The Complete TurtleTrader

by Michael W Covel

  Shortly thereafter, Faith launched his first trading effort since leaving Dennis in 1988. Hedge World Daily ran with a headline describing Faith’s and broker Yuri Plyam’s new Acceleration Mercury 4X LP hedge fund. The new fund’s strategy was going to rely on three time frames: a one-to two-day holding period, another holding period of ten to fifty days, and a third for months to years.11

  The pitch? Faith had taken a fifteen-year break from the trading business and decided to get back into trading in order to take advantage of breakthroughs in trading technology. He explained why clients should be excited at the prospects of him managing their money: “Traders used to have to sit in front of the screen all day, but that’s no longer necessary to trade successfully.”12 (It’s worth noting that Turtles trading for Dennis never sat in front of a screen.)

  Faith struck a confident tone in a chat room about coming out of retirement to form new trading pools.13 Clearly, raising money for Acceleration Capital without Faith’s name and his Turtle association would have been difficult. Dennis and the word “Turtle” were lead résumé points in the firm’s disclosure documents (and in assorted news accounts).

  While the ambitious Faith spoke of quickly raising a $100 million fund, Acceleration Capital was started with less than $1 million of client money—an extremely small amount for a hedge fund. The fund traded for a short period, accrued significant losses, and was shut down.

  Unfortunately, the shutdown was not only due to bad performance. The Commodity Futures Trading Commission, a government regulatory arm similar to the Securities and Exchange Commission, started investigating the fund.

  An employee of Castle Trading (Castle and Acceleration were in the same office) named Toby Wayne Denniston was embezzling customer monies from Acceleration Capital. From November 2004 through August 2005, this employee misappropriated $190,883 from the Acceleration’s customer account. He was forging checks and concealing his theft by altering the firm’s bank and trading account statements.14 Denniston bought a new BMW and took several trips with his stolen loot. He was ultimately fined $250,000 in an August 2006 order.

  Then a January 16, 2007 government order from a related investigation found Acceleration Capital responsible for Denniston’s actions. The firm was barred from managing money for clients permanently and fined $218,000. Yuri Plyam was also fined and prohibited from acting as a commodity pool operator (hedge fund term) for three years. The CFTC’s investigation (as of June 2007) is still ongoing, consisting of an unreleased collection of 869 depositions, 694 pages of financial records, and 200 pages of trading records.

  Faith should have been one of the biggest traders of the last twenty years, but he was clearly missing that something Jerry Parker had. Author Jack Schwager, seeing the struggles of some Turtles, reeled in the legend his Market Wizards books had created. He told me, “I don’t think it was as much of a miracle as it has been popularized. My feeling is that there is no magic here and perhaps no really great talents other than the original founders.”

  Schwager may have a point with Turtles such as Faith and others who never traded to great success after the Turtle program ended. However, twenty-year performance track records established by at least six other Turtles and William Eckhardt are without a doubt impressive.

  At the end of the day, the Turtles could have all the trading rules in the world, but if some were lazy or poor businessmen, if they lacked motivation or the ability to follow through, their failure at trading — or indeed at any entrepreneurial endeavor—was not a surprise.

  But the success or failure of some of the original Turtles does not tell us conclusively whether Dennis’s trading wisdom is truly transferable. The Turtle story arguably remains little more than a fascinating corner of investing history, but one without larger implications for the rest of us. The key test is whether the Turtles themselves were capable of passing on the investing knowledge they’d learned, that they’d applied so successfully while working for Dennis.

  Fortunately, there is at least one person who provides inspirational evidence of the true transferability of Dennis’s trading wisdom. He is rock-solid proof that a hard-working guy with no direct connection to Dennis and Eckhardt could learn to make big money trading—all out of a sleepy small town in the Texas panhandle. If the applicability of Dennis’s original experiment to wider society has ever been doubted, skeptics will need another excuse to explain away this second-generation Turtle’s success. His name is Salem Abraham.

