The Complete TurtleTrader

by Michael W Covel

  In today’s terms, this would be like someone saying he has a way of trading that’s so good he can make $200 million a year. Or think of some number that is fifty times more than is rationally achievable by any normal measure. With anyone else, Willis would have been skeptical: “If I didn’t know Rich, I would have said, ‘Gee, he really does sound a little more off balance than I’m even thinking.’ Saying $50 million in 1979 is a crazy thing to do, but I believed it. And he did it. If an edge is good or the idea is good, let’s get in front of the screen and trade them all. If it’s that good, let’s get in front of the screen and have 20 people do this. As a matter of fact, it’s very, very consistent to expanding geometrically the ability to take advantage of this good idea.”

  The goal of trading every market he could and making more money in the process was reached within a year, just as Dennis had predicted. Yet making that much more money didn’t change him one bit. His new office was not marble and glass. The outside hallway to the office had dingy brown paneling. On his office door was “C&D Commodities, Richard J. Dennis and Company.” No flash. The men’s room for the floor was next door.

  Martin Hare, a nephew of Larry Carroll’s, was sixteen and in high school when he was working for Dennis. Now an executive with Merrill Lynch in San Diego, he worked in Dennis’s unconventional office environment from 1982 to 1989. Hare still gets enthusiastic when he thinks about his after-school job: “I cut out the Wall Street settlement prices for three summers. My weekly salary at C&D was $120. That was up from $90 the summer before. The C&D office was royal blue in color. There was a sleeping room for those that needed to nap, mostly for Rich, and a refrigerator full of the best beer.”

  Dennis may have physically disappeared from the trading floor, but the hermit-like trading wizard hovered over the markets like Zeus. Everyone knew he was there when a huge order came into the pits. Traders also knew not to get in front of his orders, or they could be potentially wiped out. Critics and regulators at times thought he was too big and moved markets unfairly. Dennis scoffed, “Sour grapes.”

  The criticisms were an excuse for people who had learned to lose. Dennis had no patience for people targeting his success. “I cringe a little when I’m identified as a millionaire,” Dennis said after reading that his $250,000 contribution to Adlai Stevenson was the largest individual political gift ever in Illinois. “If somebody just had $100,000, he wouldn’t be called a thousandaire, and if a pauper gave a dollar, they wouldn’t say, ‘Pauper gives his last buck.’ “23

  Although he grew wealthier by the day, he still kept an antinuclear poster hanging in his office and remained outside the chummy atmosphere of the exchanges. He was not prone to travel in the limelight. “We don’t have much contact with him,” remarked one Board of Trade player.24

  While his peers collected vintage cars and mansions, Dennis kept wearing those out-of-date polyester pants hiked over an ever-expanding waist. He exercised by eating cheap hamburgers at noisy grills. Dennis in a short-sleeved shirt, no tie, religiously pouring over arcane baseball statistics from the Baseball Abstract, was a common sight. In fact, he would eventually buy a piece of the White Sox baseball team. Once he was an owner, his 1980s attempt to get White Sox management to see the benefits of Bill James-style “Moneyball” fell on deaf ears.

  One of his students, Michael Shannon, watched his friends try to dress him up by moving him from his South Side studio apartment, and recalled, “Bill Eckhardt and others actually forced him to move into something that was a little bit more parallel to his station.”

  Money for Dennis was just a way to keep score in the game. He was frank about it: “Trading is a little bit like hitting a ball. If you’re thinking what your batting average should be, you’re not concentrating on the right thing when you bat the ball. Dollars are the batting average of the trader.”25

  This original thinker and big-time baseball fan left a visual image on everyone. Several confidantes talked about Dennis’s socks. One of his students smiled, “You need to make sure he’s wearing a matched pair of the same color.”

  Bradley Rotter, a former West Point graduate and often called Dennis’s first investor, witnessed his eccentricity: “I was at his house for a Fourth of July tennis party and Richard Dennis couldn’t be found … at the end of the party he came out of his house wearing a white tennis shirt, white tennis shorts, and black shoes and black socks. I’ll never forget that picture.”

