The most remembered and controversial trade in the program was that 1984 heating oil trade. All the Turtles were trading $100,000 in the first month, and Faith made much more money pyramiding than the others. Dennis loved it. Gordon was shocked: “It was actually kind of strange because Curtis started getting personal calls from Rich, and he would come in the morning and say, ‘Hello, well Rich and I were talking last night and he said, ‘da da da.’ Nobody else was getting these calls.”
Faith saw the 1984 heating oil trade differently, saying that he bought three futures contracts per the rules and quickly added the maximum twelve contracts he was allowed. Heating oil went straight up, and all of the Turtles had big profits.3
But Faith, said he saw something odd in the other Turtles’ trading. He said he was the only Turtle to have “on” a full position. It was Faith’s view that every single other Turtle had decided for some reason to not trade the system as Dennis and Eckhardt had taught them. He wondered if they had even been in the same class with him.4
Because this was a very volatile trade, the price of heating oil soon plummeted. The Turtles began to exit. Faith believed that the right thing to do was to hold on (and not exit) as heating oil dropped. Soon it began to rise again, surpassing the previous high. Faith was apparently the only Turtle with all twelve contracts “long.” He said, “We had all been taught exactly the same thing but my return for January was three times or more than the best of the other Turtles.”5
Mike Cavallo and Russell Sands both reinforced the point that Faith had a helping hand that other Turtles did not have. They said Dennis guided Faith at the liquidation point on this trade. It appeared that Faith was in a special “no fail” setup to which the other Turtles were not privy.
Was all of this tension designed by Dennis just to see how other Turtles would react? Or was Faith getting extra ongoing instruction because he and Dennis had become friends?
Mike Shannon connected the dots in very human terms: “I think some of the Turtles had different motivations for doing what they did. I did it because I just found at the end of the day, I just truly enjoyed the experience. You take guys like Jim Kenney and Anthony Bruck, I think their view was a little bit more artistic. Curt Faith, on the other hand, was driven by his father. His father was a Jehovah’s Witness and he had to pay a tithing to the church. It was like his dad was a stage mom almost … [He] would come up and we’d look at this guy and some of their beliefs are just a little bit off the wall.”
Now, Mike Shannon was no angel, but his words revealed a real-world picture of the goings-on in the office. The bottom line: Given the millions Faith was trading, given the clear allocation discrepancies, given the clear discontent, this drama over allocations and extra assistance was just as much a part of being a Turtle as the rules they were taught.
Shannon was sympathetic when he described the situation: “[Curtis] made no secret of it. Look, he wasn’t running around giving us copies of [Jehovah’s Witness brochures] or anything bizarre like that … He was pretty upfront about it. He would say, ‘The church I belong to and blah, blah, blah and all that.’”
Perhaps Richard Dennis had become a father figure for the young Faith. Shannon added, “Rich really likes Curt a lot.”
The Performance
The personal and perhaps subjective descriptions of what was taking place are fascinating, but the bottom line is performance data. Sol Waksman of Barclays Performance Reporting was the only person I could find with copies of the Turtles’ month-by-month performance while they were under Dennis’s umbrella.
Table 7.1: Annual Turtle Performance.
Nothing illustrates the life of a Turtle while working for Richard Dennis better than the monthly ups and downs of the raw performance numbers. Consider the performance of three Turtles, Mike Cavallo, Jerry Parker, and Liz Cheval, during 1985 (more Turtle performance numbers are in the appendix).
Table 7.2: 1985 Month-by-Month Performance for Mike Cavallo, Jerry Parker, and Liz Cheval.
I found the omission odd that Sol Waksman did not have Curtis Faith’s numbers from inside the Turtle program. Faith said that his performance numbers were not available because he never constructed an approved track record for his years trading Dennis’s money, preventing him from giving his exact Turtle performance numbers.6
However, how was it even possible that Faith could be trading so much more money than other Turtles? Dennis had a lot of money, but not an infinite amount. Other Turtles said money was being taken from their accounts and given to Faith’s account.
Interestingly, once Faith’s account got really big, things apparently went south. One Turtle saw Faith losing much of his gains in a 1987 silver trade; it was his contention that all of the money Faith had ever made for Dennis may have been lost on that one trade.
Other Turtles talked about this silver trade, too. One said that Faith didn’t exactly follow the system because he had “gotten a feel for it.” When silver finally spiked down from a big run-up, he saw Faith as the last trader actually trying to exit.
Faith admitted that he was in error. In the EliteTrader.com chat forum, he said it was his single worst mistake trading: “I was holding 1,200 contracts of Comex Silver, yep the 5,000 ouncers for 6,000,000 ounces for Richard Dennis’s account. This along with 500 contracts of Comex Gold. Rode it all the way up and almost all the way down accounting for a whopping -65 percent drawdown in the account. The equity swing on the high-move day for the account from the high to the low was something ridiculous, like $14 million.”
At the end of the day there was no way to verify the exact amount Faith lost on that silver trade, and there was no way to verify Faith’s exact $31.5 million profit figure while working for Dennis either. In trying to do so, I talked with reporter Stanley Angrist who wrote that 1989 Wall Street Journal article nearly twenty years ago. He told me that he had no way to verify Faith’s earnings. He received that $31.5 million number from Faith himself.