  13

  Second-Generation Turtles

  “I have been broke three or four times. But fortunately for me I’m not an MBA, so I didn’t know I was broke.”

  T. Boone Pickens

  That second-generation Turtles exist is arguably the most important part of the Turtle story. Ultimately, these “Turtles” present an even more convincing argument supporting nurture over nature than does the success of the original Turtles. They prove that (possibly) anyone can be a Turtle today.

  Second-generation Turtles include Mark J. Walsh, Jonathan Craven, John D. Fornengo (originally taught by Eckhardt in 1989), and Salem Abraham, four traders among hundreds of trend followers who all learned Turtle-style trend following secondhand. In turn, they built trading businesses that in many instances far exceeded those of the original Turtle traders.

  When Walsh talks about his trading, it’s like hearing Dennis and Eckhardt all over again, discussing strength and weakness: “If beans are up 10 cents and corn is down five cents, we buy beans. Some people think to buy corn because it’s going to catch up with beans. We take the opposite. We’d rather buy the commodity that’s strongest and sell the one that’s weakest.”1 Walsh saw Dennis as “generous with his knowledge of the markets. He gave us a solid foundation on which to build a program.”2

  Two other second-generation Turtles are Robert Marcellus and Scot Henry, who run the Richmond Group Fund. Little is publicly known of their organization except that Henry once worked for Jerry Parker and Kidder Peabody (James River Capital). Coincidentally, their home base is in Manakin Sabot, Virginia, near Jerry Parker’s.

  There are many ways to analyze successful entrepreneurial traders, but “winning” is the starting point. Behind all the talk about teamwork and balance, people still judge trading success by an individual’s ability to win big money. True competitors have a remarkable immunity to failure. It’s simply not a factor that takes them out of the game even when it happens. They have a single-mindedness and zealous disregard for obstacles. They have indefatigable optimism. Winners pursue the prize because they are sure they can get it. They’re less afraid of striking out than of not taking every possible turn at bat that comes their way.3

  Many of the original Turtles simply did not think that way. Dennis taught his original Turtles only part of what made him successful. There was no way he could teach them the inner drive that had propelled him from the South Side of Chicago to becoming “Prince of the Pit.” Dennis was forced by necessity to learn the hard way, just like so many second-generation Turtles.

  Of all of the second-generation Turtles, one stands out. When Salem Abraham started trading he had no prior experience with Dennis and Eckhardt, no group of like-minded Turtle traders with whom to share experiences. He hadn’t worked for Goldman Sachs or for any other hedge fund. Yet it didn’t matter one iota.

  With his pleasant demeanor, thick brown hair, and compact physique, Salem Abraham looks younger than his forty years. He could be mistaken for one of his ranch hands, but his Texas drawl and friendly manner mask a steely entrepreneurial drive that goes back generations.

  How far away was Abraham from a Wall Street pedigree? He comes from a family of Christian Lebanese immigrants who settled in rural Canadian, Texas, in 1913. His grandfather, Malouf “Oofie” Abraham, sold ready-to-wear clothing out of a suitcase along the railroad before opening a retail store.

  Before Abraham was headed down the path to becoming a trader, he attended Notre Dame and planned to marry his childhood swe
etheart, Ruth Ann. He was going to start a mail-order business. While he did marry Ruth Ann and while he still lives in Canadian, Texas, it is not the story of his mail-order career that makes people take notice. It is his twenty-year trading performance:

  Table 13.1: Abraham Trading Company—Diversified Program (Salem Abraham).

  I first interviewed Salem Abraham face-to-face in his office in 2005. His world offers instant culture shock. Canadian, Texas, is the epitome of small-town America, but with a big twist. Abraham’s success has allowed him to endow his tiny town with amenities unusual in communities several times its size.

  Canadian’s Main Street (with one stoplight) now has the Cattle Exchange steakhouse and a restored movie theater with a digital sound system. Abraham has spent millions to create this oasis. How was he able to do it?