  Rotter was not mocking Dennis. He respected Dennis’s testicular fortitude to trade trends no matter what. In baseball, testicular fortitude means everyone can talk about the game, but if you’re going to get into the game, you must swing the bat. Dennis swung and swung hard. No singles. His was Babe Ruth, home-run, swing-for-the-fences-style moneymaking.

  However, the Babe Ruth of trading was near oblivious to the basics of everyday life. Mail and personal bills were handled by C&D’s back office because of his inattention. His office would even send over toilet paper to his apartment. The weight room in his Gold Coast condo was virtually unused. “I pat the weights once in a while.” said Dennis.26 He enjoyed using a third of his time to do absolutely nothing.

  Another Dennis student, Erle Keefer, went beyond his eccentricities: “Rich is probably the greatest trigger puller that I personally have ever known: he has the ability under tremendous pressure to stand there with his own money and pull the trigger when other people wilted. And when he was wrong, he could turn on a dime. That’s amazing—that’s not trading, that’s genetic.” The genetic line was debatable; after all, that was the point of his Turtle experiment.

  Political Ambitions

  Dennis’s success eventually caused more serious problems. In the mid-1980s, critics accused him of strong-arming the market. They blamed him for too much market volatility. Words like “collusion” were thrown around. Dennis was not buying it. He said, “One man’s volatility is another man’s profit.”27

  When Dennis was a guest on a radio show in 1984, a caller assured him that if he traded long enough, he would give it all back.28

  You could feel the anger. Some people simply did not want to hear about a young guy making millions. Even though everyone knew exchanges needed speculators, too many people didn’t want those same risk-takers to make a profit. Dennis himself appeared before Congress as they investigated the “efficiency of the markets” — unable to define what that phrase meant. His detractors were silenced after government regulators testified that the total buying and selling by Dennis did not breach exchange limits.

  Soon, Dennis would join the political fight at a whole new level. He became one of the largest Democratic donors in the country, often focusing his generosity on standard politicians and assorted underdogs. From donating millions to battered women’s shelters to the decriminalization of marijuana, causes without wide publicity appealed to him (he would give away 10 percent of his earnings every year). While calling himself a liberal libertarian, he once donated $1,000 to former Black Panther Bobby Rush.

  Dennis did more than just write checks. He became good friends with Bill Bradley and supported Walter Mondale (1984) and Bruce Babbitt (1988) for President. He lobbied hard against conservative stalwart Robert Bork. There was a rational justification in Dennis’s mind for his political ideals: “If it’s something everyone hates but you think is right, those are the important things to do because no one else is going to do them.”29

  However, becoming a successful politician on the basis of supporting the have-nots of society was not as easy as trading to make millions. It wasn’t enough merely to fund his causes; Dennis also wanted to “work” them, and immediately ran into roadblocks. Politics was not a zero-sum game, and he got frustrated. “Politicians, at worse, are mindless replicas of what their constituents think. People … don’t want to hear painful truths.”30

  When invited to participate in the diplomatic dances that made up Washington politics, he stepped on toes, and seldom refrained from voicing his opinions. Former
Federal Reserve chairman Paul Volcker was once introduced to Dennis. He told Dennis that he didn’t “like those casinos you have out there in Chicago.”31

  Dennis was well aware that he was being indulged because he was rich and would be listened to only if he had something significant to say. Soon after he founded his new 1982 think tank, the Roosevelt Center for American Policy Studies in Washington, D.C., it began to flounder.

  Washington was a tough market no matter how many millions you had. And now Democrats were frustrating him, too. He said, “My principal irritation with liberals in general: they don’t understand how it can possibly be true that you make the poor richer by making everyone richer. I don’t understand that they don’t even consider that possibility.”32

  The problem in a political world was that Dennis couldn’t work the floors of Congress the way he had the Chicago trading floors. It was one thing to own one of the six original copies of the U.S. Constitution (which he did) and an entirely different thing to try to influence modern political leaders. He was impatient.

