The Complete TurtleTrader

by Michael W Covel

  After the interview was over, Mike Cavallo was the only Turtle to mention that he was on to the clever ploy that the interview didn’t end after he left the room. After the interview, Dale Dellutri took Cavallo to the elevator and said, “Well, how did it go?” Cavallo told him how great he thought the interview was, but he quickly realized that question was part of the interview itself: “I said I liked Rich and Bill so much. Whereas other people might have said, ‘Oh God, they really put me through the ringer’ or something like that.”

  The Dennis brain trust was showing their hand. You had to play their “game.” The elevator filter must have eliminated students from the process who otherwise would have made it. That’s brutal. Perhaps, as they read this, former interviewees who did not make the cut will realize that when they said something foolish to Dale Dellutri at the elevator, it was at that point that they were eliminated from the candidate pool. No one ever said life was fair.

  Mike Cavallo was under no false illusion and knew that obvious candidates with his type of résumé were not what Dennis had in mind. He was surprised that he was even in the running. At the end of the day, Dennis and Eckhardt figured too many Cavallos and Rabars would have too many bad habits to unlearn.

  Those who think a Harvard MBA is the only ticket to business success, wake up. Cavallo was the exception, not the rule. Dennis and Eckhardt clearly believed that hiring all Harvard MBAs would have been a bust.

  All these potential students saw the interview process from different vantage points. Jeff Gordon thought the selection process came down to a “games” aptitude: “I didn’t have a résumé at the time so I wrote him a letter that indicated that I had spent more time playing chess than attending law school. The funny thing is my girlfriend read the letter and said, ‘You can’t say that!’ I said, ‘No, that’s not true, Rich Dennis is a different kind of guy, I think he’ll be looking for people who are a little bit different.’”

  During his interview, Gordon was logically assuming that he had a lot to learn from Dennis and Eckhardt, but they said to him. “Well, you might actually be disappointed.” Dennis was worth hundreds of millions at the time, yet he was self-deprecating and humble.

  Mike Carr’s previous job for Dungeons and Dragons may have been the key to convincing the C&D brain trust to hire him because both Dale Dellutri and William Eckhardt said their sons enjoyed playing the game and, as Carr commented, “I knew that couldn’t hurt!” That said, Carr had no real idea of Dennis’s style of trading and fumbled through parts of the interview. He recalled, “Richard Dennis was renowned as a technical trader, but I wasn’t aware of that at the time.” During the interview, he had asked Dennis, “Do you trade technically or fundamentally?” Dennis replied, “We trade technically.” Carr then said, “Is fundamental trading dead?” Dennis sarcastically shot back, “We hope not.”

  Jim DiMaria, the relative insider already working for Dennis as a broker, knew the importance of his hometown for his trading ambitions: “It’s just part of the fiber of Chicago. If I were from Baltimore or Los Angeles. I probably would never have done anything like this.”9 But before DiMaria was ever picked for the experiment, he knew he ultimately wanted to be the person making the trading decisions, not just someone else’s floor broker.10 He had to find a way to get there, and Dennis’s experiment was it. DiMaria, however, was completely bamboozled by the selection process: “For whatever reason I was selected. I don’t know if anyone knows why they were selected. I’ve heard that some of the people from Rich’s entourage were selected as a control group. Like let’s just grab this guy. Like maybe me? I don’t know.”

  All the prospective students knew the chance of a lifetime was staring them in the face whether or not they understood exactly what they were getting into. For example, near the end of her interview, when she realized she might be making a good impression, Liz Cheval’s knees went weak: “I couldn’t have gotten through the interview, had I known [it might work out; it was] like winning the job lottery.”11 She was confident in the interview because she couldn’t believe she had gotten that far. She knew her worst-case scenario if selected was that her résumé would be enhanced by even a few weeks spent under Dennis’s tutelage. There was nothing to lose.