While this silver trade may have been one of the final behind-the-scenes sagas within the Turtle experiment, it certainly wasn’t the last one. Once the idea of taking too much risk and not following rules was on the table, it was as though a dam broke. David Cheval, Liz Cheval’s former husband, saw more than one Turtle in the first year ignore the rules and take excessive risk. He said, “I also believe that Rich increased the stake of several traders because they blew out the initial stake — not necessarily because they were the top traders.”7
Curtis Faith disagreed saying that it wasn’t really possible to blow out the initial stake. He said that if the Turtles lost 50 percent on a closed trade basis they would not have money to trade.”8 Fifty percent was not a cutoff point. Turtles clearly breached that, and the data proves it. However, when it comes to allocations there will always be a mystery, with assorted inconsistencies as everyone protects their real or perceived reputations twenty years later.
That said, the allocation story had an ending. Sam DeNardo zeroed back in on allocations as he saw the second-year group of Turtles becoming destabilized. They were concentrating a lot on “How come you got $50,000 where I got $200,000?” or “Why did you get $600,000?” He saw them worried that they had done something wrong in Dennis’s eyes. DeNardo even tried to ease tensions by writing Dennis a letter to warn him that there was destabilization in the Turtle ranks. “They were fighting amongst each other,” he said.
Keefer also sent a brief letter to Dennis questioning his allocation formula. He believed that if Dennis had done nothing more than give an equal allocation to all Turtles, for example $5 million, he would have made much more money. He said, “I’m quite certain that it didn’t endear me to Rich a whole lot when I wrote the paper saying, ‘Here’s how the logic of asset allocation should be in this kind of a game.’”
Keefer, who thought Dennis deserved a Nobel prize for his real-world work in harnessing volatility in his trading models, lamented the allocations aspect of the program: “You’ve got somebody that’s g
ot an awesome trading system and he’s following really rigidly good protocols about trend trading and then he just literally blows it up on asset allocation.”
It was DeNardo, however, who got punished for questioning allocations—he got cut from the program. Dennis interpreted his letter as trying to make excuses for his losses. DeNardo said he followed the rules, but not always: “I remembered buying sugar when I should have been selling it. I just said, heck, ‘I’ll buy some.’ Well, I get called in for that. ‘You shouldn’t do that. It’s counter trend.’ Well, I never did it again. Let me tell you, they knew what you were doing.”
The Memo
While Dennis and Eckhardt always knew what the Turtles were doing, it turned out that the two mentors didn’t always know what they were doing. During all that downtime of waiting for the markets to trend, four Turtles from the second class (Tom Shanks, Paul Rabar, Erle Keefer, and Jiri “George” Svoboda) formed a small group to do trading research. They wanted to validate their rules instead of just playing by them.
While the rest of the Turtles may have been reading the sports pages and playing Ping-Pong, this group spent their time building a systems testing platform. Doing that took them a year. The results of their research project shook the program. They determined that Dennis had everyone taking far too much risk.
The Turtles had all been trading according to rules taught by Dennis and Eckhardt and were making millions, but the research team, using original Apple computers, blended the S1 and S2 trading systems (see chapters 4 and 5) together and found that instead of a worst-case -50 percent drawdown, they were consistently getting a worst-case -80 percent drawdown.
Paul Rabar intuitively figured out the problem occurred when both systems (S1 and S2) got the entry breakout signal at the same time. At that moment they were putting on too much risk.
Dale Dellutri had somewhat arrogantly always said to the Turtles, “If you guys ever invent anything bring it to us.” Dellutri was clear that he never really expected that to happen, so turning over this new research was going to be a delicate matter. Dennis and Eckhardt’s attitude was, “We know this trading cave, and we know it better than anyone else.” And given the success they had had, why not think that way?
However, the research team had determined the guys in the cave were off by a factor of 100 percent, and they told Dellutri. Soon afterward, Dellutri came out and ordered everyone to reduce their position sizes by 50 percent going forward.
On the heels of Dellutri’s order came the official memo from Dennis dated April 23, 1986. It said:
Real-world drawdowns far in excess of theoretically expected values have caused us to reassess the linkage between theory and fact regarding how big to trade. It seems that we have misconstrued the theoretical data so that you have been trading as much as twice as big as we thought. The good news is that this has been true throughout the whole trading program—your profits were doubled, but at the cost of a doubling of the risk. We must be living right.9
Dennis went on to reiterate what Dellutri had already told them: They would soon have to cut back their trading by 50 percent. He wanted to turn the Turtles’ risk-taking back to what they expected it to be when they started the program. While this order did not change the rules for the Turtles, it meant they would be trading less money now. Instead of trading a $1 million account, they now traded that account as if it were a $500,000 account. Essentially, they were just massively de-leveraged.
Egos must have been bruised when those four Turtles beat Dennis and Eckhardt at their own game. They had been trading by these rules for years, teaching them to others, making millions, and then suddenly their trainees proved the rules were wrong. However, even after the cutback in their leverage, the Turtles kept performing. This was tension.
