The Complete TurtleTrader

by Michael W Covel

  However, far more important than any political differences were the commonalities. Mike Cavallo saw all the Turtles as extremely bright, but viewed the group as an interesting mix of competitive and easygoing people. He believed that the great majority of the Turtles could have a day filled with total disasters yet still be pleasant.3

  In hindsight, it’s hard to know for sure if the Turtles were like what Cavallo described or if they ultimately became like that as a result of their unique situation. No one was going to make waves when a rich guy was giving out millions to a group to trade with an incentive plan to make their own millions. That kind of opportunity kept mouths closed.

  The Turtles, however, didn’t immediately realize that they had been given the “golden goose” for making millions. Since they had to hit the ground running, they did not have time to test the rules Dennis had given them. They had to trust Dennis and Eckhardt implicitly.

  Erle Keefer, hired in the second Turtle class, was in the minority with his desire for a “proof of concept.” Like his mentor, Keefer remained skeptical: “You said I learned about the golden goose, but I didn’t have a computer program, hadn’t seen printouts, hadn’t seen proof of concept. You know what I mean?”

  As time went on, some Turtles did test the rules Dennis gave them. This effort changed the direction of the Turtle program. Still, initially, the Turtles executed their trades based on the rules they had been taught. They were making big money doing so. In fact, all were now making more money than they ever had in their lives. At that moment, everyone associated with C&D Commodities was certain that they had proven nurture trumps nature — even if no one outside of the firm knew this yet.

  A Boring Trading Strategy

  The Turtles experienced what the term “free time” really meant. There simply was no trading if a market didn’t move. Not trading when there was no market movement was, in fact, one of the most important rules of all. No trending market, no profit. No market moves, no calling Robert Moss to place trades.

  These long periods of doing nothing would be considered useless by today’s hyperactive crowd, in love with checking stock quotes every minute. However, the Turtles would have had no need for hot tips from the likes of Jim Cramer of Mad Money or CNBC’s David Faber’s latest “breaking” news story.

  Today, people gobble up dozens of trading infomercials and nightly advice from everyone under the sun on what to buy and sell. All of this was useless to the Turtles. Today’s get-rich-quick crowds have created a whole culture of traders afraid of missing something. They obsess about analysis about what the markets have done or are going to do — even if it has no direct connection to their trading decisions. The Turtles, on the other hand, were perfectly content to do nothing when the rules said to do nothing.

  The Turtles would come in every day already armed with their war plans so that they didn’t make bad decisions in the heat of the battle. Stare at the screen and it’s going to say, “Do something, trade me.” All top traders today work like hell to develop a trading philosophy. They convert that philosophy to rules. After that, they stand back and see if their rules act as expected. If you build a system that gives you an entry and exit, tells you how much to bet along the way and adjusts to your current capital and current market volatility at all times, no more analysis is needed.

  The Turtles did not fight this boring state of affairs. However, everyone handled downtime differently. Jerry Parker, for example, played electronic baseball until he had figured out all the tricks. Does that mean Parker was goofing off and not trading properly? No. Far from it. Parker was always prepared. Self-discipline meant doing nothing until the time came to do something. Parker knew what role they played in Dennis’s life when he said that Dennis ran the training “because he wanted to have a certain chunk of money traded using systematic rules” while he went on and tried out new techniques.4

  But for now, their trading was all about downtime. It was for the Turtles a deliberate process of following about thirty markets, waiting to do something. They didn’t trade foreign markets at the time; many of those were yet to be invented. Their basket of markets was not very active.

  The Turtle think tank did have occasional undercurrents and personal biases, particularly when it came to Liz Cheval. This was Chicago trading in the early 1980s, and some Turtles thought sexism was an issue. The fact that some Turtles may not have taken Cheval seriously was not easy to deal with. Michael Shannon said, “Between guys hitting on her and guys shunning her and stuff, it kind of made her somewhat ambivalent to the whole Turtle process.”

  Cheval appreciated the fact that she was getting a great education in the program, but she may have had some residual animosity toward other Turtles. Shannon added support: “A lot of people just underestimated her. You have to remember this was the ‘80s. How many women commodity traders did you know at the time?” Even though they were the Turtles, it clearly did not mean they were all behaving with the decorum of choirboys.

  Jiri Svoboda used his inordinate amount of downtime for other ventures beyond trading. He was always trying to figure out ways to beat the house. This, however, was not gambling in the way most people think of it. His view was all about understanding the odds and making money.

  Svoboda had no problem leaving the office for two or three months at a time. Other Turtles made sure his trades got placed properly once Svoboda had worked out all of his if/then contingencies. In turn, he then spent much of his time in Las Vegas developing systems that could read cards being dealt at blackjack tables.

  This behavior was fine within the parameters of the experiment, because Dennis himself had created the atmosphere of “get the job done and I don’t care where you are physically.” By giving Turtles his rules, his money, his brokers, and his ATRs (the computed daily volatility for each market, or what they called “N”), Dennis had taken away much of the day-to-day routine the Turtles would have been experiencing had they been trading entirely on their own.