  All in all, the hiring process was far from headhunter precise. Dennis and Eckhardt had no formal training in job recruitment or in developing questionnaires designed to select those people most able and ready to learn. It was one thing for them to trade and make fortunes, but it was a very different thing to execute a “nature versus nurture” experiment with live human beings.

  The Turtle Contract

  Once accepted into Dennis’s program, Turtles had to adhere to a strict confidentiality agreement. It was titled “Synopsis of Contract for Trading Advisor Trainees” and said in part that each participant would have a five-year contract, which could be terminated without notice by Dennis at any time. There was no assurance of staying in the program, but the agreement did clearly state students would not be held accountable for losses that they might generate trading Dennis’s money: “The trainee will not be obligated to repay advances, which are not covered by earned performance fees, nor will the trainee be liable for losses due to adverse trading performance.” And for those students thinking ahead about how to get-rich-quick now that they had Dennis’s “secrets,” the agreement had no flexibility. During the term of the contract they were prohibited from trading for their own account and prohibited from trading for anyone other than Dennis. The agreement went on to clearly preclude competing against Dennis or disclosing any confidential or proprietary information the participants might learn. Lastly, at the end of the agreement all students were prohibited from disclosing Dennis’s proprietary trading methods for another five years.

  For those with a legal background, this agreement could have been a deal-breaker. That said, no one declined to join the Turtle program even though there were no real guarantees and many potential restrictions on their future activity. Once the agreement was signed, the Turtles headed off to class.

  Chicago was a different place when the Turtles entered class in January 1984. Harry Caray was the announcer at Wrigley Field, and Ryne Sandberg’s rookie year was underway. The Apple Macintosh had just been introduced, and Hulk Hogan defeated The Iron Sheik for the World Wrestling Federation Championship. Politically, Dennis would be very unhappy with Reagan heading toward a landslide defeat of Mondale.

  In the context of that world, the lucky few chosen to learn how to trade for big money still had to absorb trading rules that would have made investors like Warren Buffett cringe. There would be no buying and holding, or buying low and selling high. What they were about to learn was the antithesis of what was and still is taught in finance departments at the world’s finest universities. Run this story by a college finance professor today and take note of his reactions.

  The Classroom

  If Dennis had been worth only $100,000 at the time of the experiment, would the Turtles have listened as intently? No. Dennis knew the Turtles were the “dumb stumps” and that the only reason that they bought into everything was that he had made $200 million.

  If he said, “On Monday, you will buy the S&P 500 stock index when it’s up exactly 35 ticks no matter what’, all of the Turtles would have gone over a cliff to follow orders. One Turtle said that when a guy has made $200 million and he says, ‘You can walk on water’, people are going to say, ‘Okay I can walk on water.’ You have just crossed that unbelievable emotional hump that we all have in our brains.”

  Crossing the “emotional hump,” whether in trading or baseball, is reaching that point at which you are intellectually and emotionally challenged and respond by saying, “I can do it.” Between Dennis’s reputation and the self-confidence that came from being chosen from over a thousand applicants, the Turtles crossed that hump with ease. The bottom line was that two trading superstars had selected them as students. Motivation was a given.

  That same kind of au
ra surrounded Jim Leyland, manager of the 2006 pennant-winning Detroit Tigers baseball team. This was a team that only a few years prior had lost over a hundred games in one year—a horrendous record. But now they had a manager, Leyland, in whom everyone believed. There wasn’t a Detroit Tiger who didn’t suddenly feel like he could deliver in the clutch. “If I walk in there tomorrow and find my name and I’m batting cleanup, I’d expect to get a hit,” pitcher Todd Jones said. And, of course, pitchers are not counted on to hit!

  The Turtles had the same attitude. The two weeks of training consisted of Dennis and Eckhardt figuratively yelling “jump” and the Turtles responding, “How high?” However, years of legend-building have made the entire process of the Turtles’ training sound a great deal more elegant and sophisticated than it really was.

