In Dennis’s book, everything about the markets was teachable, starting with his very first prerequisite: a proper view of money. He didn’t think about money as merely a means to go buy stuff at the mall, the way most people do. He thought of money as a way to keep score. He could just as easily have used pebbles to keep count. His emotional attachment to dollars and cents appeared nonexistent.
Dennis would say, in effect, “If I make $5,000, then I can bet more and potentially make $25,000. And if I make $25,000, I can bet that again to get to $250,000. Once there, I can bet even more and get to a million.” He thought in terms of leverage. That was teachable in his book, as well.
On the other hand, William Eckhardt was solidly rooted in the nature camp (“either you’re born with trading skills or you’re not”). Dennis explained the debate, “My partner Bill has been a friend since high school. We have had philosophical disagreements about everything you could imagine. One of these arguments was whether the skills of a successful trader could be reduced to a set of rules. That was my point of view. Or whether there was something ineffable, mystical, subjective, or intuitive that made someone a good trader. This argument had been going on for a long time, and I guess I was getting a little frustrated with idle speculation. Finally, I said, ‘Here is a way we can definitely resolve this argument. Let’s hire and train people and see what happens.’ He agreed. It was an intellectual experiment.”1
Even though Eckhardt did not believe traders could be nurtured, he had faith in the underdog. He knew plenty of multimillionaires who had started trading with inherited wealth and bombed. Eckhardt saw them lose it all because they didn’t feel the pain when they were losing: “You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions.”2
The ramifications of Dennis and Eckhardt’s intellectual experiment opened a Pandora’s box of opinions and biases. Measuring and judging people by their IQ board scores, LSAT, GPA, degrees, or whatever other metric, is the way most of society operates. Yet if an IQ measure or test score was the only ticket needed for success, then all smart people would be loaded, which is obviously not the case.
Stephen Jay Gould, the late great American paleontologist, evolutionary biologist, and historian of science, was always quick to eschew society’s misconceptions about intelligence: “We like to think of America as a land with generally egalitarian traditions, a nation conceived in liberty and dedicated to the proposition that all men are created equal.”3 However, Gould saw America slipping toward measures and ratios as a sole means of predicting life success and was appalled at the increasing predilection of Americans to use a hereditarian interpretation of IQ as a limiting tool.4
Dennis, like Gould, was not about to be taken in by a hereditary interpretation of IQ. His aim was to implant his mental software into the brains of his students, and then place them into his controlled environment to see how they would react and perform.
That someone of Dennis’s stature and success would be so determined to prove nurture over nature that he would teach his proprietary trading methods to others was extraordinary. Certainly his partner was surprised that he was willing to put so much of his own money in the hands of amateurs.
With a dark beard and sideburns and a receding hairline, William Eckhardt bore an uncanny resemblance to Lenin and cut a sinewy, energetic figure, the polar opposite of the over-six-foot-tall rotund Dennis. Of the two, he was the true mathematician, with a master’s in mathematics from the University of Chicago and four years of doctoral research in mathematical logic. But for the purpose of their nature-versus-nurture debate, Eckhardt was the unapologetic biological determinist, certain that his partner was a savant, an introverted genius with special genetic talents.
Today, there are plenty of people who would still argue against Dennis, insisting that “biological determinism,” or the notion that genetics predicts the physical and behavioral nature of an organism, can’t be overcome.5 That’s bad news for a potentially successful trader or entrepreneur in any field who doesn’t have the so-called pedigree or right IQ score. The irony is that even though Dennis’s experiment proved otherwise over twenty years ago, success in the markets is still perceived by many as a virtual IQ caste system.
Skeptics of Dennis’s Turtle experiment have long rolled out barrages of excuses about how serendipitous answering that little ad was. They argue it would have been impossible for anyone, except insiders, to have known that ad was the ticket to cracking Wall Street’s Top 100 paid traders (like Jerry Parker did). How could anyone know that an ad could potentially bypass what Warren Buffett has affectionately called “the ovarian lottery” and give a random group of people the chance to make millions? It’s hard to accept that fact. It’s too much like a Hollywood script.
It’s a Small World
Richard Dennis wanted a mishmash of personalities, similar to MTV’s Real World and their diverse casting calls. He selected both far-right-wing conservatives and bleeding-heart liberals. A high school graduate and an MBA were picked from the thousand-plus applicants who threw their hats into the ring. The wild cross-section of his final Turtle picks demonstrated Dennis’s diversity desires.
There were college graduates from the State University of New York at Buffalo (business), Miami University in Ohio (economics), the New England Conservatory of Music (piano, music theory), Ferrum College in Virginia (accounting), Central Connecticut State University (marketing), Brown University (geology), the University of Chicago (Ph.D. in linguistics), Macalester College (history), and the United States Air Force Academy.
Others Dennis students had recently held jobs at Cushman/Wake-field (security guard), Caterpillar Tractor (salesperson), Collins Commodities (broker), the Ground Round Restaurant (assistant manager), A.G. Becker (phone clerk), Palomino Club (bartender), and Dungeons and Dragons (board game designer). One student simply declared his status as “unemployed.” Earlier job histories of those who made the final cut were even more mundane: kitchen worker, teacher, prison counselor, messenger, accounting assistant, and waiter.