Some Turtles thought there was a certain side of Dennis that felt as if he had created a bunch of Frankensteins (“My God, I’m competing against the people I trained!”). To top it off, during this period the Turtles were actually outperforming Dennis as a group.
Many Turtles thought they were doing better because they’d been taught good habits. Some thought Dennis had kept bad habits from the days when he was in the pit. Mike Shannon added, “He would not get angry, but he’d become hyper-critical about the certain execution of trades that would make sense if you’re standing in the pit, but really wasn’t as hyper-relevant if you were trading off the floor. He was always worried about ‘skid’ and we certainly were concerned about it as well.” But for some reason, not getting great fills on his trades (what the industry calls “skid”) was an ongoing (and perhaps irrational) bone of contention for Dennis.
For a man who taught logic and the scientific method to his students, it was amazing to hear that he worried too much about arguably inconsequential issues. He may have been feeling the tension when he once wondered outloud if he had a fatal pressure point: “I really am a contrarian at heart, and that’s really probably not good if you’re a mechanical trend follower.”10
Bad omen.
8
Game Over
“If Rich would not have traded against our positions, which I know he did at times, he’d have made even more money.”
Anonymous Turtle from interview
In early 1988, the big political news was that the Soviet Red Army was withdrawing from Afghanistan. In the business arena, Kohlberg Kravis Roberts & Co. had just completed their then record leveraged buyout of RJR Nabisco (surpassed only in February 2007 by Blackstone Group’s purchase of Equity Office). The Turtles had their own current event to deal with when Dennis suddenly pulled the plug.
It was over. Dennis sent a fax telling the Turtles that the program had been scuttled. Dennis, who was managing money for clients, too, had two public funds with Michael Milken’s Drexel Burnham Lambert. They closed down with big losses. The reason for the Turtle program shutdown has never been officially defined, but Dennis’s performance numbers painted a sobering picture:
The game changed for Dennis when his losses were 55 percent in April 1988. Not only was his public fund performance beyond terrible; his father had recently died. One Turtle attributed the program’s closure to “family issues.” They were tough times for sure. However, April was not a terribly tough performance month for the Turtles. They typically lost 10 to 12 percent each for that month (see Appendix). Their losses were nowhere near the size of Dennis’s losses.
That said, the shock of having the plug pulled threw the Turtles for a loop. Jim DiMaria was bewildered at the Turtle program’s abrupt ending: “All of a sudden it’s over. That’s how fast it was. They came in Monday morning and said, ‘Friday, we’re done.’ I was like, ‘Oh, better get a job.’” Some argued that his heavy losses forced Dennis out of the game, but DiMaria said personal trading losses didn’t force his hand. DiMaria said that it was Dennis’s money, and he just didn’t want to do it anymore.1 Other Turtles said in no uncertain terms that the program was ended as a consequence of the Drexel meltdown.
Table 8.1: Richard Dennis Trading Performance: January 1986-December 1988.
Dennis himself simply declared that he was retiring. He announced that he would move full time into political causes. He wanted to take the wind out of what he thought were efforts to make “liberal” a dirty word. He quickly plunged headlong into libertarianism. To him, libertarian ideals, which stressed individual rights, were a tonic for society. However, others were not buying his political posturing. They felt the big trading losses had pushed him into politics.
When it came to discussing his rocky trading for the Drexel funds, Dennis laid partial blame on his clients. They did not understand the nature of his trading style and when the drawdowns started, they lost faith in him. He could never understand why his clients (either now or back in the early 1980s) lacked his steely resolve. He also wondered why Drexel’s administrative people let him down. When they came to see him he said, “What the hell are you doing?” As a floor trader, Dennis had been down more than 50 percent
a few times. He asked Drexel, “Didn’t anyone tell these people what they were getting into?”2
Clearly, the marketing people sold only the “good times” to the clients invested in the Dennis-managed Drexel funds. That said, Dennis was the trader; he was the one with whom the buck stopped, not the brokers selling him to the masses. However, the Drexel fund’s troubles did not immediately discourage the former “Prince of the Pit.” He was confident even at his worst moment: “What should give investors confidence is the overall record I’ve compiled in my 18-year career.”3 An eighteen-year track records mean little to clients when you lose 55 percent in one month.
Drexel executives have proved perennially unwilling to comment on the chain of events that led to the unraveling of Dennis’s fund back in 1988. Former Drexel executive Richard Sandor had a good natured response to me when I asked if he would comment on what happened; he said “not in a million years.” Not a surprising reaction from one of the more prominent names in Chicago trading.
However, Dennis himself was not as reticent, and he addressed his hard times head on: “I wouldn’t trade a public fund now even if it were a cure for cancer.”4 He was angry. He felt the risks of trading with him were fully disclosed in printed materials, and said, “I found out the hard way, by going through the courts that disclosure documents tend not to mean anything. The way our court system is structured, you can make ignorance work to your advantage, by saying, ‘I didn’t understand the risks and this shouldn’t have happened.’ “5
The Complete TurtleTrader Page 14
