The Complete TurtleTrader

by Michael W Covel

  The Complete

  TurtleTrader

  How 23 Novice

  Investors Became

  Overnight Millionaires

  Michael W. Covel

  For Nina

  Thank you for changing my life.

  “Every morning in Africa a gazelle wakes up. It knows it must run faster than the fastest lion or it will be killed. Every morning a lion wakes up. It knows it must run faster than the slowest gazelle or it will starve to death. It doesn’t matter whether you are a lion or a gazelle. When the sun comes up, you better start running.”

  African proverb

  Contents

  Cover

  Title Page

  Preface

  1 Nurture versus Nature

  2 Prince of the Pit

  3 The Turtles

  4 The Philosophy

  5 The Rules

  6 In the Womb

  7 Who Got What to Trade

  8 Game Over

  9 Out on Their Own

  10 Dennis Comes Back to the Game

  11 Seizing Opportunity

  12 Failure Is a Choice

  13 Second-Generation Turtles

  14 Model Greatness

  Appendix I

  Appendix II

  Appendix III

  Appendix IV

  Endnotes

  Index

  Acknowledgments

  Afterword

  Also by Michael W. Covel

  About the Author

  Praise for The Complete TurtleTrader

  Copyright

  About the Publisher

  Preface

  “Trading was more teachable than I ever imagined. Even though I was the only one who thought it was teachable … it was teachable beyond my wildest imagination.”

  Richard Dennis

  This is the story of how a group of ragtag students, many with no Wall Street experience, were trained to be millionaire traders. Think of Donald Trump’s show The Apprentice, played out in the real world with real money and real hiring and firing. However, these apprentices were thrown into the fire and challenged to make money almost immediately, with millions at stake. They weren’t trying to sell ice cream on the streets of New York City. They were trading stocks, bonds, currencies, oil, and dozens of other markets to make millions.

  This story blows the roof off the conventional Wall Street success image so carefully crafted in popular culture: prestige, connections, and no place at the table for the little guy to beat the market (and beating the market is no small task). Legendary investor Benjamin Graham always said that analysts and fund managers as a whole could not beat the market because in a significant sense they were the market. On top of that, the academic community has argued for decades about efficient markets, once again implying there is no way to beat market averages.

  Yet making big money, beating the market, is doable if you don’t follow the herd, if you think outside the box. People do have a chance to win in the market game, but he or she needs the right rules and attitude to play by. And those right rules and attitude collide head-on with basic human nature.

  This real-life apprentice story would still be buried had I not randomly picked up the July 1994 issue of Financial World magazine, featuring the article “Wall Street’s Top Players.” On the cover was famed money manager George Soros playing chess. Soros had made $1.1 billion for the year. The article listed the top one hundred paid players on Wall Street for 1993, where they lived, how much they made, and in general how they made it. Soros was first. Julian Robertson was second, at $500 million. Bruce Kovner was fifth, at $200 million. Henry Kravis of KKR was eleventh at $56 million. Famed traders Louis Bacon and Monroe Trout were on the list, too.

  The rankings (and earnings) provided a crystal-clear landscape of who was making “Master of the Universe” money. Here were, without a doubt, the top players in the “game.” Unexpectedly, one of them just happened to be living and working outside Richmond, Virginia, two hours from my home.

  Twenty-fifth on the list was R. Jerry Parker, Jr., of Chesapeake Capital—and he had just made $35 million. Parker was not yet forty years old. His brief biography described him as a former pupil of Richard Dennis (who?) and noted that he was trained to be a “Turtle” (what?). Parker was described as a then twenty-five-year-old accountant who had attended Dennis’s school in 1983 to learn his “trend-tracking system.” The article also said he was a disciple of Martin Zweig (who?), who just happened to be thirty-third on the highest-paid list that year. At that moment the name “Dennis” was neither more nor less important than “Zweig,” but the implication was that these two men had made Parker extremely rich.

  I studied that list intently, and Parker appeared to be the only one in the top hundred advertised as having been “trained.” For someone like myself, looking for ways to try and earn that kind of money, his biography was immediate inspiration, even if there were no real specifics. Here was a man who bragged that he was a product of the “Virginia boondocks,” loved country music, and preferred to keep as far away from Wall Street as possible. This was no typical moneymaking story—that much I knew.

  The common wisdom that the only way you could find success was by working in eighty-story steel-and-glass towers in New York, London, Hong Kong, or Dubai was clearly dead wrong. Jerry Parker’s office was absolutely in the middle of nowhere, thirty miles outside Richmond in Manakin-Sabot, Virginia. Soon after reading the magazine, I drove down to see his office, noting its lack of pretense, and sat in the parking lot thinking, “You have got to be kidding me. This is where he makes all that money?”

  Malcolm Gladwell famously said, “There can be as much value in the blink of an eye as in months of rational analysis.” Seeing Parker’s country office was an electrical impulse for me, permanently dispelling the importance of location. But I knew nothing else at the time about Jerry Parker other than what was in that 1994 issue of Financial World. Were there more of these students? How did they become students? What were they taught? And who was this man Dennis who had taught Parker and others?