  Meeting a Turtle

  Salem Abraham would never have pursued trading if not for a chance meeting with Jerry Parker. It was the spring of 1987. He was at Notre Dame with one semester left, determined to graduate in three and a half years in order to start his mail-order business. Then he attended a family wedding where he met Parker, and his life changed.

  Abraham was making casual conversation with Parker (whose wife and Abraham shared mutual first cousins), with no expectation of a life-changing moment at hand. He asked Parker what he did for a living. Parker said, “We figure out the odds and there’s certain patterns that we look for. Then we manage our risk and when these patterns happen, you put on certain trades.” Abraham incredulously followed up, “The odds are in your favor? You’re sure of that?”

  When Abraham heard the Turtle story for the first time, he was floored. He recalled, “Jerry told me about Richard Dennis and told me about these guys that he hired to train to trade. He told me that everybody’s making money and how much money they’ve made each year.” Abraham, who’d already decided he wanted “to make a living in a little town in Texas,” quickly said to himself, “This can work from Canadian. It’s right up my alley.”

  At that moment he saw an opportunity, just as his grandfather had decades before when the railroad was being built. He had never before heard of the Turtles or Richard Dennis, yet he took stock of Parker’s career, and without knowing the specifics, immediately shifted his goals in life to pursue trading. No more mail-order business.

  Luckily for Abraham, Parker said that if he ever wanted to visit Richmond he would show him some things to point him in the right direction. Abraham called the next week. It never occurred to Abraham that Parker might have been making polite social conversation, never dreaming that Abraham would take him up on the offer.

  The thought that he might have been imposing on Parker simply did not occur to Abraham, who later described his mindset at the time: “I think you’re kind of young and dumb and you just say, ‘He made the offer and that means he really means it.’” When Abraham called, all he could hear was, “Well, ah.” At that moment Abraham knew Parker was just trying to be nice to the new relative. But Parker finally said, “Sure, come on out.”

  Abraham knew the immediate import of Parker living in Richmond and trading out of his home office for his own plans to build a career in tiny Canadian. That bit of knowledge told him that all he needed was a telephone line to potentially be the next Jerry Parker. The self-confidence to instantly switch gears from mail-order business ideas to a trading career was the first sign of a true entrepreneur in action. Abraham was also very fortunate to have grown up in a family of entrepreneurs who would take a chance on his seemingly crazy trading idea.

  Those who immediately interpret this to mean Abraham got a free family gift may want to reconsider. It was his responsibility to use his very limited capital wisely. So not surprisingly, he saw “risk management” as the big lesson during their first meeting at Parker’s office. Abraham recalled, “Jerry was clearly aware that there were things that were proprietary he couldn’t tell me.” But he said to Abraham, “Look, this trend-following works, and here’s some ideas you ought to think about,” and then gave him some risk management concepts to think about. Reflecting on Parker’s generosity Abraham, said, “I certainly would never be in the position I’m in without his early help. I would never be where I am now.”

  At the time Abraham knew nothing about trading. He had no experience, but he started researching after meeting Parker at his office. Back at Notre Dame, he then read everything he could about Richard Dennis and trend followers. He said, “If you want to be successful at something, well, you want to identify who’s been successful and what are they doing.”

  During his last semester at Notre Dame, Abraham touted the success of Dennis to deaf ears. His professors weren’t interested. They said Richard Dennis was “lucky.” It’s not surprising that professors were skeptical, since Abraham was preaching a gospel that went squarely against the notion of efficient markets — the backbone of generally accepted financial truth.

  Nor was Abraham the only convert to new success following a conversation with Jerry Parker. Off the record, another trader also spoke to me about Parker’s generosity with trading advice. Parker had helped him navigate the waters of setting up his trading firm many years ago. That trader is worth close to $100 million today.