Dennis selected one woman from the ad, a rarity in the 1980s “all boys” world of Chicago trading. He also selected gay students, whether he knew their orientation at the time or not. His picks ran the gamut from mild-mannered, professional academics to regular-guy blue-collar types, to some with wildly volatile personalities.
There were certain things Dennis was looking for. He wanted students who showed a willingness to take calculated risks. Those who stood out from the herd in some kind of an unconventional way had a leg up. This wasn’t a normal hiring process in the early 1980s, nor would it be normal now. Today, MBA types, for example, are geared to the intellectual rigors of running a company but are reluctant to get their hands dirty. They are the ones who think IQ and connections are all they need. They don’t want to do the hard work. They don’t want to really take a risk.6
Dennis didn’t want those people. He was searching for people who enjoyed playing games of chance. He was looking for people who could think in terms of “odds.” Think like a Vegas “handicapper”? You were more likely to get an interview. None of this was surprising to those who knew Dennis. Reacting to opportunities that others never saw was how he marched through life.
With a story like this, it’s not hard to imagine the legend that has built up over the years. The experiment has inspired a cultlike reverence, often passed along by word of mouth. However, Charles Faulkner, a modeler of great traders, was instantly struck by the deeper meaning of Dennis’s experiment. He wondered how Dennis knew, saying, “I would have sided with Bill’s skepticism. Even if … it was teachable, it certainly should have taken more effort and a much longer time than Dennis allowed for learning it. The experiment, and more significantly the results, violated all of my beliefs around effort and merit and reward. If something was that easy to learn, it shouldn
’t pay so well and vice versa. I marveled at the range of thinking, awareness, and inference, this implied.”
Dennis and Eckhardt taught their students everything they needed in only two weeks to trade bonds, currencies, corn, oil, stocks, and all other markets. Their students did not learn to trade from a screaming mosh pit on the trading floor with wild hand signals, but rather in a quiet office with no televisions, computers and only a few phones.
Each student received $1 million to trade after his classroom instruction. They were to get 15 percent of the profits, while Dennis got 85 percent. No surprise that he would get the lion’s share; it was, after all, his money.
Dennis was honest about taking the majority of the profits when he said in November 1983, right before launching the experiment, that there would be no charity involved. He viewed the experiment as a way to diversify his portfolio. While he knew his “no experience necessary” students could be wiped out, he viewed it all as a way to gain more control of how his millions were being put to use, saying, “I’m tired of investing in someone else’s condominium in Timbuktu.”7
Replacing condo investment ideas with a group of surrogates was a smart move. Many of his students went on to make 100 percent or more per year over four years. That’s monster moneymaking. Even more important than those successes from the early 1980s is the current track record of three of the participants. Long after the experiment’s ending, Eckhardt, along with two of Dennis’s former pupils, Jerry Parker and Paul Rabar, manage in excess of $3 billion in 2007. They still trade in a very similar fashion to how they did back in the day.
Beyond Turtles-related successes, there are hundreds of others, traders of big achievements, who owe a debt of gratitude to Dennis for sharing his knowledge and experience. Additionally, men considered to be trading peers of Dennis (not trained by him), men of similar macro trading backgrounds such as Bruce Kovner, Louis Bacon, and Paul Tudor Jones, are to this day regularly the highest paid on Wall Street.
Of course, the $3 billion traded by Dennis’s trading progeny doesn’t seem that large when headlines today scream out with stories of new hedge funds launched with billions out of the gate. When Jon Wood, formerly of UBS, started his new fund with more than $5 billion and when Jack R. Meyer, the former investment manager of Harvard University’s assets, raised more than $6 billion for Convexity Capital, the $3 billion from Dennis’s associates sounds less impressive.8
In fact, some argue that Dennis’s “lack of pedigree” approach has been passed by. One recent story profiled a twenty-seven-year-old trader from Goldman Sachs. A “well-bred” product of Massachusetts’s tony Deerfield Academy and Duke University, he was described as having all of the ingredients of a grade-A trader. One of his peers gushed. “He’s smart, competitive, and a hard worker. Keep your eye on this kid.”9
That praise has to be put into perspective. If a trader starts a career with a prominent investment bank, he becomes valuable by using Goldman Sachs’s money, offices, and connections. The access he has sitting in the catbird seat at a top bank is a major secret of his success.
Investment banks were simply never the career paths of the great entrepreneurial traders. That is why Dennis brings hope. Independent-minded rebel traders, like him, never got to where they were by moving up bureaucratic ladders. They did not bide their time for twenty years engaging in office politics. Dennis and his peers were never part of a Fortune 500 hierarchy. They had one objective: to make absolute-return money trading the markets on their terms. It was high risk and high reward.
Dennis’s Turtle experiment proved, all things being equal, that his students could learn to trade to make millions. However, all things being equal, after they learned the “right” trading rules to make those millions, if they did not exhibit, like Boston Red Sox slugger David Ortiz does in baseball, a “walk-off home run” mentality every day, they would fail. Great training alone was not enough to win for the long run. In the end, a persistent drive for winning combined with a healthy dose of courage would be mandatory for Dennis’s students’ long-term survival.