  They were put up in the Union League Club in downtown Chicago. Mike Cavallo described it as “sort of one of those old-fashioned fancy clubs where there were elderly people dozing under their newspaper.”

  He was not exaggerating. Tom Willis and I tried to have lunch there in 2006, but were asked to leave because I was wearing jeans. The Union League Club remains an old-world bastion for those who made their market fortunes way back when. With dark wood paneling, worn Oriental carpets, and leather-upholstered furniture, and staffed by elderly union workers moving in slow motion, it is well past its prime.

  Clearly, not much had changed at the club since the Turtles walked in the door. That Richard Dennis should belong to such a club in 1983 was amusing given how anti-establishment he was. However, he was simply being practical, because the club was close to the Chicago Board of Trade and C&D Commodities’ offices.

  The Turtles spent their two weeks of training at the Union League Club as well. They all had to wear a jacket and tie at all times — including Dennis. Only half of the more than two dozen students in the training room were Turtles, if you defined Turtles as those students who would trade only Dennis’s money. It was HBO’s hit show Entourage for sure.

  Right before training began the Turtles attended a welcoming party, since Dennis liked to throw lavish cocktail parties during the Christmas holidays. The newcomers got a glimpse of what passed for Dennis’s Chicago social scene and had the chance to meet each other. But the party did little to assuage the jitters. The first day of training had many feeling the stomach clutch of starting grade school all over again. They walked into the classroom fully unnerved.

  Richard Dennis, William Eckhardt, and Dale Dellutri handled the training the same way they had managed the interview process. It turns out that the C&D Commodities brain trust had met each other at St. Laurence Catholic High School. As fate would have it, they became close friends only because they were seated in alphabetical order.

  On the first day of Turtle class you could hear a pin drop. Palpable excitement was in the air. The possibility of making money like Dennis had everyone jacked. The first hours consisted of Dellutri discussing how things would work procedurally and laying out “housekeeping” matters for people who had never traded.

  Dellutri was assigned the role of Turtle “team mom.” He encouraged the Turtles to ask questions during class, but few did at the outset. To everyone’s disappointment, Dennis was not there during that first class. Instead, it was Eckhardt who launched into the challenge of “managing risk” as the first topic.

  Managing risk was not what new traders would assume as a logical starting point. That Eckhardt would choose to begin with risk management was the first indication that the Turtles were starting an unconventional journey. Instead of introducing the course with a lecture on making money, he was laying the foundation for what the students had to do when they lost money.

  Another C&D colleague, Robert Moss, was brought in on several occasions to discuss order execution. He wanted the class to understand what really was going on in the pit when their orders went in. “I think Bill and Rich wanted them to have a pretty good understanding given that some of them had never really been involved in the industry before,” he said.

  Once the students were past the initial jitters there was some give and take, with questions and discussion. However, the class was primarily a lecture with note-taking. The Turtles with experience quickly realized that Dennis and Eckhardt knew far more than they did. Mike Cavallo said, “A lot of the stuff that they were talking about I knew, but I had no idea they weighted some stuff at so much more importance.”

  Contrary to popular belief among those familiar with the Turtle experiment, Dennis’s absence that first day of class was not an aberration. William Eckhardt taught the Turtles a great deal of what they learned during those two weeks in the classroom (there was only one week of training the second year).

  The irony is that while it was Eckhardt who bet against people being able to learn how to trade, in the classroom he taught much of “the meat and potatoes.” It was Dennis who added a succession of trading war stories and anecdotes.

  To those who saw them up close, Dennis had the capacity to make an observation in an instant that would take someone else weeks of painstaking math to figure out. Even Eckhardt marveled as Dennis’s knack to intuitively see “it”: “Look what this means. Look at the deep axiom in here. It works.” That said, Eckhardt was the mathematical genius. He was the master of probability. Combining their observations was the magical mixture.

  Mike Shannon saw the importance of their symbiotic relationship: “In fact, a lot of the system development wasn’t Richard Dennis. It was indeed Bill Eckhardt. They both hatched it up between them and they’re both certainly responsible for it.”