  Taking the Plunge

  Once Abraham had Parker’s initial mentoring, he started researching trend-following trading rules by hand. It was messy. He was marking charts, noting his risk rules and then just keeping tabs every day. “If I would have bought here, sold here, bought here, sold here.”

  He went to his grandfather with a portfolio of twenty-one markets that he had tested over an eight-month period, and said, “Look, if I had started with a million dollars, it’d be worth $1.6 million at the end of eight months.” He was excited to show all the stuff he had been working on. Abraham’s grandfather, who at that time was seventy-two, had seen lots of Texas deals. He was skeptical of his grandson’s new venture.

  His grandfather’s skepticism would be hard to overcome and Abraham had to have been pretty tough to take the withering sarcasm that followed. His grandfather said, “What are we going to do? I guess we just package this up and send it to Chicago. They cut us some check, right, dumb-ass? You may think you’re a smart kid coming out of Notre Dame, but these guys in Chicago, they’re going to chew you up and spit you out. Of all the ways to lose money, why in the hell did you have to pick the very fastest way?”

  Not about to be dismissed, Abraham explained the wisdom behind his trading philosophy. He said he was going to use good risk management, explaining, “Just because you have a Lamborghini, you don’t have to go 160 miles an hour. I’m never going past 30 and I’m going to control risk.”

  It was obvious where Abraham had inherited his confidence and entrepreneurial zeal. More than just hard business truths had been passed down from generation to generation. Abraham had also been given a moral business compass. His grandfather used to say that if you screw one person, you’re done and you are out of business. He wanted his grandsons to always keep their word, number one. But he also wanted them to go above and beyond what’s fair, saying, “Make sure, even though that’s not the deal.” The legendary investor Boone Pickens, a longtime family friend, saw heredity playing a role in Abraham’s drive. He had known the family for fifty years and saw them make a great contribution to the Texas panhandle.4

  Luckily for Abraham, he had grown up around entrepreneurial risk-taking and even participated in some family business deals. He learned the most from the potential deals that went awry. On one oil and gas deal that he learned about from his grandfather, he decided that he would talk to the representative at Shell Oil. Abraham thought they would sell a piece of land to him.

  His grandfather knew it was going nowhere, saying, “No way. They’ve had this for thirty years, forty years we’ve all talked to them. They won’t do anything with anybody.” Abraham was not deterred, and said, “This guy at Shell Oil, he’s new there. I think he’ll do something.”

 
His grandfather responded with some attitude: “Tell you what, if you get that deal done, I will kiss your butt out there in the middle of the intersection under that stoplight right there.” Abraham replied to his grandfather, “Pucker up, old man, because it’s going to happen.” The deal never happened.

  However, it was that same entrepreneurial fearlessness that Abraham used to launch his trading career that last semester at Notre Dame. It demanded burning the candle at both ends. He was trading twenty-one markets and taking a grueling twenty-one semester hours. He was cramming, and all of his classes had to be scheduled in the afternoon. He would wake up at 7 A.M. and trade from 7 A.M. to 10 A.M. Then he would put his stops in and go to class. After class he would check to see if his stops had been hit.

  The fall of 1987 was no ordinary time, especially for a brand-new trader experiencing historic market volatility. During the last part of September and the first part of October, the interest rates started going straight down. Abraham had come home for fall break on October 19, 1987. He recalled, “The Friday before fall break I made a lot of money. My $50,000 was $66,000 as of Friday. I’m going home and I’m feeling great.” Then, Monday morning, the stock market tanked.

  These were big events. Things were going haywire. Abraham worried about his positions in Eurodollars. He called up his broker and said, “So where are Eurodollars?” His broker replied, “They’re up 250.’” Abraham shot back, “Two fifty, what do you mean, 25?” His broker said, “No, 250.’” Abraham wanted to know if it was as bad as what he was thinking. He immediately knew that that move was in the neighborhood of 10+ standard deviations away from where Eurodollars normally traded.