The Complete TurtleTrader

by Michael W Covel

  His $66,000 had dropped to $33,000. But by the end of the day, he considered it all a great lesson. He had learned the significance of hanging in there to play another day. He felt that to survive at this point in his trading career, with his own money on the line, and not blow out, was “okay.” He recalled, “The one lesson I was clear on: always know the thing that they say can never happen, can happen.”

  Abraham took a short break after the 1987 October crash. He was out of the markets for a week or so and then got back in. He traded during November and a little bit of December and then shut down for the year. His account had bounced back to $45,000 from that $33,000 low. He took $1,600 out of his account and went to Jim’s Guns, Gold, and Diamonds to buy an engagement ring to propose to his now wife.

  Commodities Corporation

  Starting in 1988 Abraham wanted to trade full time, but he still had to prove himself to his grandfather. He told his grandfather, “I want to do this on the side. I know we’re not that busy. Will you let me do this on the side?” He had $45,000, and his older brother Eddie agreed to put up $15,000. His younger brother Jason put in $10,000 to get the “Abraham brother fund” up to $70,000. He wanted his grandfather to put in $30,000 so he would have an even $100,000 trading account.

  His grandfather was willing to play ball, but true to Abraham family ethos there would be a deal. He announced, “Okay, here’s the deal. I’ll put up $30,000. But if we get down to $50,000, we throw that quote machine out the window and we stop all this trading nonsense.”

  For a man in his early twenties, Salem Abraham was taking on some serious risk and pressure. And as is often the case, just when he was out of the gate with his $100,000 account for his new trading firm, the bottom dropped out.

  The first two weeks of May 1988 were horrible markets. Abraham was downstairs in his office when his grandfather stuck his head in one morning and said, “Where are we today?” Abraham replied, “Sixty-eight thousand dollars.” In sarcastic glee, his grandfather said, “Just a matter of time,” and he walked out the door.

  Time never happened. The grain market drought of 1988 hit and Abraham was long soybeans, corn, and wheat. The markets just exploded the second half of May and into June. He was very well positioned and rocked along to serious profit.

  How could Abraham have been certain that bigger things were around the corner with the kind of volatility he had seen in his first eight months of trading? Plenty of people would have quit, chalking it up to a failed business venture. In spite of the ups and downs, once he’d shown his grandfather that he was on to a profitable angle, the senior Abraham came on board in a big way. His grandfather walked in the door one day with a “Dean Witter Principal Guarantee Fund 2” brochure and threw it on his grandson’s desk, declaring, “Hey, you did better than these guys did.”

  Commodities Corporation was the manager of the Dean Witter fund, and they were in the process of raising $100 million and allocating it among eight to ten traders. Commodities Corporation had quite a history. They were a prominent Princeton, New Jersey-based trading incubator (now part of Goldman Sachs following a late-1990s buyout). They were responsible for the early funding (and in some instances training) of hedge fund greats such as Paul Tudor Jones, Louis Bacon, Ed Seykota, Bruce Kovner, and Michael Marcus.

  Abraham did not know all that history at the time. He just picked up the phone and called Commodities Corporation. He got Elaine Crocker on the phone late in the day. Crocker, who now runs Louis Bacon’s Moore Capital and today may be the most powerful woman in the hedge fund industry, said she would send some information. Abraham doubted Crocker was taking him seriously, because he had only a one-year track record.

  But eventually Commodities Corporation got back in touch with him, announcing that they were going to be in Houston and inviting him to meet with them. He jumped at the opportunity and flew to the Houston airport to meet Crocker and Michael Garfinkel.

  Abraham had just celebrated his twenty-third birthday before the meeting. Garfinkel did most of the talking. Crocker sat back and watched the discussion. Garfinkel said, “Wow, last month was a tough month. What happened?” Abraham pointed out that during the current month he was up 40 percent.

  Crocker started laughing. Not seeing the humor in his response, Abraham asked. “What’s so funny about up 40 percent?” Garfinkel, sensing a disconnect, wanted to know what kind of returns Abraham was shooting for. Abraham gave the Turtle-like answer of 100 percent a year. And just like many of the original Turtles were told after leaving Dennis, Crocker wanted Abraham to back off his riskier “shoot for the moon” approach. She and Garfinkel made the same observation Jerry Parker and others had heard: “If you make 30 percent a year, people will beat a path to your door. You need to back off on the leverage.”

