The Complete TurtleTrader

by Michael W Covel

  Dennis Retires Again

  Soon after the Sands dustup, Dennis staged another remarkable comeback. It would take him through most of the 1990s. While Dennis did not reveal his exact trading systems to the public, his performance data had earmarks of trend-following trading. After returning in 1994, his compounded annual rate of return was approximately plus 63 percent through September 1998. For two years in a row, 1995 (108.9%) and 1996 (112.7%), Dennis had triple-digit returns.15

  He was still the same high-risk, high-reward trader he had always been. It was his ticket to the Hall of Fame and his Achilles’ heel rolled into one. However, this was now the time of Bill Clinton and the dotcom bubble. It was hard to get noticed even with his great performance.

  On top of that, many investors were gun-shy about another Dennis comeback. In an effort to allay client fears, he assured everyone that his infamous discretion, his inability to not personally interfere with his own rules, had been eliminated. He said the computer was his new friend: “Given what the computer can do today—compared with what it could do only a few years ago, I just can’t see how any human could possibly compete on a level field with a well-designed computerized set of systems.”16

  The term “computer” as a marketing hook was old news. In some ways, Dennis was a technophobe in the middle of the Internet revolution (he always said he could not program). Maybe the over-sixty crowd bought in, but no one else on Wall Street breathed a huge sigh of relief just because he’d used the word “computer.”17

  Worse yet, Dennis’s critics thought that his strict mechanical trading formula was just a marketing ploy. Dennis rebutted them by saying he had put in checks and balances. He struck a confident tone: “At the end of the day, a trader has to go with what works. I know that mechanical systems work best, and therefore I am quite comfortable that our strategies will continue to be successful.”18

  There was a difference in Dennis’s trading strategy this time around: He was religiously applying that same discipline he had taught his students. For example, he was right there in August of 1998 making big money during one of the most historic months on Wall Street. He, like all trend followers, made a fortune in August. “Between the ruble, Yeltsin, and the deep blue sea, it’s been pretty crazy,” said Dennis with a hint of glee. He was up 13.5 percent in August 1998, giving him a year-to-date return of about 45 percent.19

  Other traders were sinking like stones in the zero-sum market game at the same moment Dennis was flying high. Wall Street’s darling, Long Term Capital Management’s (LTCM), for example, imploded at the same time. LTCM lost billions. Chief Executive John W. Meriwether, the legendary former Salomon Brothers bond trader, said in a letter to investors at the time, “August (1998) was very painful for all of us.”20 LTCM and its two Nobel laureates, Robert H. Merton and Myron S. Scholes, padded the pockets of Dennis and other trend-following traders, including the Turtles.

  It was a high point for Dennis’s trading return, because within a few years of that historic zero-sum win, he was out of the game again. On September 29, 2000, Dennis Trading Group ceased trading and liquidated customer accounts. Burt Kozloff, an investor in Dennis’s current fund, laid out the painful truth: “Dennis Trading Group was –50% down in June but then made a slight recovery in July. But we finally broke through the –50% mark to –52%. You still can trade and try to recover when you’re down 50%, but you run the risk of falling to -60% or -70%, and there’s no turning back from there.”21

  While it was no solace for Richard Dennis, the moment when clients pulled funds from him in the fall of 2000 was a bottom for trend-following traders. In the following twelve months, returns for many of his trading peers zoomed up 100 percent or more in performance. Dennis’s clients had panicked at the bottom and paid dearly.

  Dennis was once again out of public money management. Meanwhile, his conservative Republican student Jerry Parker was rising even farther to the top in both the trading and political worlds. His story would take the Turtles and their philosophy to a whole new level.

  11

  Seizing Opportunity

  “A good plan violently executed now is better than a perfect plan next week.”

  General George S. Patton

  Imagine driving to Manakin-Sabot, outside of Richmond, Virginia, to see Jerry Parker’s office in 1994. The last thing you would have anticipated was an unassuming colonial-style brick and wood building that looked as though it might house a local insurance company or realestate office. It was situated in a field along a country road. Describing my feeling, upon seeing it, as thunderstruck would be an understatement.

  Actually entering Parker’s office was like walking into the old, musty office of your neighborhood attorney who at seventy was about to retire. The front-office staff was friendly, unpretentious, and informal.

  In contrast to that original office, Parker’s new office (opened in 1995, approximately ten miles away) has a far more gracious feeling of Southern gentility and success. From the entrance, two staircases spiral up each side of the room to a top landing area. However, today visitors can no longer stroll in unannounced. Smoked-glass windows, video cameras, and a request for identification are not surprising precautions in today’s security-conscious society.

  What remains true to Parker’s down-to-earth character is that his current office is located across from a 1960s-style strip mall that includes a salon, Mary Lou and Co: Hair, Nails & Wigs. Soccer moms park in the Chesapeake Capital parking lot to pick up their children at the church-run preschool next door. A Turtle is making a fortune in suburban Richmond, and no one is paying attention.

  Moreover, one would never guess the financial disparity between Parker and other Turtles from the furnishings of his private office. It is nondescript, almost utilitarian except for a small turtle on his desk. Yet the gap between him and his former partner Sands is arguably now a billion dollars in net worth. The reasons for that are arguably more important to understand than the rules originally taught the Turtles.

