Money was mother’s milk in a Turtle’s world. Since without Dennis’s money to trade, there would be no Turtle program. But soon the Turtles learned that there was little rhyme or reason when it came to how much money each of them got from Dennis to trade. This was no small matter; it made the difference between making millions or not. Again, the movie Trading Places comes to mind, with the scene in which Billy Ray exclaimed, “The whole thing was an experiment, fool! And you and me were the guinea pigs! They made a bet over what would happen to us!”1
Sam DeNardo, a first-year-class Turtle, who received a $1 million allocation from Dennis but rationalized away the smaller amounts given to second-year-class Turtles. He thought Dennis figured he didn’t need to risk as much with the second-year class: “He started those guys up with different amounts. It would have been nice to know at the time how fast he wanted us to go, how aggressive, or how conservative. I think that was part of what he was trying to discover.”
The outside world was hearing that the Turtles had it made in the shade, but behind the scenes Dennis was making unequal allocations to his students. His action created tension within the ranks, but no one was about to complain openly. After all, they, were making more money than they ever had before. Yet being a Turtle was clearly a double-edged sword.
Jeff Gordon, discerned overall friction before allocations even became an issue. He saw some people in the Turtle program as being there only because of a previous acquaintance with Dennis, while others were hired through the ad. Dennis referred to the people who had had a connection with him as a “control group.” Gordon said, “They were just chosen for other reasons.”
Gordon and several other traders thought the people like him (those who had been hired and screened from the want ads) were superior traders. Dennis thought there was no difference. This was small potatoes to the real office tension to come.
With different amounts of money being allocated, the Turtles started to earn wildly different amounts. Mike Cavallo, for example, was one of the early leaders. He described everyone as doing well initially, but said that then in the spring of 1984 they all got crushed.
At that point, midyear, when the Turtles in the first class were all in the red, Dennis came in and said that they were all trading well. He then increased their equity. This made no sense to the Turtles. They were shocked. They were down big, and Dennis was going to give them more money?
Cavallo could not believe it: “I might have thought he’d say, ‘Well, I think the program has been a failure. I’m going to close you down.’ Instead, he increased equity especially for a few of us that he thought who were trading the best. I was one [along with] Curt [Faith] and Howard [Seidler]. I guess we were trading the best at that time.” The word “best” made little sense when comparing Turtle performance data (see Appendix). They were all going up and down as a group in general.
Over time, however, the ones who perceived unfairness in the disparate allocations became frustrated. Erle Keefer said some Turtles spoke up vociferously about the allocation of money. He recalled, “You’ve got guys like Curt Faith and Mike Cavallo who go down to minus 50 percent, minus 70 percent and not only are they given a reload, but they’re given even more money.”
They all sat in the classroom together. They all learned the same rules. They then went to the office together and initially all received the same amount of money to trade. Almost out of the gate everyone started to lose, but some of the biggest losers were given even more money to trade.
Many Turtles thought Dennis was subjectively guessing who was going to be a great trader, as opposed to letting the actual trading results dictate greatness. The rub for many was that Dennis and Eckhardt always argued that trading should be based on true logic. Now some saw Dennis allocating money in a “losing game” fashion, meaning they could not understand why he was not using the scientific method in his trading allocations just the way he had taught the Turtles to do in their trading.
More and more frustration boiled over at how herky-jerky the allocation process had become. In 1986, for example, the money management business as a whole had a very difficult year. Jeff Gordon was quick to point out his success: “I produced plus 65 percent that year without a double-digit drawdown.”
How did Dennis reward Gordon in terms of an allocation for the next year? Dennis decreased his allocation and his incentive fee. It seemed to resemble a science experiment: “Add acid to base and note the reaction.” However, it was Dennis’s game, and he alone had the right to make the rules.
