The Complete TurtleTrader

by Michael W Covel

  Even if it was arguably a bad long-term move to cater to clients’ desires for less leverage, there was only so much Turtles could do. If a client says, “I want this” and Turtles say, “I won’t trade that way, it hurts compounding,” they will not have that client. It was a classic Catch-22.

  Parker got it. He was quite willing to compromise the original rules, which was after all was making him super-rich in the early 1990s. But while, the idea of lowering returns by reducing leverage in the hope of reducing drawdown may have been a winning move for Parker, it wasn’t for all the Turtles.

  In fact, it may have contributed to their downfall. The very nature of what the Turtles had been taught revolved around taking large calculated risks. Reducing the risk level quickly reduced the size of potential returns. In the trading business, big returns are critical. The basics of compounding are always at play. If Turtles were cutting their appetite for risk in year one, they left little or no cushion if their next year’s performance bombed.10

  However, many of Parker’s Turtle compatriots were not ready to give up the original high-risk style they were taught. Those Turtles never stopped seeing the benefits to the home-run approach Dennis had taught them.

  Sticking to Their Knitting

  Unlike Parker and Rabar, Tom Shanks did not pull back from the original aggressive Turtle rules. From his then home office overlooking the Sonoma Valley in California, he was blunt: “There are individual investors who seek high returns and are willing to accept the risk entailed in achieving them.”11

  However, most investors did not want Shanks’s Turtles style even though he would eventually knock the cover off the ball. Other Turtles saw Shanks as Mickey Mantle. “He will hit the ball out of the park. It’s just you have to stay with him. Unfortunately, money is being controlled by people who don’t know the business. They couldn’t trade their way out of a paper bag if their life depended on it.”

  This criticism of people ignoring high-return traders was spot on, but being right does not mean Shanks was on the way to being Parker wealthy. One Turtle could not figure out how an investment with Shanks could not be a small percentage of everyone’s portfolio, saying, “If you … saw gold go from $350 an ounce to $600 an ounce, you want to be with Tom, because … you’re going to make a lot more money with someone like him.”

  This was the original Turtle trading mentality, but it goes straight against people’s natural inclinations. Of course, Dennis had taught the Turtles that natural inclinations are almost always wrong when it comes to making the right market decisions.12

  Shanks did his best to differentiate himself from other Turtles by declaring at one point that his trading had shifted to 75 percent systematic and 25 percent discretionary.13 For some investors, the idea that a mechanical “black box” trading system, with trades placed from code executed inside a computer, is foreign. Shanks used the word “discretion” to allay those fears. He wanted to show that he added value to his trading system beyond the hard and fast rules. However, Shanks’s use of discretion almost sank his firm in the mid-1990s before he recovered, acknowledging the mistake.

  He was not the only Turtle to stick with Dennis’s high-risk, high-return style. Liz Cheval was clear: “I felt that people who invested based on my track record deserved the same trading program that produced those results.”14 She added, “Volatility is what creates the high returns investors want from the market in the first place. As always, when assuming risk, investors should look for commensurate rewards. And high rewards don’t come without high volatility.”15 Cheval openly admitted that she adjusted the size of her trading positions using Dennis’s model for volatility.16

  With the passing of years, and with the time to reflect on the wisdom of Parker’s less leveraged approach versus Shanks and Cheval’s high-octane approach, the market of nervous institutional investors made a choice. It liked Parker’s choice and frowned on any allegiance to the original Turtle style.

  Highly Correlated Traders

  However they positioned themselves, whether as less or more risky than their mentor, the Turtles as individuals were the same traders in the eyes of Wall Street insiders. Their trading performance was highly correlated, which meant there was a historical tendency for their performance to move in tandem.17 Numerous correlation comparisons showed the Turtles trading the same way.18

  However, it was Tom Shanks’s opinion that the Turtles had evolved and developed systems very different from those taught under Dennis. He said, “Independent evolution suggests that the dissimilarities in trading between Turtles are always increasing.”19 Shanks’s opinion seemed designed to camouflage the fact that the Turtles were all really competitors.20

  This spin did not convince old pros on Wall Street. Virginia Parker (unrelated to Jerry Parker), a fund management consultant, saw no mystery in the Turtles, as well she knew that they were all driven by systematic, momentum-based, trend-following models.21

  Mark Goodman, president of Kenmar Asset Allocation, a firm that invested with the likes of the Turtles, said what none of them wanted to hear: “If you were to put all trend-following models side by side, you would probably find that most made their profits and incurred losses in the same markets. You are not going to find that EMC [Liz Cheval] made it in one market, while Rabar made it in another. They were all looking at the same charts and obtaining the same perception of opportunity.”22

  Whether dealing with initial fame, trading as a less or more risky Turtle, or battling correlation perceptions or negative associations with Dennis, the pressure was on. If there were potential jealousies inside the program, imagine the feelings of rivalry building up now with the Jerry Parkers of the world fast approaching a net worth of over $100 million in the early to mid-1990s.

  Perhaps the Turtle story would have ended right there. They had all been part of a grand experiment. They all learned to trade well while under Dennis. It had been a good ride. But here is where Turtles separated. Beyond the rules, they still needed something else for long-term trading success.

