The rules were simple. For every 10 percent in drawdown in their account, Turtles cut their trading unit risk by 20 percent. For example, if they were trading a 2 percent unit and if an 11 percent drawdown happened, they would cut their trading size from 2 percent to 1.6 percent (2.0 x 80%). If their trading capital dropped down 22 percent, then they would cut their trading size by another 20 percent (1.6 x 80%), making each unit 1.28 percent.
When did they increase their unit sizes back to normal? Once their capital started going back up. Erle Keefer remembered one of his peers saying, “Oh my God, I am down so much that I have to make 100 percent just to get back to even.” But that Turtle ended up the year with a nice bonus, because the markets finally started clicking (and trending). Keefer added, “When the statistics finally all work and all those markets start moving, those ‘hot wires’ can start pulling you up pretty fast from a drawdown.”
For example, let’s say you are at $10,000 and you keep losing, then you win a little, then you lose a little. You are now down to $7,500. You are probably trading 40 to 50 percent of your original unit size. All of a sudden everything goes back up to $7,800. It goes up to $8,000, and you start restoring unit size. The Turtles could be down eleven months and one week into the year and then in the last three weeks of the year go from being down 30 or 40 percent to up 150 percent. Look at their month-by-month data from 1984 to 1988 (see Appendix). When the markets kicked in, it was a wild ride.
By reducing positions when they were losing money, the Turtles countered the arithmetic progression toward “ruin” effectively.19 Dennis and Eckhardt’s logic makes good conceptual sense, even for nonmath novice traders.
Eckhardt did not want the Turtles to worry about linear decreases in their accounts. The slightest exponential curve from a big trend would eventually surpass the steepest linear curve they saw while losing. Discipline, money management, and patience were the only ways it would work.20
This day-to-day routine, however, was mundane. Every day they would come in and there would be an envelope with their name on it. That envelope would have their printouts with their positions. It included updated “N” values, too. That’s right, the Turtles did not have to worry about the basics of calculating “N.” Of course, they learned the hows and whys of “N” from Eckhardt, but the time-consuming calculations were done for them. The Turtles simply picked up their envelopes and checked to make sure their positions and orders were all as they were supposed to be.
Liquidation (Exit) Rule Summaries
There were two basic “stops” or exits to get Turtles out of their trades:
The 2N stop.
The S1 or S2 breakout exits.
The Turtles were instructed to take whichever stop hit first. For example, assume you enter any market. Your 2N stop is quickly hit, and you exit with a small loss. That’s easy. On the other hand, perhaps you enter a market and it takes off. A monster trend zooms either up or down. In that case, your S1 or S2 breakout stop would get you out with a profit.
This was stomach-churning. David Cheval lived this process working with his then wife Liz Cheval. He said, “When we have good profits, then we’re very aggressive with those profits. We’ll risk 100 percent of the profit in a trade if it doesn’t follow through based on our system.” The Turtles could have had a 50 percent profit in a market, but their stop still might be at their predesignated risk of 2 percent. It was possible for them to lose all of that profit plus the 2 percent.21
Portfolio Selection and Position Balancing
This philosophy applied to all markets, meaning as long as liquidity and a selection of quality markets existed (and today there is no shortage of those) and there is some inherent volatility in that market (Turtles need movement after all to make money), any market could be traded like a Turtle.
The Turtles initially traded these markets:
Table 5.16: Markets Traded Initially By Turtles.
Trading Your Own Account Tip #11:
There is no one set portfolio you can trade. Today, traders trade Turtle-like rules across widely differing portfolios (stocks, currencies, bonds, commodities, etc.). It is a primary reason traders have differing performances. There is also no one starting capital number that can be promised as an elixir for all traders. Some start with small money and get huge. Some start with big money and don’t make it. You will see in later chapters the other pieces of the trading puzzle beyond these rules that separate winners and losers.
However, it was critical to avoid having one of highly correlated markets. In simple terms, think of correlated markets typically moving together in lockstep. Too many potentially correlated markets in a portfolio and the Turtles increased their unit risk.
For example, the Dow Jones Industrials stock index and the S&P 500 stock index are highly correlated. Both move up and down together. Buying one unit in the Dow and then buying one unit in the S&P is like having two units in either market alone.
Or, assume both Apple and Dell were in a Turtle’s portfolio. Both stocks go up and down together like clockwork. Proper Turtle trading strategy would dictate one unit of Apple. However, if one unit of Dell was also bought, since these two stocks have high correlation, this would be essentially trading double the amount of Apple that should be traded. To trade both stocks was to take twice the risk you should take.
Table 5.17: Table to Show Correlation Effect Between Portfolios.
Look at table 5.17. Notice that both columns in each table have the same number of markets. They could easily have the same number of units. However, the “More Risk” table has more markets highly correlated to each other. Corn and soybeans, gold and silver, and the two note contracts are all highly correlated. Essentially, Turtles would be trading only four markets. The “Less Risk” table shows a broader grouping of markets with less correlation. For example, historically the Japanese yen and crude oil do not move together.