  Richard Dennis was an iconoclast, a wildcatting Chicago trader not affiliated with a major investment bank or Fortune 500 firm. As the “locals” were fond of saying on Chicago trading floors, Dennis “bet his left nut.” In 1983, by the time he was thirty-seven, he’d made hundreds of millions of dollars out of an initial grubstake of a few hundred. Dennis had done it on his own terms in less than fifteen years, with no formal training or guidance from anyone. He took calculated risks leveraging up huge amounts of money. If he liked a trade, he took all of it he could get. He lived the markets as a “betting” business.

  Dennis figured out how to profit in the real world from an understanding of behavioral finance decades before Nobel prizes were handed out to professors preaching theory. His competitors could never get a handle on his consistent ability to exploit irrational market behavior throughout all types of markets. His understanding of probabilities and payoffs was freakish.

  Dennis simply marched to a different drum. He eschewed publicity about his net worth even though the press speculated about it extensively. “I find that kind of gauche,” said Dennis. 1 Perhaps he was reticent to focus on his wealth because what he really wanted to prove was that his earning skills were nothing special. He felt anyone could learn how to trade if taught properly.

  His partner, William Eckhardt, disagreed, and their debate resulted in an experiment with a group of would-be apprentice traders recruited during 1983 and 1984 for two trading “classes.” That “Turtle” name? It was simply the nickname Dennis used for his students. He had been on a trip to Singapore and visited a turtle-breeding farm. A huge vat of squirming turtles inspired him to sa
y, “We are going to grow traders just like they grow turtles in Singapore.”

  After Dennis and Eckhardt taught novices like Jerry Parker how to make millions and the “school” closed, the experiment morphed into word-of-mouth legend over the years supported by few hard facts. The National Enquirer version of the story was captured in 1989 by a Wall Street Journal headline, “Can the skills of successful trading be learned? Or are they innate, some sort of sixth sense a lucky few are born with?”

  Since the 1980s are long past, many might wonder if the Turtles’ story still has relevance. It has more relevance than ever. The philosophy and rules Dennis taught his students, for example, are similar to the trading strategy employed by numerous billion-dollar-plus hedge funds. True, the typical stock-tip chaser glued daily to CNBC has not heard this story, but the players on Wall Street, the ones who make the real money, know.

  The inside story has not been told to a wider audience until now because Richard Dennis is not a household name today, and because so much has happened on Wall Street since 1983. After the experiment ended, the characters, both teachers and Turtles, went their separate ways and an important human experiment fell through the cracks, even though what took place is as significant today as then.

  The effort to get the real story out there started to gain momentum in 2004, when I was invited to visit Legg Mason’s headquarters in Baltimore following the release of my first book, Trend Following. After lunch, I found myself in a classroom on the top floor with Bill Miller, the fund manager of the $18 billion Legg Mason Value Trust fund (LMVTX). Beating the Standard & Poor’s 500-stock index for fifteen years straight put him in a similar league as Warren Buffett. Miller, like Dennis, had taken extraordinary calculated risks and more often than not been proven right.2 On this day he was lecturing a roomful of eager trainees.

  Out of the blue, Miller invited me to the lectern to address his class. The first questions, however, came straight from Miller and Michael Mauboussin (Legg Mason’s chief investment strategist). They were, “Tell us about Richard Dennis and the Turtles.” At that moment, I realized that if these two Wall Street pros wanted to know more about Dennis, his experiment, and the Turtles, it was clear a much larger audience would want to hear the story.

  However, as someone not there in 1983, I knew the task of telling a complete story from an objective vantage, with so many competing characters and competing agendas, was going to be a serious challenge. Getting those who lived the experience to talk, coupled with sleuthlike research to corroborate everything, was the only way to make this story really come alive. That said, behind the scenes the soap opera of those Turtles who worked hard to prevent this book’s publication is a saga in itself.

  Still, the biggest problem with a story like this is that most people don’t want to actually understand how the real pros make big money. They want the road to riches to be effortless. Look at the collective public fascination with Jim Cramer — a man who is the polar opposite of Richard Dennis and Jerry Parker. Cramer is no doubt intelligent, but tuning into his extremely popular Mad Money TV show is like watching a traffic accident. There is a live studio audience that hoots and hollers at Cramer’s fundamentally driven buy signals and wild prop-smashing antics. In one word: bullshit.

  That said, a lot of people, many highly educated, believe that Cramer’s way is the way to get rich. Instead of employing a statistical thinking toward market decisions, the general public keeps investing based on impulsive “feelings,” letting an assortment of emotional biases rule their lives. In the end, to their detriment, people are always risk-adverse toward gains, but risk-seeking toward losses. They are stuck.