  10

  Dennis Comes Back to the Game

  “He was the toughest son of a bitch I ever knew. He taught me that trading is very competitive and you have to be able to handle getting your butt kicked. No matter how you cut it, there are enormous emotional ups and downs involved.”

  Paul Tudor Jones, hedge fund manager, on his mentor Eli Tullis

  Whether the Turtles became big winners or losers, the excitement of their fame and money had their former teacher wanting a piece of the early 1990s money pouring into hedge funds. The Turtles’ success was 100 percent because of him, but now his students were ahead. To trade or not to trade was Dennis’s internal debate as he pondered reentry into a now more crowded field to compete against his apprentices.1

  However, the early to mid-1990s was a tough time for Dennis. He was still unhappy about a class action suit brought against him after the Drexel fund debacle. Plaintiffs chasing him through the courts concluded he was “financially strapped” and “debt-ridden.”2 Dennis poverty-stricken? Doubtful. Was Dennis envious of his students’ success? He essentially said so.

  Jeff Gordon attempted to get into Dennis’s head: “Rich thought he could out-trade his own methodology. How in the world could a methodology that you created with your own knowledge out-trade you?”

  Yet Gordon, like so many others who were acquainted with Dennis’s 1988 “retirement” and shutdown of the Turtle program, was not sympathetic. He was perplexed. He kept wondering about what could have been: “Let’s just say, you taught a bunch of beginners to play chess, then you start playing them and they all start [beating] you. How would you feel? If Richard Dennis had hung up his cleats and just allowed the Turtle program to manage all that money he got from Drexel, they might have $10 billion now. He could be sitting on easy street. We will never know how many hundreds of millions and perhaps how many billions of dollars he might have left on the table because he disbanded the Turtle group.”
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br />   Dennis must have felt that he had left money on the table, too, because in 1994, along with his brother Tom, he launched a new firm called Dennis Trading Group. No fanfare; just an unlisted phone number and suite number on the door to protect anonymity.

  This was not the mammoth operation of C&D in the 1980s (one hundred employees, fifty to one hundred customers, and $8 million in fixed costs), but Dennis still had loyal supporters. “He is a lifelong student of the markets and a brilliant individual. Anything he does is worth paying close attention to,” said Sol Waksman of Barclay Trading Group, a consulting firm that tracks fund performance.3

  While he had taken to calling himself a “researcher” now instead of a “trader,” one of the questions Dennis was asked most frequently was, “Why are you doing this? Why step back into the fire again?” Dennis gave all kinds of answers from philanthropy to politics, but when pressed, he came back to his famous students: “I kept picking up the trade journals and seeing how much money they were managing. I thought, ‘I know I’m at least as good as some of these people.’ So I decided to give it another try.”4

  Still, there were reservations about this comeback. Vic Lespinasse, a floor analyst at the Chicago Board of Trade, saw the pros and cons: “He still has a very good reputation, although it has been tarnished somewhat by the Drexel episode. He’s going to have to establish a track record again, but I don’t see why he shouldn’t do that. I think he’s a superstar.”5

  When Dennis was asked to compare his new firm’s trading strategy to the Turtles, he sounded less confident than in years past: “The people I trained [Turtles] are succeeding on the ideas they learned from me. People might be interested in getting some updated ideas. If yesterday’s motto was that the trend is our friend, today it might be that the trend is a harsh mistress.”6

  Just as the Turtles were trying to overcome identity issues on Wall Street and Dennis was staging his comeback, Turtle Russell Sands threw everyone a curve ball.

  Russell Sands

  Russell Sands lasted one year as a Turtle before leaving for reasons that aren’t completely clear. While he said that he resigned, other Turtles said he was “let go.” However, that detail was minor in view of Sands’s true Turtle legacy: selling Dennis’s famous rules.

  The selling of Dennis’s rules followed shortly after Sands’s departure from Chesapeake Capital (the firm he’d created with Jerry Parker). Sands was always honest about why Parker carried more weight in their former firm (“he had the longer and more valid track record”), but at the same time tension was brewing.

  For a while they had a close relationship. Every day they were at each other’s house. However, Parker soon bought Sands out. What was Sands’s version of the buyout? “Jerry got greedy.” In all fairness, many hard-working people who make millions are called greedy. Sands could have just as easily been called jealous.

  Sands had an explanation for why trading had not gone his way after parting with Parker: “Paul Saunders and Kevin Brandt [Kidder Peabody/James River Capital Principles] came to me and said, ‘Russell, why don’t you start your own company? We’ll give you some money and let Jerry have Chesapeake.’ I said fine. This was right after the first Gulf War, when there had been some huge moves in the oil markets.”

  Kidder Peabody gave Sands money to trade, but the markets did not produce good trends over the next six to nine months. Sands said his trading performance went down to around 25 percent. His clients all ran for the doors. He sounded boxed in explaining his predicament: “Now, I’m basically out of business and don’t know what to do next.”

