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The Best Wall Street History Books
By David Kathman
Morningstar

Investment writers love history. I've lost count of the number of times I've seen the current bull market compared to that of the 1920s, or the Internet-stock frenzy to the tulip mania of the 1630s. But all too often, such comparisons are facile and superficial. It may well be that today's market is similar to 1929's, but it's important to understand why.

The following Wall Street history books cover a variety of topics and time periods, but they have one thing in common: They bring the past alive and provide some much-needed perspective on the pleasures and pitfalls of today's market. They're also entertaining to read, especially if you're a history buff like I am.

Wall Street: A History by Charles R. Geist
For those who want the big picture, this book covers the history of Wall Street from the late 1700s through 1996 in admirable detail. Geist describes the beginnings of the New York Stock Exchange in the 18th century, its growing importance throughout the 19th century as railroads, steel, and electricity made some individuals incredibly wealthy, and the market's many ups and downs throughout the 20th century.

He does a particularly good job of intertwining broad themes, such as the gradual increase in government regulation of Wall Street, with sketches of individual incidents and characters. He doesn't have the space to spend too much time on any particular event--his account of the 1929 crash is only seven pages long--but the historical perspective this book provides is invaluable.

Once in Golconda: A True Drama of Wall Street, 1920-1938 by John Brooks
This classic, originally published in 1969, was recently reissued in paperback. The years have not lessened its appeal. Author John Brooks chronicles the story of Wall Street during the heady bull market of the 1920s, the crash of 1929, and the worst days of the Great Depression, using lots of details and sharply-written anecdotes.

Brooks grabs the reader right off the bat with a vivid description of a bomb that exploded outside the New York Stock Exchange on September 16, 1920, deftly using the episode to provide background and set the stage for the dramatic narrative that follows. Though Brooks brings to life all the major characters of 1920s Wall Street, he homes in on Richard Whitney, the J. P. Morgan executive and stock exchange honcho who was eventually convicted of embezzlement and tossed into Sing Sing. Whitney's hubris and downfall not only parallels the market's excesses, it also effectively foreshadows the greed of the insider traders of the 1980s.

Capital Ideas by Peter Bernstein
Unless you've got an MBA in finance, such things as the Capital Asset Pricing Model (CAPM) and the Black-Scholes option-pricing formula can seem mind-numbingly complex. Yet these ideas have had a profound effect on how today's financial markets work and how people invest. In this book, Peter Bernstein traces the history of academic finance, making its ideas surprisingly understandable for nonspecialist readers.

The book opens at the turn of the 20th century with an obscure French mathematician named Louis Bachelier, who first proposed that stock prices are random and unpredictable. Bachelier's theory was almost totally forgotten until the 1950s, when Harry Markowitz took the idea and built on it. The seed planted by Markowitz eventually led to the Efficient Market Hypothesis, CAPM, and all the other theories of modern academic finance. Many of these theories are controversial, especially among people who actually trade stocks for a living. But they can't be ignored, and Bernstein's book is essential reading if you want to understand these ideas and where they originated.

Den of Thieves by James B. Stewart
The insider-trading scandals of the 1980s made national headlines, turned Ivan Boesky and Michael Milken into household names, and led to the collapse of Drexel Burnham Lambert, one of the most powerful investment banks on Wall Street. James Stewart covered the story for the Wall Street Journal as it unfolded, and this best-selling book retells the fascinating story.

In the first half of his chronicle, Stewart cuts back and forth among the major players in the scandal--Boesky, Milken, Martin Siegel, and Dennis Levine. He details how the insider-trading ring snowballed from occasional tips in the late 1970s to an organized billion-dollar operation by the mid-1980s. The second half of the book shifts perspective, describing how an anonymous tip to a Merrill Lynch compliance officer in May 1985 led the authorities to gradually unravel the ring and bring down its leaders. Stewart knows how to build suspense and keep the reader turning the pages. If this weren't all true, it would make great fiction.

Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It by Nicholas Dunbar
Remember when world financial markets crashed in the summer of 1998, and Long Term Capital Management--a $130 billion hedge fund--became the most notorious casualty? In this book, Nicholas Dunbar explains how the LTCM fiasco happened. But in order to make sense of the esoteric inner workings of LTCM, he explores the 30-year history behind the financial theories that blew up so dramatically two years ago.

LTCM arose from the intersection of two groups: Salomon Brothers bond guru John Meriwether and his team, who made millions with innovative bond-trading techniques, and Nobel Prize-winning economists Robert Merton and Myron Scholes, whose theories revolutionized the options market. The idea behind LTCM was to merge Meriwether's trading expertise with Merton's and Scholes' formulas to make billions of dollars in low-risk profits for wealthy clients.

Those formulas worked wonders for a few years, until rapidly plunging prices in the summer of '98 caused liquidity to dry up and brought the LTCM edifice crashing down. Dunbar provides a vivid picture of people making or losing billions of dollars in the blink of an eye. He also shows why there's no free lunch in investing, no matter how many Nobel Prize winners you have on your payroll.

David Kathman is an analyst with Morningstar.com. He can be reached at david_kathman@morningstar.com.  

 
   
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