Gordon was frank about his ultimate difference of opinion with Dennis and the eventual outcome: “He didn’t like my risk control. Well, he was the guy making the decisions. Did I appreciate that? No, because I knew how I had done. On a reward-to-risk basis I was wiping everybody else out.” Dennis’s act of lowering Gordon’s incentive fee, which no matter his allocation meant less profit, was not interpreted well: “After that I wasn’t terribly enthusiastic about remaining in the Turtle program. I wasn’t providing Rich what he wanted. I left the program in July of 1987.”
But Gordon had a problem, however. Like all Turtles, he had signed a contract to trade exclusively for Dennis for five years. If he quit the program, he could not trade for others. Gordon knew what he was up against. “You didn’t want to get into a lawsuit with somebody who has $200 million,” he said.
Dennis did not care whether Gordon had a “decent” risk-adjusted return. Dennis wanted big rewards—absolute returns. It is not surprising that Dennis cut Gordon prematurely. Given Dennis’s strong philosophical underpinnings (“follow my rules”), and given the fact that Dennis and Gordon had political differences (Gordon supported Hart in the 1984 presidential race, not Mondale), this appeared to be as much about butting heads as about making money.
But Gordon was not alone. Echoing similar concerns, Jim DiMaria addressed allocations as well: “I think the first year [Turtles] were all given the million-dollar trading limits to start. Then in the second year, there were eight of us. I think three were given a million, two were given $600,000, and three were given $300,000. I was one of the $300,000 ones, which is fine. It was still a job. I was a little surprised, but we did get a draw.”
Dennis and Eckhardt matched DiMaria’s prior $18,000 salary, but the Turtle allocation process was a mystery. DiMaria said, “Everyone sort of believed in ‘the market is never wrong’ and ‘technical versus fundamental,’ but then when the money distribution went out, it was like there was no correlation between who got the money and what the performance was.”
DiMaria was at the bottom in equity and near the top in performance. That type of discrepancy continued throughout the whole program. Adding fuel to that fire was the common knowledge that, one turtle was soon getting twenty times what others got.
It bears repeating: The Turtles all had the same rules and the same training. At the same time their earnings were based on an incentive structure tied to their total account value, and some Turtles were trading millions while some were trading thousands. That’s a formula for internal strife. Conversation after conversation regarding allocations peeled away the rivalries and ill will below the surface.
As time marched on under Dennis’s roof, it became apparent that the one Turtle who got the largest allocation of all was purportedly not following Dennis’s rules as taught. Almost every Turtle brought all discussions back to Curtis Faith, who had perhaps half the money in the program at one point. DiMaria was blunt: “His trading was pretty erratic. He’d have great months, but he took enormous risks to get there.”
In 1989, the Wall Street Journal described Curtis Faith as “the most successful Turtle.” The article included a chart showing the performance numbers of fourteen Turtles, but conspicuously absent from the chart were Faith’s performance numbers. Only in the text of the article was there mention of “trading records” showing that Faith made about $31.5 million in profits during the Turtle program.2
However, if you look at the bi
g picture this headline was problematic. If Faith was trading the most money, and hence earning the most from incentive fees, then the Wall Street Journal was in severe error by saying he was the most “successful” Turtle. To appreciate the imbalance between Faith and the other Turtles, consider an example: Trader “John” is given $20 million to trade and trader “Mary” is given $20,000 to trade. They both get a 15 percent incentive fee and both produce plus 50 percent returns. It can’t be said with a straight face that John is unilaterally more successful.
During research, I found a chat forum posting with what appeared to be an inside view of the Turtles’ allocations. The post reiterated the $31.5 million that Faith purportedly made, but also said that the entire Turtle group “made around $100 million.” This chat forum posting emphasized that Faith had made 30 percent of the total. It concluded with faulty logic, “What Jerry Parker made 5 years later trading a much larger equity base is not relevant.”
That posting conveniently left out the critical fact that Faith was trading upward of twenty times the equity base of other Turtles. In other words, Faith made more because he was trading more. But there are no performance numbers demonstrating that he was the best-performing Turtle.