  In August 1992, a few days after Hurricane Andrew had rocked south Florida, Sands rocked the Turtles’ carefully crafted secrecy. The Chicago Tribune blasted the story:

  A disciple of Richard J. Dennis, the world-famous Chicago futures trader, is offering to reveal the master’s trading secrets to the public for the first time … promising to tell all at seminars across the country, including one this weekend in Chicago, for an admission fee of $2,500 a person.7

  Maybe Sands selling Dennis’s rules would have been no big deal in a normal situation, but the secrecy in the Turtles’ world was intense. Mike Shannon laughed at the situation in hindsight: “If we were having this interview and it was 1986 or 1987, we wouldn’t be talking. We were very guarded about the whole thing and we were intensely proud of what we were back in the day. We felt that there was something really incredibly special going on, that we were part of a special and experimental project. The secrecy alone was just off the charts. We weren’t allowed to discuss it according to Richard or anybody that worked for him.”

  However, Jim DiMaria downplayed the need for even signing an agreement: “It was pretty obvious to me that this stuff should be kept secret … the stuff we were taught was their stuff. I was lucky enough that they shared it with me. I didn’t feel like sharing it with anyone else.”

  DiMaria’s response was typical of how most Turtles felt toward Dennis. After all, the Turtle experiment was all about making big-time money, and sharing rules for making millions made no sense. So not knowing what the impact of Sands’s actions would be, the other Turtles attempted to minimize the importance of Dennis’s rules. They wanted the world to know that the rules alone weren’t the secret to riches (true point).

  As a counterstrike, Sands argued that it was a good business opportunity: “I didn’t do anything illegal. I didn’t even do anything immoral. I tell people, ‘Whatever I say is what Richard Dennis said twenty years ago.’ I give him all the credit in the world for it. I didn’t come up with these ideas. I’m just passing it on. That’s the way it is.”

  Fifteen years before he was the arguable billionaire he is today, Jerry Parker reacted with outrage against his former partner: “I don’t think Russell has anything to say that’s worth $2,500.”8 Given that Sands and Parker had been co-workers and friends at one time, his comment was a ninety-five-mile-per-hour fastball at Sands’s head.

  Liz Cheval then played the “Sands only learned so much” card, saying that it took her about two years to fully grasp and then use Dennis’s rules.9 Other Turtles said that since Sands was terminated from the program after one year, he did not get the “real” system.10

  Right. Parker and Sands had worked in the same house every day. At that time, Sands knew what Parker knew about the Turtle trading rules. Both shared the same basic knowledge back then. The “doing” part, the reason Parker is huge today, is a whole other story.

  Sam DeNardo pulled back the curtain on Sands: “I think he [Sands] was talking to people outside the room about what he was doing. That got him in a lot of trouble. I heard it with my own ears. There was some talk that he was talking to either his mother or somebody about different trades. The word got back to Rich. And I don’t know if it was that or his performance that got him cut from the program. He ultimately got cut.” Multiple Turtles gave the same basic story.

  Sands said he was not fired, but chose to resign. He said, “I’m sure some of them say I quit. I’m sure some of them say I was fired. I’m sure some of them say I had a big mouth and said things I shouldn’t have said.”

  On the other hand the leaflet for Sands’s 1992 seminars said he’d co-managed funds with Parker. Parker, said in most cases that Sands merely placed orders at his direction. He thought Sands’s prime motivation for selling the rules was to raise money and get back into trading.11

  Parker thought Sands’s actions violated Dennis’s training not in a legal way, but in a moral and ethical one. He said of Dennis, “How could we repay him for giving us all this knowledge?”12 Parker added, “Rich always said that you can’t pay attention to books, articles or papers. If it was worth knowing, the people would keep it for themselves and trade.”13

  In the end, maybe Sands had simply embarrassed his Turtle peers so much that they felt they had to respond. The promotional language Sands and his marketing people used to sell the Turtle rules promised: “The Most Powerful, Valuable and Profitabl
e Trading Method Ever … Now Revealed in a New Trading Course for Just a Small, No-Risk Investment!” Sands’s ads screamed about “A Very Affordable Low, Low Price! 15 straight years of Profitable Trading!”

  Playing right into the attacks against him, Sands’s marketing pitched, “Listen, there are a lot of people very upset that Russell is sharing these secrets, especially at such a low price. The other original Turtles and their phenomenally successful mentor do not want these priceless secrets revealed. At any price!” It was like a 2007 late-night infomercial from INVESTools.

  Eventually, DeNardo offered a more sympathetic interpretation of Sands’s teaching: “Everybody else is sort of mad at him for letting the system out of the bag. What else was he supposed to do? Drive a cab?” Erle Keefer gave another reason for the secrecy at any cost: “Honestly, I don’t think we were that sophisticated. I just think there was … allegiance to Rich.”

  Dennis’s own take on the selling of rules was tight-lipped. He made it clear, however, that a few Turtles had failed: “There were one or two [Turtles] who will remain nameless. The majority was exemplary.”14

  He may have been diplomatic, but his longtime friend and fellow trader Tom Willis, who was and is no fan of Sands, was not: “I’ve always thought that Rich exemplifies the Christian attitude and behavior more than most Christians I know. He probably doesn’t hold a grudge against Russell.”