  To many it seemed Eckhardt was along for the ride, appreciating the Turtle experiment from a psychological point of view, but he definitely wanted his credit for the Turtles after it was over. Today, his regulatory disclosures emphasize that he “co-developed” the systems “co-taught” to the Turtles. Without Eckhardt, there would have been no Turtles.

  Mike Cavallo thought there was a more important, though subtle, aspect in their collaboration: “Bill did a lot of the real mathematical work on developing the systems. I think he didn’t have Rich’s trading genius, which is why I think in their discussion, he thought the trading genius was the main part whereas Rich thought the system was the main part.”

  To this day, Eckhardt has had a terrific trading career. He has arguably achieved much greater wealth over the long term than Dennis. His hedge fund is now near $800 million USD. Yet when Eckhardt and Dennis first started working together, Dennis was the one who had made the fortune trading and Eckhardt was the original Turtle learning from him.

  It was clear to Mike Shannon that Dennis had a massive head start over Eckhardt in terms of wealth and trading experience. He said, “Bill was more inclined at the time to intellectually pursue the concept of trading more so than he was in it for serious financial gain.” Over time, Eckhardt realized that he had to strike a balance between the business end and the actual trading. Shannon added, “I think Bill probably is worth more, but once you get over being worth a quarter of a billion dollars …”

  Eckhardt always good-naturedly admitted that he had lost the nurture-versus-nature battle, in which he had taken the point of view that their systems could not be taught to kids off the street: “I assumed that a trader added something that couldn’t be encapsulated in a mechanical program. I was proven wrong. By and large, [the Turtles] learned to trade exceedingly well. The answer to the question of whether trading can be taught has to be an unqualified yes.”12 He also scoffed at the argument that the Turtles’ success was based on sheer luck: “The probability of experiencing the kind of success that we have had and continue to have by chance alone has to be near zero. The systems worked for us year after year. We taught some of these systems to others, and it worked for them. They then managed other people’s money, and it worked again.” He acknowledged the possibility that their achievement could have been the result of luck, but he saw the probability of that being infinitesimally small.13
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br />   Nor did Eckhardt buy into the infinite monkey theorem that says out of the millions of monkeys in the world, one, simply by randomly hitting the keyboard, would eventually produce the collected works of Shakespeare. To this day, many regularly push the notion that successes such as Eckhardt and the Turtles were simply the lucky survivors from the whole monkey population.

  Some critics have attempted to explain away the Turtles as a careful selection of very smart students. Michael Cavallo, after all, could play five people at once at chess while blindfolded and beat them fast. He exemplified the fact that brainpower wasn’t lacking in the C&D office. Eckhardt disagreed, saying that he had not seen much correlation between good trading and intelligence:

  Some outstanding traders are quite intelligent, but a few aren’t. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important. This is not rocket science. However, it’s much easier to learn what you should do in trading than to do it.14

  Eckhardt was saying that, as with anything in life, most people know what the right thing to do is but fail to do it. Trading is no different.

  Dennis’s partner and right-hand man personally learned how hard it was to do the right thing as an early acolyte of Dennis — just like the many other young traders in Chicago during the 1970s. His galvanizing experience with Dennis was on the morning of November 1, 1978. President Carter was trying to halt a sinking U.S. dollar. It was a lesson in “emotional fortitude” forever etched in Eckhardt’s memory.

  There was a rate hike and intervention in the currency markets — not good news for Dennis and Eckhardt, who held large long positions in gold, foreign currencies, and the grains. The markets collapsed on the open. Gold opened below the $10-an-ounce trading limit, so they could not exit. Silver, though down sharply, was still trading. The Comex in New York told them they could still trade it. So they started selling silver “short,” aiming to profit as it decreased in order to protect themselves against further losses from the gold. But they were also concerned that silver might rally. Decisions had to be made, and fast. There was a lot at stake.15