  The bottom line is that Jerry Parker, Liz Cheval, Tom Shanks, Howard Seidler, Jim DiMaria, Paul Rabar, and their teacher Bill Eckhardt had entrepreneurial skills beyond trading Dennis’s rules. They had something extra. The people who excel in any field are people who realize that the moment is to be seized, that there are opportunities at every turn. They’re more alive to the moment.1

  Did Dennis think that in the long run all of his students would be alive to the moment? Back in 1986, long before the Turtles were out on their own, he was asked how he would have reacted to his ad. He responded, “I guess I would’ve applied. I have no doubt that for the people who got the job it was the best job that has ever come along for them. Obviously, not all 14 are going to be the greatest traders who ever lived, but I think there are two or three who could be really excellent.”2

  R. Jerry Parker, Jr., became excellent. A graduate of Ferrum College and the University of Virginia, he is a devoted Christian and family man, who along with his wife home-schooled their three children.

  Even though he is comparatively straight-laced, Parker still makes time to kick back and enjoy life, especially sports. He made sure he got good seats at Chicago Bulls games when they were winning championships with Michael Jordan. Today, he still cheers on his University of Virginia Cavaliers basketball team at the new John Paul Jones arena in Charlottesville.

  Parker was certainly not considered the success he is today while working for Dennis. He ended his first year trading as a Turtle down 10 percent before regrouping to have three stellar years. But keep in mind that he did not make the most money while working for Dennis, in large part due to Dennis’s allotment of allocations, not his performance. Parker may have had some regrets about the way his mentor parceled out money, but those years under Dennis were central to his development.

  The confidence he gained while trading for Dennis was his biggest lesson: “The most important experience that led me to utilize a technical approach was the amount of success that
I experienced trading Rich’s system.”3 What was the critical experience he gained under Dennis? “It’s important to live with someone who says, ‘It’s okay to lose money.’”

  Tom Shanks agreed wholeheartedly with Parker about the need for a mentor: “By far, the structure of what I do is based on Richard’s systems, and certainly, philosophically, everything I do in terms of trading is based on what I learned from Richard.”4

  Parker and Dennis are still political opposites. Today, Parker is one of the most influential backers of Republican candidates in the state of Virginia. He has contributed over $500,000 to mostly conservative candidates since 1995. While he has ruled out a run for political office so far, his wealth and political power put him on the short list of potential Virginia governors.

  Aspects of Parker’s politics have universal appeal. He has said, “When there is a tax increase and the result is a surplus, the taxpayers should receive their money back. Just as when you pay too much for something in a store, you get your change back.”5

  Bottom line, Parker’s earnings from 1988 through 2006 are the clearest demonstration yet that the story of the Turtles is relevant today. Using his publicly available disclosures and the size of his fund, and assuming a standard fee structure, the best educated guess of Parker’s net worth is approximately $770 million.

  Table 11.1: Annual Returns, 199–-2–06, for Jerry Parker’s Chesapeake Capital.

  That number assumes no reinvesting for twenty years. If 10 percent growth is assumed and compounded annually, Parker’s net worth could be as high as $1.75 billion.

  What Separated Parker from Other Turtles?

  “You had to be really smart to be hired by Dennis.” It might be comforting to think that intelligence alone accounted for the Turtles’ trading success, but that would be an excuse. That said, many of the Turtles were brilliant. So there is no intention here to slight their individual brainpower.

  However, a high IQ is hardly the key to success in life, or Enron’s hundreds of MBAs from the top schools in the country might have prevented its demise.6 Intelligence ensures absolutely nothing in the long run; success requires something more.

  As it turns out, most CEOs at the biggest corporations didn’t attend Ivy League schools. They went to state universities, big and small, or to lesser-known private colleges. Most people, would guess that the percentage of CEOs bearing Ivy League undergraduate degrees is far higher than the actual figure of only 10 percent.7 So what, beyond pure intelligence, enabled Parker’s twenty years of great performance?

  The Maginot line, between those Turtles who achieved huge trading success after working for Dennis and those who failed at trading, came down to an understanding and application of entrepreneurial skills. The Turtles had to have trading rules, but without entrepreneurial savvy they were doomed. Nancy Upton and Don Sexton, professors at Baylor University who have long studied entrepreneurs, pinpointed traits possessed by Parker and other entrepreneurs:

  Nonconformists—lower need to conform indicating self-reliance.

  Emotionally aloof—not necessarily cold to others, but can be oblivious.

  Sky divers—lower concern for physical harm, but does change with age.

  Risk takers — more comfortable taking it.

  Socially adroit—more persuasive.

  Autonomous—higher need for independence.

  Change seekers — like novel approaches. This is different than 99% of all other people.

  Energetic—higher need and / or ability to work longer.

  Self-sufficient—don’t need as much sympathy or reassurance, but they still need to form networks so self-sufficiency need not be taken to extremes.8

  We shouldn’t underestimate those nine factors. Dennis turned on the lights and supplied the brokers, the money, and the system. With Dennis out of the picture, the Turtles had to answer for themselves as to whether or not they had the ability and the desire to succeed on their own. Their dilemma, whether they knew it or not at the time, could be solved by how well they applied only those nine traits.