However, as long as the risk Faith was taking was within the parameters, this was not considered a big deal. DiMaria was quick to correct that view: “No, not within the parameters. That was sort of the standing joke. There were parameters and then there were Curtis parameters. He just got to do whatever he wanted. It’s as if the whole thing was decided on ‘who knows what?’ criteria. Who were going to be the good traders and who weren’t? And returns be damned. It was totally fundamental. It was, ‘Mike Cavallo, he’s like the smartest guy in the program. We got to give him a lot of money.’ I was at the other end of the spectrum. Maybe because I was a control person and they thought I wasn’t going to be anything.”
Faith saw it differently, saying there was a certain amount of variability when they were taught the S1 and S2 trading systems. He saw his subjective choices as key to his success. Faith was also the most openly competitive in his public statements about his experience. It could be that when Faith said he wanted to beat everyone in the room, he was motivated by his lack of a college degree (Jehovah’s witnesses do not advocate college as part of their religions practice). Or he simply may have had a healthy “I will show them” chip on his shoulder.
At first blush, DiMaria’s initial comments could have been “sour grapes.” However, they weren’t made purely out of self-interest; he saw other Turtles getting the short end of the allocation stick. He said, “George Svoboda was an absolute genius and probably had the potential to be the best trader of all and might be.” However, as the program went on, many Turtles saw that the correlation between trading success and the amount of money they were given by Dennis as not very good.
Yet DiMaria added, “I think at the end of the first year I was one of the top performers, if not the top performer. My bonus was like $10,000 when other people were getting $600,000. I had a kid and all and it was tough. It was very, very difficult.”
Twenty years later, the regret of not being given the opportunity to trade a larger account for Dennis still comes across in DiMaria’s voice. There was a touch of Rodney Dangerfield’s “no respect.” However, it is worth noting that today DiMaria has a continuous month-by-month track record dating back to 1988. That’s a twenty year track record in stark contrast to Faith’s lack of performance numbers over the last 20 years.
While many Turtles like DiMaria thought Dennis was playing favorites, Mike Cavallo bluntly disagreed. He thought allocations were all performance driven. In 1984, Dennis decided that trading grains wasn’t worth his time anymore. He gave those grain accounts to Howard Seidler, Faith, and Cavallo to trade.
Talk about even more tension. Everyone in the room knew about these grain accounts. They all knew they created the potential for trading much larger, with the chance to earn much more through incentive fees. Cavallo agreed: “I would say, sure there was some jealousy. I think it’s just human nature. People are in this great job that’s so much better than anything they’ve ever done, so much fun, and so lucrative, and who are now making six-figure incomes for the first time, get jealous of the people making seven-figure incomes.”
Although no one knew to the penny what other Turtles were making, it was obvious some were trading much more money than others. Everyone was worth basically the same when the Turtles started. Then, within eighteen months to two years, a few Turtles were millionaires and many were not, but all the while everyone was generating very similar returns. This was tension personified.
Cavallo also saw more than just allocation issues at play. He witnessed some Turtles who were less confident in their trading. There were Turtles actually imitating other Turtles. He saw a few trying to piggyback others’ trading orders.
However, in the end, it all kept coming back to allocations. For instance Jerry Parker was not happy about being allocated such a small amount either. Parker thought he was trading just as well as the Turtles who were getting the big allocations. The performance numbers support that. At one point in 1986, Parker was trading $4.2 million for Dennis. Then, in 1987, he was trading $1.4 million. Parker made plus 124 percent for 1986 and plus 36 percent for 1987.
Erle Keefer said that politics was the reason why Parker received smaller allocations from Dennis. Keefer said that Parker believed that, too. He said, “Jeff Gordon and Jerry are the political polar opposites of Rich. Jerry was about the biggest polar [opposite].”