  Ultimately, over time he would become a board member of the libertarian Cato Institute, serving with such notable peers as John C. Malone, chairman, Liberty Media Corporation, and Frederick W. Smith, chairman and CEO, FedEx Corporation. He also joined the board of the Reason Foundation, another libertarian think tank.

  Dennis’s political forays were never easy. One political critic of his thought Dennis was a bully because he didn’t adjust his thinking to accommodate others.33 Dennis saw that criticism as coming from a typical Washington careerist being afraid to rock the boat.

  His stance on the decriminalization of narcotics best illustrated what made him tick. He knew the “drug czar” of the day, Bill Bennett, would never defeat drug violence with his “just say no” approach. Dennis thought people should be allowed to do what they wanted to do, even if they injured themselves, as long as they did not hurt others. He commented:

  The drug war violates the Golden Rule of doing unto others as you would have them do unto you. None of us is free of vice or temptation. Does any one of us really want to be jailed for our moral shortcomings? If our teenaged child is arrested for drug possession—a distinct possibility, since 54 percent of teenagers admit trying illicit drugs — do we really want him or her sent to prison for falling victim to the curiosity of youth?34

  Here was a man making millions in the pits by winning as much money from others as possible, but at the same time he was clearly worried about others’ well-being. He was a mass of contradictions.

  Rough Seas

  Dennis had some severe down periods before that banner year of 1986. Perhaps his political ambitions had caused a loss of focus. Adding to his responsibility, by this time he had moved beyond trading only his own money. He was trading for others, and managing their money was not his strongest suit. He said, “It’s drastically more work to lose other people’s money. It’s tough. I go home and worry about it.”35

  This was not what his clients wanted to hear. In 1983, when his assets under management peaked at over $25 million, his accounts for clients hit turbulence. After a 53 percent rise in January, accounts dropped 33 percent in February and March. That drop was enough to prompt George Soros to yank the $2 million he had invested with Dennis only two months earlier. After a partial rebound in April and May, Dennis’s funds dived another 50 percent in value. His 1983-era computer that cost $150,000 did little to console nervous clients.

  It took many of his investors more than two years to get back to even with their investment. Most didn’t stick around, and Dennis closed down some accounts in 1984. He rebated all management fees to losing accounts and conceded that trading client money as aggressively as his own money was not something clients could psychologically handle.36 What did that aggression look like on a month-by-month basis?

  Table 2.1: Richard Dennis Trading Performance:

  July 1982–December 1983.

  Dennis was famous for those big returns, and that was what his clients wanted — to become rich like Rich. They got on board knowing full well the voyage would get rocky, but conveniently forgot that fact when rough sailing made them seasick. At the first sign of troubled waters, when they were puking losses, they cut short the voyage and blamed Dennis. He was learning the hard way about people’s irrational expectations.

  In 2005, Dennis looked back on his troubled times in the fund management arena:

  I think the problem is that a money manager very rarely ever sits down with the person whose money it is. There’s always a representative of a firm of a firm of a firm. When you have customer money, you generally try to please the people who want “passable,” whereas you might be able to explain it to the ultimate end user whose money it is that “this might look brutal, but we’re trying for something spectacular.”37

  However, at that time in 1983, Dennis needed a way out of the customer rat race. He wanted to divert even more attention to big-picture strategies, from philosophizing to an even greater focus on decriminalization of pot to anything but being beholden to impatient and uninformed clients.

  In many ways his Turtle teaching experiment was his second act, and he knew it. He said, “You shouldn’t, I suppose, live in your trading children’s reflective glory, but I am. I think [training the Turtles] is the single best thing I’ve done in commodities.”38 Yet there was no way he could have known at the time that the single best thing he would do would change his life and the history of speculative trading in ways never imagined.