The Turtles were also taught that combining long and short units into their portfolio offered further diversification. In fact, when they combined long and short units, Dennis and Eckhardt discovered that they could actually trade more overall units. This was how they were able to load up on so many positions. While they appeared overleveraged in others’ eyes, Dennis and Eckhardt had the Turtles safely under risk management (unit) guidelines.
Consider another portfolio example. Assume it is long units in corn, feeder cattle, gold, and Swiss francs, for a total of four long units. Also, assume it has short units in British pounds, copper, and sugar, for a total of three short units.
To calculate the total Turtle unit risk, you would take the smaller number and divide it by two. Then you would subtract that number from the larger number. In this example it would be 4 – (3/2), giving 2.5 units of risk. This is how the Turtles added more units without adding more risk.
Why did the Turtles diversify so much? There was no way they could predict which market would trend big, nor could they predict the magnitude of any trend’s move. Miss only one big trend and their whole year could be ruined.22
Table 5.18: (2) Charts That Demonstrate Long/Short Rule Calculations.
That was it. Boom. Two weeks of training, at the Union League Club, was done. With those rules in hand, they entered Dennis’s office space in the old Insurance Exchange building next to the Chicago Board of Trade. They took his money and started trading.
However, the Turtles were given one more mandate that superseded all the philosophy and rules: Practice. Sure, it might sound cliched, but it was reality. To put it in perspective, many people see winners like Tiger Woods and make innumerable excuses about why he is great and they are not: “He started learning golf as a toddler.” “He is a natural athlete.” “He earned his titles during a time when golf was lacking top-notch competition.”
The truth? Woods is great because he has the discipline of practice ingrained in him. Look at the tape of him on Johnny Carson when he was three or four years old. Practice, practice, practice—all the time. Wo
ods is famous for saying, “No matter how good you get you can always get better and that’s the exciting part.” That mentality is mission critical for both golf and trading.
Medicine is yet another field where skills develop as a result of repetitive training. Research shows time and time again that medical students are often clumsy at their first tries at performing even such basic procedures as finding a vein to tap for blood work.23 However, their process of focusing on repetition and discipline consistently produces many competent doctors with long and successful careers.24
For the Turtles there was going to be nothing glamorous—just as with doctors practicing to find a vein. At the end of the day, their training was surely not what they expected (of course how could they have really known what to expect?). But they never truly got a “secret” sauce. As one Turtle put it, “Richard didn’t quite give us the Holy Grail. There’s no single magic element.” Magic or not, once the Turtles finished class they immediately went to work. However, before they started making big money, there were rough patches.
6
In the Womb
“It’s possible to train people to perform to a certain level in chess, but if this training does not promote self-education and a philosophical attitude, then the trainees will be little more than performing seals.”
Nigel Davies, Daily Speculations
How many Turtles were there? The number of Turtles is in dispute. Dennis and Eckhardt not only included people selected from want ads in the training room, they also invited an assortment of colleagues who were already working for them. Other people in the office entourage, who were close enough to pick up the essential concepts of what they were teaching, ended up exposed to the Turtle rules.
Take, for example, Mark Walsh. Walsh was not an official Turtle, but someone who has traded like a Turtle for twenty years. With a track record of better than 20 percent average annual performance, he is an equal to Turtles who managed money for clients since 1988. Sam DeNardo, a generally accepted Turtle, didn’t want his definition of the Turtle club violated: “I love Mark Walsh, I’ve known him for a long time but he wasn’t really a Turtle … And I think the Turtles, the real Turtles, feel strongly about keeping the group true to what the list was.”
DeNardo also argued against Craig Soderquist as a Turtle even though the Wall Street Journal had referred to him as one: “Soderquist was somebody involved in Rich’s life at the time who maybe got a couple guys’ notes from the meetings.” However, Robert Moss, head of Richard Dennis’s trading-floor operations in New York from 1984 to 1988, stated without a moment’s hesitation that Soderquist was a Turtle. Moss’s job was to execute daily for C&D Commodities thousands of futures contracts across New York trading pits. He would know.1 Yet Jeff Gordon, a verified Turtle, disagreed with Moss, saying that the Turtles were only those who traded Dennis’s money.
Clearly, many people, official Turtles or not, learned the methods simply because they were close to the action in the C&D offices. It was easy to see that once Dennis and Eckhardt started the training phase of their experiment, it was similar to the informal seminars Dennis and Tom Willis had held in the 1970s. Training was open to a much wider circle than Turtles hired via the ad would have preferred.
The refinements and distinctions as to who was and who was not a Turtle went right to the heart of what was to become a serious competition. They might have all been told they were equal, and perhaps they were initially, but this was no game. Millions of dollars were on the line.
The Office Environment
Within the offices of C&D Commodities, the Turtles were Dennis’s pet project. They were viewed as worker bees freeing him up for bigger-picture political initiatives.2 Robert Moss said that they were “essentially a stable of ‘little Richards,’ no pun intended.”
