Is that trader next to you flashing a sell sign?
The easiest million dollars I ever made in the market was beneath the rubble of Martha Stewart and Sam Waksal.
It was late December 2001, and the people in the know had already sold their shares of ImClone due to the FDA's rejection of Erbitux. But it wasn't until the close of business on Dec. 28 when a press release informed us all. The next day, the stock was in a freefall. There was no bottom in sight.
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Shares of the company were trading around $15 (Martha had sold at $58) when my direct wire from Morgan Stanley started ringing and my coverage said, "I've got 200k IMCL to buy." I said thank you and hung up. Then Goldman called with the same exact flow. A few seconds later JPMorgan and Lehman relayed that they had large buyers of IMCL. Weird. Within the same minute a few more firms called to indicate they had six figure buyers of IMCL. So by the tenth call from UBS I knew what he was going to say before I even picked up the phone, "Hey Turney, we've got 200k shares of IMCL for sale."
"Okay thanks," I said as I hung up. Then I said to myself — did he just say for sale?
I quickly called back and confirmed that in fact he did say for sale.
So I screamed, "I BUY."
With so many large buyers on the street it only took minutes for the stock to be up a quick $5 and that's when I sold my shares. It's as if a million dollars just fell into my lap. Usually it's not that easy…
Read people, not charts
The market is designed to make the most number of people look stupid. If you believe this theory like I do, then wouldn't it make sense to read people just like you read charts? I tried to do this whenever I could. It helps when a large part of the finance population are looking or wanting the same thing — like a top in the market. There's an emotional see-saw within trading that's sometimes easy to spot.
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I relied on trying to read people to better understand what the market was doing and might do in the future. It was a skill that was born out of a lack of having any other traditional type of finance skills. I tried to read everyone: the other guys on my desk, the hundreds of sell-side brokers I spoke with daily, assistants, portfolio managers and even your Aunt Ginny while slow dancing with her at your wedding. It didn't matter — if someone had an opinion on the market, I wanted to hear it.
Reading people works best over a long period of time — you need a baseline. The historic behavior and emotional reactions will lead you to understanding how a stock might trade in the future. Clearly it works best with the people you sit next to or who are in your office, but it can also be used with the people you speak to on the phone daily. What is their normal behavior and what does the stock or market normally do? If you start to see a pattern — then you're in business.
The Tarot of trading
Redundancy (buy) / Apathy (sell) – In 2002, it was like "Groundhogs Day." For 10 months straight, everyone was trying to catch a rally. And every day, I'd call 10 people invested in the market and ask them the same questions — what they thought of the market and where they thought it was going. I kept getting the same answers every day. It has to rally soon, they thought. And every morning, futures would be up in the morning, we'd have a 30- to 60-minute rally when the market opened and then it would sell off the rest of the day, lower and lower. By October, nobody cared anymore — they just assumed the market was going to zero…
Rally time.
The market started to come back and no one was positioned for it. Everyone who had called for a rally and tried to get long was no longer around. They'd been exhausted from the months of a daily beat down. The market started to prepare for a huge rally — and took off a few months later.
We started getting long and saved our year in 2002. We were set up in 2003 and had our best year ever, performance-wise. I made $2 million that year.
Frustration (buy) / Capitulation (sell) – I used to be able to hear it in the voices of my analyst. They kept fighting a fight they couldn't win, but they keep getting into the ring. They couldn't understand why their stocks were going lower, because fundamentally, they had nailed the call. It's frustrating to think you're right, but not have the market validate your brilliance. On the day they tell me to blow out the position, it was time to buy more. They always capitulated at the bottom.
Second guessing (buy) / You're the worst trader on the street (sell) – When my portfolio manager asked me to sell 100k shares of Amazon at 9:30 a.m. and then at noon I gave him the report, he was all smiles. But by the late afternoon, he started asking me why I sold the AMZN so fast. The stock was up another 4 percent from where we sold it. (What I really wanted to say: "Aren't you the one who decided to sell the position in the first place?!")
A week or two later, when he was still staring at the AMZN stock price and asked, "Why the hell do I even pay you? You should pay me to work here" — that's when I knew the stock would drop.
Do you have any stock tips? (buy) / Pillow talk and hairdressers (sell) – For years leading into the Internet bubble, I'd be cornered at family gatherings, anniversary parties and by total strangers when they found out I worked on Wall Street. They wanted a tip. They wanted to get in the game and get rich quick — which all meant the market was probably going higher. But I knew it was near the end when my girlfriend, who had never mentioned the word stock in her life, started trying to figure out her asset allocation for her 401(k) in bed. And a few weeks after the Super Bowl in 2000, the woman cutting my hair with a mouth full of Trident gum said, "You should really buy some Pets.com. I picked up 75 shares today." I tried to get a borrow on the stock the next day. When the people last in line start talking about it — it's time to get out.
But of course all of this could change with a single event. Just because you read someone today doesn't mean it will play out tomorrow.
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.