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Investment lessons from 9/11

Updated: Sep 12, 2019

One of the many true heroes of 9/11 rushing into the inferno to save lives.

The true heroes of 9/11 are the fire fighters, police officers and others who ran into the buildings with no consideration for their own safety to help those inside those towering infernos. They demonstrated nobility of spirit that makes one weep even today.

This a is a record of what my investment team and I did that terrible day to try and protect our clients' assets, and some of the lessons learned that may prove useful for other investment managers in terms of structuring their operations for action in times of unexpected crises. (It was written several years ago, and presented here to commemorate 9/11 and help others prepare for the next unexpected disaster.)

Recap of Events on 9/11

On the morning of September 11, 2001 at 4:15 a.m. PST my alarm went off as usual. I got out of bed, showered, and headed into the office of my investment company, Seagate Global Advisors.

The office was a 15 minute drive away directly on the water in Redondo Beach, California. I got into the office at 5:01 a.m., made a strong cup of Peet’s coffee, opened all the blinds, and sat down at my desk after taking a long look at the beautiful Pacific Ocean and the developing sunrise.

9/11/2001 was not a big numbers day, so 5:30 a.m. came and went without much portfolio activity. The TV was on CNN in the trading room with the volume on mute.

Then around 8:50 a.m. EST, my attention was drawn to the silent TV. There was a picture of the World Trade North Tower on fire, so we turned on the volume and heard the announcer say a plane had apparently crashed into it.

It was a clear day in NY, so I found it hard to believe this was an accident.

And I had remembered that the towers had been bombed by terrorists in 1993. After that incident I started studying and tracking Middle Eastern terrorists, including Osama bin Laden. One thing I had learned was that the terrorist groups do not forget a target, they often hit the same place again until it is destroyed. So immediately I thought this could be another terrorist attack on the World Trade Center.

We were discussing the possibility it was terrorism and the implications on the trading desk when to our horror at 9:03 EST another plane slammed into the other tower.

At 9:05 EST we convened an Investment Committee meeting and agreed: 1) This was a terrorist attack, with Osama bin Laden as the prime suspect; 2) The scale and nature of the attack would fundamentally change a number of things; 3) One result would be a slowdown in trade and other economic activity which would cause the Fed to ease; 4) War was a high probability response, and was bad for risk assets and good for safe haven assets; 5) We had to act quickly to reduce portfolio risk and buy safe haven assets to protect our investors.

9:11 EST the Investment Committee meeting ended.

That morning our global macro hedge fund had a long bias with around $250 mm in positions given our positive outlook. That outlook had been changed 180 degrees in 21 minutes. Our investment team jumped on the phones and started to sell our riskier assets. But time was not on our side.

At 9:17 EST the FAA shut down all NYC area airports.

At 9:21 the Port Authority closed all bridges and tunnels.

It was announced that the US stock exchanges would not open. So, getting people to answer the phones in NY, much less give us bids on anything was really difficult (at that time we traded over the phones). We sold what we could and started to buy what we thought would be safe haven assets given our new world view.

Since it was hard getting anyone to pick the phones up in NY, we called the London trading desk of Deutsche Bank and first bought $35 mm of Swiss Francs based on the idea that SF’s always do well in chaos.

Next on the London futures exchange we bought $35 million of 10 year German Bund contracts, $25 million of 5 year German Bund contracts and $250 million of 3 month Euro Swiss future contacts. All were bought on the idea the global interest rates would fall and investors would move from risky assets into safe government bonds which would cause their prices to rise.

At 9:40 the FAA halted all air traffic, which seemed a smart decision made under extreme conditions. Three minutes later, AA flight 77 slammed into the Pentagon.

As London closed and with NY trading desks out of commission, we called the Windy City.

Chicago was still open. My friend Kenny Meahan, one of the top futures brokers in Chicago, took my call and he started buying Eurodollar contracts for us. Execution was hard as the pits were in chaos.

9:59 our attention was diverted to the TV as we watched in horror as the south tower of the World Trade Center collapsed. Our hearts collapsed as well.

10:10 United Airlines flight 93 crashed into the dirt in southern Pennsylvania.

We frantically continued to buy Eurodollar contracts.

10:28 our horror was multiplied as the north tower of the World Trade center pancaked to earth in billows of smoke, fire and ash. The devastation was beyond belief.

Shortly thereafter, I cannot remember the exact time, the Chicago futures exchanges closed as well, the final place in the US you could execute an investment order. Kenny informed me he had managed to buy $350 million of Eurodollar contracts for us which would increase in value if short term interest rates fell as we expected.

The terrorists managed to close down the entire financial system in a little over 2 hours during which time we completely changed our world view and executed over $700 million in trades in response. Those actions prevented a loss of principal for our investors, and some gains. But we were powerless to prevent the loss of life in NYC that fateful day.