  Jerry Parker applied the nine traits out of the gate, which some Turtles proved unable or unwilling to do. Parker always had the self-confidence to believe that one day his earnings could rival those of Dennis. Other Turtles, when seeing firsthand Dennis earn $80 million in 1986, may have thought, “That could never be me.” A few confessed that they just felt lucky to be a Turtle, and when describing their peers some used words like “timid” or “gun shy.”

  No one ever described Parker like that. Although he didn’t say so directly, he was referencing those nine characteristics of an entrepreneur when he spoke about what it really takes to be a success. He said, “We’re not really interested in people who are experts at the French stock markets or German bond markets. It doesn’t take a huge monster infrastructure — not Harvard MBAs and people from Goldman Sachs.”

  Loren Pope, author of Colleges that Change Lives, a book extolling the virtues of small liberal-arts colleges, appreciated the deeper meaning in Parker’s wisdom: “The Ivies and other A-league schools have a lot of prestige because they’re supposed to open doors and lead to successful careers. But parents who expect the Ivies to ensure their kids’ success are going to be disappointed. The old-boy network isn’t much good in an economy like this. It’s competence that counts.”9

  Competence is not easy to acquire. Parker saw life as a Turtle as pretty easy by comparison to his solo operation. He recalled, “Trading for Rich, you got in at 7 A.M. and at 2 P.M. you watched the Cubs game.” But once he became a money manager for clients he had to raise money, hire people, do research, track his performance, and trade. “The degree to which you are successful will be partly because of your buys and sells. But you’re also running a business: hiring, making sure you have good accounting and legal and marketing systems in place.”10

  Parker’s business acumen came from many sources beyond Dennis. His favorite book, for example, is Selling the Invisible, a modern-day marketing bible. But Parker always brought it back to his training under Dennis: “An honest, humble mentor is the best thing going. Learn from other people. Do the right thing every day, focus on what you’re doing, and let the cards fall where they may.”11

  After the Turtle program ended, Jim DiMaria had no doubts about the cards falling right for Parker: “Jerry wanted to raise a lot of money. He said it from day one.”

  Decide What You Really Want

  Following the Market Wizards books, many Turtles were content to bask in their fame without making the true effort needed to build a solid business. Parker’s goal was not to be on the front cover of magazines (although he did once appear on the cover of Financial Trader in 1994, leaning against the white picket fence surrounding his suburban Richmond estate). No, what he wanted was “Master of the Universe” profits.

  Jonathan Craven was the second person hired at Chesapeake Capital. Today, Craven runs his own trading firm with $20 million under management. He never forgot Parker’s core principles. Parker said, “You have to have faith in two things.” When Craven asked, “What’s that?” Parker said, “God and your system.” Craven added, “You have to have faith that your system works. Otherwise, you would get one hour of sleep a night.”

  What was Craven getting at? Many people think the Jerry Parkers of the world have systems or rules that limit them to certain markets. Upon learning of a trader like Parker, they naively assume he trades only commodities. The reality is that Parker applies Dennis’s philosophy to all markets. He seeks to apply Dennis’s original principles globally in markets all around the world. He doesn’t care what market: Chinese porcelain, gold, silver, markets that exist, markets that don’t exist today, and markets that others are making lots of money in that he is not trading.12

  Craven learned that philosophy of diversity while under Parker’s tutelage. The number of markets they traded was always in flux: “We could have sixty-five markets or we could have thirty.” Craven was once asked, “Are you al
ways in the market? What’s the maximum number of positions you could have on at any one time?” Craven responded. “It all depends. If the markets are going sideways, theoretically zero. The markets are trending up or down? I could have sixty-five positions.”

  Unfortunately, what Parker does to make money in all those markets is often confused with jargon terms like “managed futures” and “commodity trading advisor.” Both are government terms for hedge funds. In many cases traders have been guilty of compounding the confusion, as Parker was quick to admit:

  I think another mistake we made was defining ourselves as “managed futures,” where we immediately limit our universe. Is our expertise in that, or is our expertise in systematic trend following, or model development? Maybe we trend follow with Chinese porcelain. Maybe we trend follow with gold and silver, or stock futures, or whatever the client needs … We need to look at the investment world globally and communicate our expertise of systematic trading.13

  Communicating his expertise has always been a challenge. People with trading philosophies that run counter to Parker’s have actively spun the word “commodity” as something negative. It can’t be said enough, Turtle trend-following is a strategy. These traders trade financial instruments across the globe, ranging from stocks to currencies to energies to wheat to gold to bonds to commodities.

  Even though Parker has had a great run, he is still fighting the kind of uphill battle that sunk many of his Turtle peers. He knows that people look at systematic and computerized trading with too much skepticism. He said, “I think we’ve miscommunicated to our clients what our expertise really is. Our methods will work on lots of different markets. The ones that are hot today and the ones that are not hot today.”14 He could have been William Eckhardt in the Turtles’ classroom in 1984: There was no change in the message.