Before getting into what really happened with the Turtles, who the winners and losers were and why, it’s crucial to get acquainted with what made Dennis tick in the first place. Knowing how a regular guy from the South Side of Chicago made $1 million by the age of twenty-five in the early 1970s and $200 million by the age of thirty-seven in the early 1980s is the first step toward understanding why nurture won out.
2
Prince of the Pit
“Great investors conceptualize problems differently than other investors. These investors don’t succeed by accessing better information; they succeed by using the information differently than others.”
Michael J. Mauboussin,
chief investment strategist of Legg Mason Capital Management
Nineteen eighty-six was a huge year for Richard Dennis. He made $80 million (about $147 million in 2007 dollars). That kind of moneymaking put him squarely at the center of Wall Street alongside George Soros, who was making $100 million, and then junk bond king Michael Milken of Drexel Burnham Lambert, who was pulling in $80 million.1
Profits like those for Dennis came with heartburn. He was down $10 million in a single day that year before bouncing back, a roller-coaster ride that would have made mere mortals lose serious sleep. Yet Dennis cockily said that he slept like a baby during all that volatility.2
His moneymaking style was about mammoth home runs and many smaller strikeouts. If there was a “secret,” he knew that you had to be able to accept losses both psychologically and physiologically. Still, 1986 was a long time ago, and memories dull when an old pro starts talking about the benefits of taking “losses.”
During his heyday in the 1970s, 1980s, and mid-1990s, Dennis was described in a number of ways by those who knew of him. There was Dennis the legendary floor trader, Dennis the trading system’s trading guru, Dennis who started funds with investment bank Drexel Burn-ham, Dennis the philanthropist, Dennis the political activist, and Dennis the industry-leading money manager.3 He was a difficult man to stereotype, and he liked it that way.
“Dennis the gambler” was the only label that offended him, because he never considered himself a gambler in the Las Vegas sense. He understood financial Darwinism (read: “odds”) through and through. He always played the “game” knowing that everyone else was out to beat him. Financial futures pioneer Richard Sandor put Dennis in perspective: “The name of the game is survival when the markets are this chaotic. From that perspective, he may go down as one of the most successful speculators in the 20th century.”4
Dennis’s success started long before he launched the Turtle experiment. He grew up in Chicago during the 1950s, a street kid from the old South Side neighborhoods. There was no privileged childhood with wealthy parents and well-placed friends. He did not have a silver spoon or the right connections.
The teenage Dennis was introverted and wore thick glasses and polyester pants. His first stab at trading, while attending the all-boys’ St. Laurence Prep School in Chicago, was to buy ten shares of a $3 “phonograph” stock. The company folded. While his first attempt at trading failed, he was a natural at poker, intuitively understanding the odds.
His teachers did not forget him. James Sherman, who taught theology and European history to Dennis, said that he never would take anything at face value. Dennis and his friends enjoyed the mental gymnastics of taking sides in an argument. Sherman added, “If somebody had said back then that Richard Dennis would become a very wealthy man as a commodity trader, I probably wouldn’t have believed them.” His former teacher would have predicted Dennis to be in front of the fire, with a sweater and a pipe, expounding on the cosmos.5
At seventeen, Dennis landed a summer job as a runner ($1.60 an hour) at the Chicago Mercantile Exchange. Each day the exchange floor was mobbed by hundreds of traders fighting and screaming to place their trades. They were exactly like auctioneers buying and selling their wares except that
they were in a trading pit battling it out. An indoor game of tackle football would be a good description of the scene.
Dennis longed to be there, but to trade on the floor you had to be twenty-one. He found a way over that hurdle by talking his father into trading for him. A blue-collar worker for Chicago’s city government, the father became a proxy guided by his son’s hand signals from the sidelines.
Despite some trading success in his teens, Dennis headed off to college at DePaul University, where his passion for philosophy (after flunking out of an accounting class) from high school days was rekindled. He was most taken with British philosophers David Hume and John Locke, who had a relatively simple way of viewing the world. “Prove it to me” was their basic perspective.
Hume thought the mind a blank slate (tabula rasa) on which experience could be written. He believed that since human beings live and function in the world, they should try to observe how they do so. Discovering the causes of human belief was his key principle.6 Locke, on the other hand, argued that there were no innate ideas. He asked the question, “How is the mind furnished?” He wanted to know where reason and knowledge came from. His answer was one word: “experience.”
Both Hume and Locke belonged to the school of thought known as Empiricism. Empiricism is rooted in the notion that knowledge is derived from experiment, observation, and experience. Little nuggets of simple common sense from these two eighteenth-century British philosophers connected with an impressionable college student. They became his idols.
Dennis was not shy about his leanings, asserting, “I’m an empiricist, through and through. David Hume and Bertrand Russell. I’m solidly in the English tradition.” Dennis saw Hume as ruthlessly skeptical. Hume took on the sacred cows of his generation, and Dennis loved that attitude.7
The Complete TurtleTrader Page 2