The events of 9/11 made me realize how quickly the world can change. In less than 2 hours the course of modern history was altered. Markets and prices were dramatically affected. The outlook for the price of oil was altered. Asset allocations and investment strategies would need to be changed in response.

Many investors want to ignore the potential for events like 9/11. It is much more comfortable to pretend black swan events do not happen. But they do, and 9/11 was one of them. I had structured our investment strategy, process and trading desk to be ready for the unexpected and to react quickly. 9/11 reinforced the wisdom of being so structured and this is an important lesson.

Note that this approach is very different from the notion that markets are perfectly efficient and that it is impossible to outperform them. There is a large group that supports this theory, and the related strategy is indexing. Indexing has some merits and can be used appropriately in some situations. However, 9/11 again re-enforced my long held view that active management is superior to passive management for those that have some degree of investment expertise.

Related to this, 9/11 proved the benefit of having good relationships with brokers that know you well and will respond to you when you need them. The transfer to electronic execution has some benefits, but there is a cost in terms of information transfer and order execution during chaos.

Another important lesson of 9/11 is that while markets may be efficient at discounting information that is expected, they are much less efficient at discounting information that is not expected. It took the markets weeks and even months to fully process the negative impact on economic growth of the events of the morning of 9/11. This is a fundamental observation that allows active managers to outperform, not just in extreme cases of non-scheduled information, but also in more mundane situations as well. Many academics simply do not understand how markets actually discount information.

The value of liquidity was again proven on 9/11. You may earn a little less in very liquid securities, but they proved valuable on 9/11. Even if you have to wait only half a day to sell something, like a mutual fund, it may be too late.

For less liquid securities you may receive some extra yield or upside return, but I prefer to focus on highly liquid securities for part of your portfolio and then invest in illiquid securities and funds that offer the potential for higher return and/or lower risk in exchange for less liquidity. The middle tier of the liquidity spectrum turns to cement when you really need to get out so you cannot use that feature when necessary, but you are paying for it. This was demonstrated on 9/11 and again in 2008 collapse.

Right after 9/11 Seagate Global’s Investment Committee spent a lot of time thinking about what other devious things could be done by a determined terrorist. We came up with a number of terror acts that would cost little and could be easily implemented. Unfortunately, some of them have been used since 9/11.

Luckily, terrorists have not used weapons of mass destruction, be it biological, nuclear, gas or some other monstrous killing machine. We know they are seeking such weapons. Therefore, investors are well advised to be mentally prepared at any time for such an attack.

It is unsettling for many investors to be asked to consider this, and I would guess most investors simply want to ignore this and hope the authorities prevent it. To me, hope is just another four letter word, not an investment strategy.

Also, there are many events that could quickly affect financial markets but that are not a terrorist attack such as a natural disaster. The issue for investment managers is not terrorism per se. It is unexpected events and how to manage risk before, during and after such events.

So, be vigilant for the next unexpected event. Continue to build a base of knowledge of current events and politics as well as economics and history. Continuously scan news for stories that may provide a clue as to potential risks.

And remember, some events that are called black swans, such as the 2008 financial collapse, are actually perfectly predictable, it is just that many people have difficulty seeing them. I for one saw 2008 coming in 2006 and positioned investors accordingly (our hedge fund was up 17% in 2008). It was not unexpected in the least. It was a slow motion train wreck with the bell wringing loud and clear for 2 years.

Here I must add that the current situation of central bank induced negative interest rates is another slow motion train wreck. I have significantly altered my asset allocation in anticipation of the negative consequences that are coming from current policies. It is not a question of if, but when.

Structure your portfolio into two sectors; highly liquid that can be sold immediately, and illiquid which provides a higher potential return but is illiquid. Do not invest in securities that promise liquidity, but only during calm markets.

Many risks can be identified before the event, while others can be mitigated after the fact such as on 9/11 right after the planes hit the towers. But you have to have the courage and ability to act quickly. It is these times that separate the true money managers from the closet indexers.

If you are not prepared to make the quick decisions needed in today’s internet connected world, find an advisor who is and will act on your behalf to protect your investment when new information is learned. Ask such potential advisors how they dealt with the 1987 stock market crash, the 1994 bond market crash, the dot com bust of 2000, 9/11 and the financial collapse of 2008. Your best single defense against another black swan event is a battle proven money manager.

Final Thoughts

Managing money can sometimes seem like being in a war, as on 9/11. Money managers who are able to fight and win financial market battles are to be lauded. Half the battle is preparation.

However, the true heroes are those that ran up the Twin Tower stairs to their deaths to help others escape the inferno.

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