World on fire: Learning to think like Wall Street

When tragedy strikes — traders trade.

It was April 20, 1999, the second week of my hedge-fund career, when news broke about the Columbine High School massacre. While I tried to comprehend how two individuals were capable of a shooting spree of fellow students, others in the office were discussing if SWHC, CAB and ATK were longs or shorts. They wondered what effects this might have on gun control.


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I was in shock. What did a bloodbath of 12 students and a teacher have to do with the market? I didn't know how to think like that. I just assumed I'd wait two or three days like everyone else and read the 37 different (yet exactly the same) rearview mirror research reports from the sell side. Or I could just look at my screens to inform me what the exact implications were, because we all know stocks don't lie — people do. The questions in my head were about the how and why — not the what.

The market didn't care that people were dead. The office felt like someone jacked up the AC — it was like an ice box. But the fact of the matter was it was very simple: Supply +/- Demand / Information = Intrinsic Value. End of story.

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A few days after Sept. 11, 2001, I had lunch with a good friend. We shared our experiences of the fatal day; his being much scarier than mine. We weren't sure what to make of it. A lot of the details were still unknown. But my friend told me he kept hearing two words ring in his ears. He'd been on the phone with one of his hedge-fund clients from Connecticut when the second plane hit. All he remembered as he got off the phone was a trader screaming, "BUY OIL!" at the exact moment he was instructed to evacuate Tower 7. Again, I was amazed and shocked. How could someone even think like that?

If you think the market is insensitive — you're correct. It's void of emotion and compassion. It's in place to efficiently and effectively put a value on the news. There are times when you see the humans shine through the machines and trade based on emotion, like with the patriotic rally after Sept. 11. The fundamentals and economy were indicating there should be a pullback before the planes ever hit, but when the markets finally reopened it only took a week for the selloff to flush itself out. Which then led to a monthlong rally above pre-Sept. 11 levels.

By February of 2003, I started to train my brain to think like a trader. Instead of asking how or why, I started to ask: What is the trade?

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The SARS virus was the crisis where I began to think differently. Everyone was afraid of SARS. People were talking about a pandemic and the Asian markets had been in a freefall. An American businessman traveling from China developed the symptoms. The plane was diverted and he was taken to a hospital. He died there along with the doctor who treated him. The World Health Organization issued a global alert.

As a health-care trader, I focused nearly all of my time and energy on SARS. These opportunities were not just confined to drug makers and medical-supply companies. The virus had the potential to seriously affect the airlines, tourism, restaurants, air-filter companies, quarantine centers. You could cast the net as wide as you wanted. Just about every day, research told me of a new tiny biotech company that was either working on a vaccine for the flu or had uncovered a new strain, which could have been good for health-care stocks, though very bad for the human race.

And by being in front of SARS; we got off to a great start and a very profitable year at Argus Partners.

Then there's what was happening in Iraq. The old adage on Wall Street goes: Buy on the cannons, sell on the trumpets. Going to war was good for the stock market. So we increased our long exposure even more, which led to more profits.

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There's always something going on — Y2K. The blackout in the Northeast in 2003. Hurricane Katrina in 2005. Earthquakes. Tsunamis. Marathon bombers. Israel vs. Hamas. They all impact the market. They say, "For every action there's a reaction." On Wall Street, it might be more fitting to say, "For every tragedy there's a trade."

The market is like your unfiltered friend who tells you what you need to hear — not what you want to hear. The flashing lights on your screens never offer you a Hallmark card, a box of tissues or a night on the couch watching "Love Actually" with a pint of ice cream. It just gives you the facts.

No doubt, in the past week, many young summer associates, fresh from college with that change-the-world optimism, are learning that very lesson. Suddenly, while they're seeing a commercial flight shot down in eastern Ukraine, killing all 298 people on board, or children killed in Gaza, their co-workers are wondering what the market implications are.

Remember if you're a trader and the world is on fire, first go long water and second, call the fire department.

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Commentary by Turney Duff, a former trader at the hedge fund Galleon Group. Duff chronicled the spectacular rise and fall of his career on Wall Street in the book, "The Buy Side." The paperback edition comes out June 17 and Sony bought the TV/movie rights to the book. Duff is currently working on his second book, a Wall Street novel. Follow him on Twitter @turneyduff.