  The trading day unfolded with the Turtles tracking their group of markets. If one or more of those markets generated an entry or exit signal, they picked up the phone, called to the trading floor, and made the trade. Then they would wait for the market to move one way or the other before picking up the phone and calling the floor again.

  The Turtles were on their own Survivor island. They marked all of their charts and made all their calculations on loose-leaf paper. If they wanted a Wall Street Journal, they had to buy it. Dennis of course would have paid, but he was a technical trader, not a fundamental guy. There was no reason to study the Journal every day.

  Think about how many people in 2007 read the Wall Street Journal daily from start to finish searching for fundamental insights. Consider how many people scan annual reports or crop reports online. Not the Turtles.

  Everything they did was basic. The Turtles would actually write down their orders for the next day and make a carbon copy. They would leave the carbon copy behind, in case they couldn’t make it in the next day. That way their orders would still be executed properly. Jim DiMaria laughed, “People don’t even know what carbon paper is anymore.”

  Beyond the day-to-day office idiosyncrasies, the physical locations of the Turtles would soon change dramatically. For that first year they were all in the same office, but after that some left. Mike Cavallo was in the office for one year before he moved home to Boston to continue working for Dennis long distance. Russell Sands was gone after the first year, too—he left the program completely.

  Their office environment was slowly changing as time went by. Jim DiMaria said, “At some point, half the people, like Jerry Parker, moved back to Virginia (his home). So those of us Chicago people who wanted to stay, we moved to a smaller office. But the dynamic was gone at that point.”

  Early on, when everyone was together in Chicago, there were bonding moments as they labored in the trenches with little outside guidance. They were not expert traders out of the gate—far from it. To begin with, al
most all the Turtles were in their twenties or late teens. It wasn’t long before the first-year class was down 50 percent each on average six months into the program. If you think some of them were panicking, you’re right.

  Still, out of those early volatile performance swings came personal anecdotes that put their daily grind into perspective. September 1985, for example, was a difficult learning moment. The “Group of Seven” finance ministers made a concerted effort to weaken the U.S. dollar. Over the weekend they changed their policy on the dollar. All of the currencies quickly gapped a couple of hundred points higher. Some of the Turtles were short.

  Jeff Gordon, who had exited his positions, remembered that Tom Shanks was still short. He said, “You have to imagine, here we are, managing millions of dollars, we come in [Monday], we have these positions and the market is so much against you. We have large positions, we’ve just lost a horrendous amount of money, through no fault of our own.” Gordon was pointing out that Shanks was following Dennis’s rules and that by following those rules exactly, he had incurred significant losses.

  Even though the Turtles were given precise rules. Dennis’s weakness for discretionary decisions rubbed off on his students. In theory they all had the same rules for selecting markets to trade, when to enter and exit, and how much to buy and sell. However, there were ongoing incidents of exceptions to the rules.

  One of those exceptions involved a cocoa trade. Erle Keefer vividly recalled it: “Cocoa is going out the roof. We generated the whole move because we were allowed to add on. We had the whole market. The guys on the floor knew it was Rich’s traders, but they just kept the market going. We push it up another ten points and they add on. We are shoving that through the roof and when our buying dried up, the market collapsed. We all got stung hard because honestly we were loaded. Phil Lu was the only one who didn’t have any cocoa positions.”

  During the Turtle program, Dennis had a policy that one day a year all Turtles would individually go to lunch with him. They got to trade with Dennis for the day, so to speak. When Phil Lu came back from his day with Dennis, he thought Dennis was unhappy with him. Dennis wanted to know what caused Lu not to take the cocoa trade. Lu’s decision to not take the trade clearly was against how they had been trained.

  Lu had a reason. Each day the Turtles had to write down their contingencies for the day. Lu, who never really had the intense trader drive, simply had two pages on his computer listing his if/then contingencies, his buy and sell points, for each market each day, and his second page listed cocoa. It turns out that Lu had a rule that if he had two pages and if a trade wasn’t on page one, he wouldn’t trade it. Cocoa was on page two for him.

  Dennis said, “Why didn’t you trade cocoa? What told you?” Lu said, “Oh, I only trade stuff that is on my first page and cocoa wasn’t on my first page.” Lu thought he saw Dennis’s face fall. After all, Dennis, ever the curious skeptic, had hoped he was about to learn something new from one of his students.

  Lu’s trading was a great example of the imprecision within the Turtle world that could and did lead to different levels of performance. It was the type of incident that showed even though the Turtles were doing exceedingly well trading, there were reasons for differing performance numbers.

  Dennis’s hiring process loaded the experiment up with real characters. Perhaps the most colorful background of any Turtle was that of Mike Shannon.

  At one point I asked Shannon if there was anything else to know about the whole Turtle process. He said bluntly and out of left field, “You know that I was a criminal, right?” Before explaining himself, he said his story deserved a disclaimer. First, his transgressions were twenty-five years ago, and second, he is very anti-drug today. He then explained, “Probably about two or three years before I joined Richard Dennis, I was a drug dealer. I used to control about maybe 80 percent of the drug traffic within the Rush Street nightclub scene in Chicago.”

