument and largely letting the reader decide. Personally, I think the facts speak for themselves.

The Rational Optimist, Matt Ridley, 2010

This is a “history” book that really isn’t a history book. Ridley walks us through the rise of human civilization, showing how mankind’s capitalist creativity solved problem after problem, shortage after shortage, launching countless new industries and technologies along the way. He tells stories with facts and empirical evidence, showing how scarcity-obsessed Malthusian pessimists were wrong again and again.

Like I said, though, this isn’t a history book. It’s a retort to our doomy gloomy myopic media. Ridley uses history to show why pundits’ apocalyptic forecasts are almost surely wrong—optimism for the future is rational! Throughout human history, wherever capitalism and free markets flourished, ideas collided in marvelous ways, bursting forth with unimaginable (to most) and creative for-profit solutions to shortages, diseases and other potential nightmares—often before they even became problems! The human race when even semi-liberated is remarkable at adapting to and overcoming whatever seemingly dire circumstances befall it. Just as the shale boom twisted the knife in Peak Oil, colliding ideas will solve quandaries we can’t fathom today. As Plato said so long ago, necessity is the mother of invention.

This book is an antidote to the morose media hyperbole bombarding us daily. It will keep you sane and giddy over our long-term prospects—and for stocks—after all, a share of stock is a share in magical capitalist innovation. As a bonus, you’ll also see why free trade and globalization are so vital to the future. Ideas come together when people do. The more interconnected the world is, the more we exchange ideas as well as goods and services, and the more magic happens. Protectionist pundits can’t fathom this. They see the world as a fixed pie, and globalization as a jobs-killing menace. Ridley shows you exactly why this is hogwash.

Senseless Panic, William M. Isaac, 2010

From the first sentence, it’s clear this is the rare published history of the 2008 global financial crisis that takes a non-mainstream view: “The financial panic of 2008 and the ensuing deep recession did not have to happen, and I am appalled by the enormous financial, human, and political cost of it all.”¹¹

Many believe the panic was a natural consequence of a housing bubble, deregulation, overeager banks and financial excess gone wrong. That’s the poppycock the media has melted into our mythology ever since. Nonsense. Isaac, who helmed the Federal Deposit Insurance Corporation (FDIC) during the early-1980s savings and loan crisis, was perhaps uniquely equipped to spot the real culprit—mark-to-market accounting. Isaac was one of the first to argue publicly for repealing the mark-to-market regulation in September 2008. If the Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) hadn’t taken more than half a year to listen to him, life might have gotten better much faster than it did.

Isaac builds his case against mark-to-market accounting by walking us through the 1980s bank troubles and showing how regulators’ overreaction led directly to the 2008 panic. We see a raft of supposed reforms in the 1990s and 2000s, all aimed at preventing a repeat of the 1989–1992 savings and loan crisis, but instead laying the groundwork for something much worse. Isaac shows how the SEC and FASB incorrectly decided weak accounting standards drove the 1980s’ problems and misapplied the “solution” of FAS 157, the mark-to-market accounting rule. He shows how “Prompt Corrective Action” provisions, which forced harsh penalties on banks whose capital falls below the minimum, gave banks huge incentives to unload shaky assets at the first sign of trouble. And he shows how these factors collided horribly into the vicious cycle of asset write-downs and fire sales that culminated in the panic of September 2008. We see, with facts and numbers, how 300 billion in likely loan losses spiraled into 1.8 trillion of largely unnecessary non-market-oriented write-downs, leeching liquidity. When it all snowballed, we see how the Treasury’s interference with the Fed politicized crisis management behind closed doors, leading to the arbitrary, devastating events of September. We still don’t know why the Fed and Treasury picked certain winners and losers. We just know all hell broke loose when they did.

This book is a fact-driven, searing indictment of mark-to-market accounting and crisis mismanagement. Isaac’s viewpoint is rare and right, and it shows in spades how regulators needlessly create risk—just as we chronicled in Chapter 6. Understanding how this created crisis in 2008 won’t just help you understand the seminal financial event of my adult lifetime. It’ll also help you know what to look for next time.

We’ve come to the end of our book club now. Is your library list a mile long? I hope so! But make sure you’ve left room, as there is one literary topic we haven’t hit yet: behavioral finance. One of my favorites! Ready? Flip to Chapter 9!