Dennis was giving positive reinforcement in the form of larger allocations not only to Turtles who were willing to take bigger risks, but also apparently to those with whom he had become closer friends. Parker was a Republican. Obviously, he wasn’t Dennis’s favorite Turtle.
Parker may have been the first Turtle hired, but Dennis was still a human being. Keefer added, “He still had his favorites. Curt was a favorite. Mike Cavallo was a favorite. Then you look at some other people and you say, ‘Why did they get less money?’ Maybe they just didn’t want to pull the trigger on big numbers?”
Parker was by no means the only Turtle whose allocation was cut back after big performance runs. Many other Turtles with seriously eye-popping performance had their money under management slashed. Liz Cheval, Paul Rabar, and Mike Carr all had their allocations cut.
The fear of not knowing what to expect next was a constant in the Turtles lives. Turtles would get calls without explanation to increase or decrease 20 percent of their account size. They scratched their heads, wondering what was going on. Some Turtles joked that perhaps they were in a cruel psychological experiment. Others seriously considered the possibility that they were being filmed like Jim Carrey in the Truman Show.
Mike Cavallo, who viewed the allocation process as a meritocracy, did end up having some questions, too. He thought Dennis was partly awarding trading aggressiveness, placing bigger bets with Turtles he thought were trading better, but even Cavallo could not understand Dennis’s decision-making logic when it came to Faith. He said, “It seemed like Curt was trading too aggressively and too riskily and yet was getting rewarded for it. He was making the most, although probably not on a risk-adjusted basis. So at the time, it was just sort of puzzling. I’m not particularly a jealous person, so I wasn’t too worried about it.”
Cavallo knew Dennis had become very successful as a very young man by taking big risks. The implication was that Faith was Dennis’s chosen one. Others said the C&D brain trust were enamored with the fact that Faith was so young.
It became increasingly apparent that the whole subject of allocations issues was just an entry into the central sticky issue of the program: favoritism. The disparity began almost out of the gate. There was a heating oil trade only weeks after the Turtles’ initial training in 1984. The Turtles were supposed to be trading much smaller sizes. They were supposed to be trading “one lots” or just one futures contract.
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nbsp; Faith apparently traded much larger and made more money than all of the other Turtles. Cavallo thought Faith had exceeded what they were allowed to trade, but he also thought an arguably reckless or “go for the jugular” attitude may have elevated him in Dennis’s eyes.
It kept coming across loud and clear from assorted Turtles: Faith’s trading didn’t reflect what they’d been taught. Cavallo, the Harvard MBA, was brutally honest: “It wasn’t at all what we were taught. In fact, you could say it was slightly counter to what we were taught.” Even though Cavallo was making millions and was easily considered a top-grossing Turtle at the time, the fact that Dennis gave more and more money to Faith perplexed him. Cavallo had no ax to grind in talking about Faith. In fact, years later he served on the board of directors of a firm Faith had started.
Why was Cavallo concerned about Faith’s style of trading? He worried that Faith was risking so much that he could ultimately be ruined (as in mathematical risk of ruin). From that first day of class Eckhardt had pressed home the point of managing risk, but many Turtles saw it almost immediately being ignored by one of their own.
DiMaria, who was only eighteen months older than Faith, saw everyone playing by the rules during the program except Faith. He said, “That would go to position sizing, markets traded … he was the special boy wonder. So he could do things that the rest of us couldn’t. He probably doesn’t realize that. Did he have special rules ahead of the game, or did he change the game and then ask if those new rules were okay?”
Jeff Gordon was the first to broach Faith’s religion. He said, “Curtis was a Jehovah’s Witness. A person of faith, a religious person, someone who you’d think would have morals. I am not saying that Curtis does not have morals or religious convictions. But when it came to handling Richard Dennis’s money, Curt could have cared less if he lost it all. That’s how he conducted himself. The fact of the matter is, in retrospect that appears to be what Rich wanted. Rich wanted people who would be really aggressive.”
The Complete TurtleTrader Page 13