That stable had very little in personal oversight once they were trained. Russell Sands, for one, was surprised at the complete lack of supervision. He noted, “We might have seen Rich, Bill, or Dale once a week on a Friday afternoon for two hours.” According to Sands, they would walk in and say, “How did you guys do this week? Anybody have any questions?” That was it.
If one of the Turtles did not follow the rules, Dennis and Eckhardt, who reviewed their daily statements, would call up and ask for an explanation. Sands added, “But aside from that, there was no mentoring; there was no supervision, there was nothing. We were totally on our own.” It was, “Here’s the money, keep a journal, write down every trade you took and why you took it.” The Turtles would become more famous and successful over time, but in the beginning there was no fanfare.
The working conditions were Spartan. Dennis provided them with a large trading office sandwiched between two floors in the Insurance Exchange building. It was furnished with metal desks and chairs. The most basic amenities, such as a coffee machine or TV, were missing. There was a bookcase with trading books that hardly anyone ever read. Eventually a Ping-Pong table was brought in.
The Turtle seating arrangements were reminiscent of grade school. They were seated two by two, with six-foot-tall dividers between the cubicles. The informal, no-frills environment was typical of the way Dennis ran his business and his life. Mr. Anti-Establishment was passing his attitude down to his students.
This attitude left others in the building wondering what the Turtle office was up to. After all, they had all kinds of downtime trading as trend traders. They would go days without trading. On top of that, there was no dress code. They used to show up to work in the summer in cutoffs and T-shirts.
A Harvard MBA worked side-by-side with a recent high school graduate. A Jehovah’s Witness played Ping-Pong with a blackjack player from Eastern Europe. Jewish and Christian students were mixed into one diverse office.
Consider Anthony Bruck, a wiry and fashionable Chicago socialite and artist. He reminded some of Andy Warhol. He’d come to work dressed in skin-tight black clothes. Bruck, like Jim Kenney, was a friend of Dennis before the experiment started.
Erle Keefer loved the wild diversity of what was almost a mini United Nations: “You had people who didn’t have a college degree, then people who had doctorates. Anthony Bruck had a doctorate in linguistics. Actually, I think that probably helped him to be a good trader because you had to think about it analytically and conceptually.”
Mike Carr was a terrific demonstration of Dennis’s eclectic hiring policy. He couldn’t spell “future” (as in trading futures), so to speak, in the beginning. Carr, like other newbie Turtles, had to be shown a chart and how to read it. He was living proof that you did not need a Harvard MBA to excel.
Even more unusual was the inclusion of Lucy Wyatt. For years, people who were aware of the Turtle story have assumed that there was only one female Turtle, Liz Cheval. But it turns out that there were two.
Wyatt was a friend of William Eckhardt’s. Jim DiMaria noted: “While the rest of us were like Turtles and that’s what we were and that’s what we did, she would kind of come and go. She did actually have a desk … in the room. I guess maybe that’s the Turtle barometer … you have a desk in that room.”
Off the record, several Turtles who’d been hired through the screening process commented that having Dennis employees and friends in the room trading as Turtles caused strife. One said, “The regular Turtles, so to speak, wondered how in the hell were they ever picked for this program. The ones not picked via a screening process just didn’t have the mental horsepower for it.” All one Turtle could remember about Wyatt was that she was always doing her nails.
Mike Cavallo said that Wyatt had been Eckhardt’s girlfriend. He noted, “She was in the room with us. So of the people, if you were going to say who was a Turtle and who wasn’t, she would have been considered to be the least likely to be called a Turtle.”
Did Wyatt trade? Apparently yes. Many people who hear the Turtle story make excuses for why they could never fit in. Wyatt made it clear that anyone could have fit in with the Turtles.
Wildly differin
g political views did not keep Turtles from fitting in, either. Jerry Parker and Richard Dennis, for example, were political opposites. Mike Shannon painted Parker in extreme terms: “[He was] about as right-wing conservative as you can get and we had people in there who were more liberal than Rich by a long shot.” Shannon got a kick out of the political diversity crammed into the one-room office. He said, “Jerry was far right and at the time I was more far left. We would really lock horns once in a while on certain political and social issues. He is so far right. It’s just unbelievable. I just never really took him seriously in that regard.” However, Shannon did take Parker seriously as a trader, saying, “He’s very good. But the funny thing is with all of that, when it came to the actual trading and discussing the systems and methodologies, we were all on the same page. No matter what the political background or social background, we all tried to cooperate as much as possible.”
These political differences were no small matter. Jeff Gordon learned this firsthand at a dinner before the 1984 presidential election. Everyone knew Mondale was Dennis’s guy. Dennis started going around the table asking everyone who they were voting for. One by one, they all said, “Mondale.” They were all his guests, and Dennis was one of the richest guys around. However, when it was Gordon’s turn he said, “Gary Hart.” Gordon knew he had just upset the trading king of Chicago.
The Complete TurtleTrader Page 11