  Glory and legend aside, in 1983, with a clear plate, Dennis’s most immediate task was to select his Turtle students from the thousands who responded to his want ad.

  3

  The Turtles

  “How much of a role does luck play in trading? In the long run, zero. Absolutely zero. I don’t think anybody winds up making money in this business because they started out lucky.”

  Richard Dennis

  Over the years, almost every time the subject of Dennis’s training experiment (starting in winter 1983) comes up, those people who have heard of it invariably compare it to the spring 1983 classic movie Trading Places, staring Eddie Murphy and Dan Aykroyd. Millions have seen the movie over the last twenty years, either in the theater or on television.

  The idea for the movie appears to have sprung from Mark Twain’s 1893 short story “The £1,000,000 Bank Note.” Twain’s famous story speculated on what would happen if a perfectly honest American visitor was turned loose in London with nothing but a million-pound bank note in his pocket and no explanation of how it got there.

  In Trading Places, ultra-rich commodity brokers, brothers Mortimer and Randolph Duke, make a bet that they can turn a blue blood (Aykroyd, as Louis Winthorpe III) to crime and turn a street hustler (Murphy, as Billy Ray Valentine) into a successful trader. In the movie Mortimer, arguing against Hume and Locke, exclaims, “With his genes, you could put Winthorpe anywhere and he’s going to come out on top. Breeding … same as in race horses. It’s in the blood.”1

  When I was trying to nail down with 100 percent certainty that the screenplay came before Dennis’s Turtle training experiment, the film’s screenwriter, Herschel Weingrod, shed some light. He flatly said that he had never heard of Richard Dennis when his script was completed in October 1982. He was researching and writing a script in the early 1980s about Chicago trading and didn’t immediately hear of Richard Dennis? That seemed implausible.

  Yet it’s very plausible to assume the movie’s basic premise had an influence on Dennis’s experiment. I wasn’t alone in that view. Mike Carr, one of Dennis’s students, often received the same reaction when the subject of the experiment came up: “Whenever you describe the program to anybody, they say, ‘Oh it’s like Trading Places,’ and of course, that’s a logical parallel. I think you’d have to ask Rich and Bill, but I never viewed it as anything other than coincidental.”

  It is easy to see why Carr would say that; Dennis was an empiricist before the movie was on t
he drawing board. But at a bare minimum the movie must have been a catalyst, the trigger for him to take action. When he was asked whether his training experiment was inspired by Trading Places, Dennis denied it: “Oh God, no! Actually I think the movie came after. I certainly hope that’s true! I did like that movie more than I wanted to. We did [the experiment] because everyone believed in intuition including Bill who is a very logical guy. And I thought about intuition and about trading and it didn’t seem right.”2

  A third student of Dennis’s Mike Shannon, with respect for Dennis in his voice, disagreed wholeheartedly with Carr: “Let me put it this way, and bluntly, you bet your ass it had a freaking role in [the experiment]. It absolutely did. Whether he denies it or not, of course it did.”

  Despite Dennis’s denial, the parallels seem to be too close to be coincidental. Dennis was watching Randolph and Mortimer play out his debate on the big screen. Randolph was convinced Eddie Murphy’s character was the product of a poor environment; Mortimer thought that view was babble.

  Unlike the movie, the exact nature of Dennis and Eckhardt’s wager, if any existed, is not known. However, the movie Trading Places did gross over $100 million before the training experiment was even on the drawing board.

  Dennis was about to become the new Willy Wonka. He was about to let people into his “factory,” C&D Commodities, just like Wonka let kids into his chocolate factory. There were risks for him. His students might let him down or, worse, steal his secrets. He was undeterred: “Some people tell you ‘no,’ but I think it [trading] is transferable. It seemed to me so clear that it is transferable, that there are no mysteries. If it isn’t a mystery, then I ought to be able to get people to do that. I don’t want to spend so much time working anymore and also I want to prove to people that there’s no great mystery to it.”3