  Other Turtles confirmed his account, but this unusual story kept unfolding long into the Turtle program. After he had been working for Dennis for fifteen months or so as a Turtle, Shannon was called to testify in a federal drug case for the government. Dennis found out and called him into the office. Shannon thought he was going to be let go when Dennis reached into his briefcase and pulled out a transcript of the trial. Dennis was stern: “Now look, I am not going to fire you if you tell me the truth. Just tell me the truth, what’s going on?” Shannon gave up the whole story about his drug-dealing past and his current side gig working for the FBI. Dennis was shaking his head. “Are you done with them?” Shannon had no clue whether they were done with him.

  Shannon was convinced that Dennis was the reason his problems went away. He said, “I was well into the Turtle program and I was a little profitable as well. I think if I was a marginal trader he might have cut me loose.” Shannon said that Dennis’s political connections ended his nightmare, adding, “So, I have no criminal record.”

  Another Turtle said about Dennis’s handling of Shannon, “Rich grew up around a lot of pretty tough guys, being in the trading business and everything else. Rich knew that there was always another story. By his nature Rich is an amazingly forgiving person.”

  Throughout the Turtle blowouts, quirky trading decisions, and a federal narcotics investigation, Dennis treated his people right. On one occasion he flew the entire C&D entourage to Las Vegas to see the rock band Blood, Sweat and Tears (he was a 1970s music aficionado, after all). Even though he might have led an outwardly frugal life, Dennis was generous to everyone he came in contact with.

  The Group Dynamic

  The Turtles were exposed to ideas with tremendous power, but those ideas did not come without a price. Human nature was always at play. It was one thing to practice applying Dennis and Eckhardt’s rules on a blackboard, but learning how the rules performed in live action was critical for confidence.

  In this sense, the Turtles’ training had unmistakable parallels with the U.S. Army Rangers’ training regime. The Rangers work under the assumption that extraordinary performance can’t come from rehearsing under ordinary conditions. Elite troops can be forged only from extraordinary challenges that force them to draw upon emotional and physical reserves they never knew they possessed. Trading for Dennis was the same. The Turtles had been taught how to handle their worst-case trading scenarios and to feel confident in any trading situation but it wasn’t easy.5

  Gaining confidence, whether Turtle or Ranger, involved a setting. The Turtles were in an empty office learning their way; the Rangers were in a physical training pit learning theirs. Both groups always had the eerie feeling that someone was watching over them. In a way the Turtles and Rangers were both trapped, though voluntarily. They had signed over their lives to people they didn’t know with the expectation that those people would subject them to pain.6

  Of course, the Turtles did not endure the physical pain of Ranger School, but they certainly endured psychological pain while they gained confidence in their ability to trade. Whether intentional or not, the Turtle office environment fostered a tribelike atmosphere.

  And many Turtles saw their group, or tribe, dynamic as crucial while they were in the womb trading Dennis’s millions. Erle Keefer felt the psychological need: “The reason we all needed to stay together, especially in the beginning, was we literally made all our money in a normal year in about a three-week period. The rest of the year, most people were down minus 30 percent. And then the markets all clicked in and we had bullets to fire because of Rich’s money management scheme. You can go from minus 30 percent down to a plus 150 percent up in three weeks with no trouble at all.”

  Slaving away together as comrades-in-arms was important because they were getting the crap kicked out of them on a day-to-day basis, with lots of small losses and very little positive reinforcement. When the big trend came it was great, but they still had to patiently wait for it to happen.

  Imagine sitting there day after day with a multimillion-dollar trading acco
unt funded by a guy who is Chicago’s trading royalty. And imagine that the account appears to be slowly dwindling away, little bit by little bit, even though you are doing what you are supposed to do. There was self-doubt. There was concern. The group dynamic helped the Turtles alleviate stress and reassure each other that they were all doing the right thing.

  As time passed, though, the Turtles saw Dennis’s system making huge amounts of money from big trends. They finally had the psychological assurance of “I know this works in my gut, and you can’t take that away from me.”

  However, even with the tribelike atmosphere, even with the Ranger parallels, even with learning in their guts what it really meant to trade like Dennis, as evidence accumulated, it showed that the group process had ultimately turned out not to be significant. That’s because the “Turtle trading tribe” was ultimately undermined by an unexpected threat: competition and jealousy. Liz Cheval addressed the rivalry head on when she declared, “At the end of the day, the numbers are there in black and white. Either you made money or you didn’t.”7

  The Turtles would soon learn that trading for Dennis over the four-year life of the program was more complicated than the black-and-white world described by Cheval. The Turtle trading experiment was about to become an experiment inside an experiment, with newly confident Turtles just as quickly burdened with self-doubt.

  7

  Who Got What to Trade

  “It’s interesting where the truth ultimately ends up. What you read on the front of the newspaper and what really happens can often be the difference between black and white.”

  Anonymous Turtle in interview

  When the Turtles first started working together the atmosphere was pretty carefree. After all, they had been selected and trained by the trading king of Chicago. But their complacency was short lived. In just a few months they became the equivalent of insecure earthlings being analyzed from afar — just like in an old Twilight Zone episode. The initial experiment of nature versus nurture was one thing, but now there was another experiment underway, intentional or not.