  The average newbie investor’s method for success is not pretty. He gets in because his friends are doing it. Then the news media start up the stories of little guys doing well during a bull market. They all start to “invest” by picking stocks with “low” prices. As the market roars in their favor, thoughts of crashes never enter their mind (“With all the money in there, it could never go down!”). They never see their own slaughter coming, even though their market bubble is never different from past ones.

  The media tell us that average investors now supposedly understand the concept of risk, yet worrying about possibilities while ignoring probabilities is at epidemic levels.3 People gamble away fortunes on money-losing hunches or double down when logic says to fold. At the end of a lifetime they are never any closer to learning how to do it right. But outside of the herd there are the special few, who have the uncanny knack for knowing when to buy and sell, combined with an uncanny knack to properly assess risk.4

  Richard Dennis mastered that uncanny knack by his early twenties. Unlike the general public wedded to their “feelings” to make decisions Dennis used mathematical tools to calculate risk and used it to his advantage. What he learned and what he taught students never resembled Jim Cramer barking stock tips. More important, Dennis proved that his ability to make money in the markets was not luck. His students, mostly novices, made millions for him and themselves.

  What was the real story, and how did the Turtles learn their craft? What trading rules were they taught, and how can an average trader or investor use those insights today in his portfolio? What happened to them after the experiment, in the ensuing years? Finding the answers to those questions, with and without Dennis and his students’ cooperation, has kept me passionately curious since 1994.

  I am not alone in that curiosity. As author Steve Gabriel wrote on Yahoo! Finance recently, “The experiment has already been done that shows that we can all learn to trade for a living if we want to. That is why the ‘Turtles’ matter.” The Turtles are an answer to the age-old question of nature versus nurture, the living proof of the single most famous Wall Street school for making money.

  1

  Nurture versus Nature

  “Give me a dozen healthy infants and my own specific world to bring them up in, and I’ll guarantee to take any one at random and train him to become any type of specialist I might select—, lawyer, artist, merchant, chef and yes, even beggar and thief, regardless of his talents, penchants, tendencies, abilities, vocations, and race of his ancestors.”

  John B. Watson,

  early twentieth-century American psychologist

  In the early 1980s, when Chicago’s reigning trader king, Richard Dennis, decided to conduct his real-life social experiment, Wall Street was heating up. The stock market was at the start of a huge bull market. On the world stage, Iraq had invaded Iran. Lotus Development had released Lotus -–-3, and Microsoft had put their new word processing program (“Word”) on the market. President Reagan, much to the liberally minded Dennis’s chagrin, declared it “The Year of the Bible.”

  In order for Dennis to find his special breed of student guinea pigs, he circumvented conventional recruitment methods. His firm, C&D Commodities, budgeted $15,000 for classified ads in the Wall Street journal, Barron’s, and the International Herald Tribune seeking trainees during late fall 1983 and 1984. Avid job seekers saw this:

  Richard J. Dennis

  of C&D Commodities

  is accepting applications for the position of

  Commodity Futures Trader

  to expand his established group of traders.

  Mr. Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis: they will not be allowed to trade futures for themselves or others. Traders will be paid a percentage of their trading profits, and will be allowed a small draw. Prior experience in trading will be considered, but is not necessary. Applicants should send a brief resume with one sentence giving their reasons for applying to:

  C&D Commodities

  141 W. Jackson, Suite 2313

  Chicago, IL 60604

  Attn: Dale Dellutri

  Applications must be received by October 1, 1984.

  No telephone calls will be accepted.

  Lost in the back pa
ges of national dailies, the ad attracted surprisingly few respondents when you consider what Dennis was offering. But then, people don’t usually expect the road to riches to be in plain sight.

  The ad invited anyone to join one of Chicago’s most successful trading firms, making “experience” optional. It was as if the Washington Redskins had advertised open positions regardless of age, weight, or football experience.

  Perhaps most stunning was that C&D Commodities was going to teach proprietary trading concepts. This was unheard of at the time (and still is today), since great moneymaking trading systems were always kept under lock and key.

  Dennis’s recruitment process took place long before the chain-reaction flow of Craig’s List ads that attract in thousands of résumés within hours for any job. However, it was 1983, and reaching out to touch the world with the flick of a blog post was not yet reality.

  Potential students who were ultimately hired recall being stunned. “This can’t be what I think it is” was a common refrain. It was, unbelievably, an invitation to learn at the feet of Chicago’s greatest living trader and then use his money to trade and take a piece of the profits. One of the greatest educational opportunities of the century garnered responses ranging from a sentence written on a coconut to the mundane “I think I can make money for you.” Let’s face it, guessing what would make a wealthy, reclusive, and eccentric trader take notice of you in order to get to the next step — a face-to-face interview—had no precedent.

  This casting of a wide net was all part of Dennis’s plan to resolve his decade-long nature-versus-nurture debate with his partner William Eckhardt. Dennis believed that his ability to trade was not a natural gift. He looked at the markets as being like Monopoly. He saw strategies, rules, odds, and numbers as objective and learnable.