  Commodities Corporation still wanted to see a ten-year simulation of Abraham’s system—something he did not have. Their request forced Abraham to learn programming to quickly test his trading system. The pressure was on. It started Abraham down the path of developing a whole new research and programming skill set. It was just one of the many ways he was setting himself apart from the original Turtles.

  There was one more consideration in the deal. Commodities Corporation wanted to invest Abraham’s minimum account size. Since he had no minimum, he settled on $200,000, rightfully surmising that Commodities Corporation would pony up to a reasonable number. He was right, and they became his first big client.

  For a young man with no trading pedigree and no hedge fund experience, this investment was admission to the major leagues. Commodities Corporation invested the next $7 to $8 million in his firm as well. That initial $30,000 investment from his grandfather? It’s worth $1.3 million today.

  However, even with all that moneymaking success, Abraham was still just a young guy, and his experiences with the establishment questioning his credibility were similar to those of the young Richard Dennis. Reminiscent of Dennis’s trip to the bank to cash the $250,000 check was Abraham trying to rent a car at age twenty-five, with no luck since they had recently raised the minimum age requirement. He was managing $15 million, but the Hertz counter was not budging on renting to him. Salem, after attempting to negotiate, tried some attitude: “Do you know that I have people who entrust $15 million with me, and I can buy and sell whatever I want to with this $15 million? You won’t loan me a car? A $15,000, $20,000 car for the day?” The lady at the counter was looking him up and down thinking, “Yeah, right, I’m not believing you, punk.” Salem added, “I had to call Joe’s Rent-a-Wreck.”

  Dennis and Eckhardt Training

  Even people who are knowledgeable about the Turtles do not know about an obscure third Turtle class after the 1983 and 1984 original ones on which the Turtle legend was built. Abraham actually received personal instruction from Dennis and Eckhardt several years after his trading firm was launched. In the early 1990s, Commodities Corporation asked Dennis and Eckhardt to hold a third Turtle class for their stable of traders. Commodities Corporation was giving them money to trade, and part of the deal was that they had to hold a seminar. The seminar was supposed to simulate the Turtle trader experience, except instead of two weeks, it was held over four days.

  While Abraham was already trading by Turtle-style trend-following trading rules, and while he found much of the training to reinforce what he already knew (“What I got out of it was a lot of risk management ideas, position sizing ideas, and system analysis ideas.”), the classroom experience with thirty students from Commodities Corporation was a memorable part of his education.

  However, Abraham saw his learning process as a step-by-step journey, not just a lucky leap: “It’s like climbing a mountain. Which step was the most important? Every step is needed to get to the top of the mountain. Each individual step is not that much.” This makes him far more the “average guy” than Parker, Rabar, or any of the other original Turtles, who had four years of Dennis covering the overhead costs.

  The seminar opened Abraha
m’s eyes though. He was very impressed by William Eckhardt. All of the students had also been given an advance copy of Eckhardt’s interview in the New Market Wizards. Abraham added, “I went into that meeting thinking, ‘Oh yeah, Richard Dennis, he’s the guy and Eckhardt is the sidekick’ kind of deal.” Just as the original Turtles had learned during their training, Abraham discovered that he was wrong: “However when I got through, I really appreciated the math and the objective data. The statistics of this works, this doesn’t work. It’s all odds. I actually got more useful information from Eckhardt. But of course Richard Dennis is clearly a brilliant trader.”

  Dennis would basically tell the class, “The system is a nice thing to guide you, but it’s okay to set the system aside.” Eckhardt was saying something a little different: “These are the odds; it’s all a math game.” Nothing had changed about the two teachers since the original Turtle experiment.

  Eckhardt challenged the Commodities Corporation traders with a series of questions. There were ten questions the traders had to answer within a range. The goal was to get nine of the ten correct. Eckhardt asked, “What does a 747 plane weigh?” The answer could be as big a range as the traders wanted it to be, but the goal was to be 90 percent certain that they were right. It tested their confidence and their ability to estimate. Everyone missed four or five questions. Eckhardt said that the majority of people missed about 45 percent of the questions because they were overconfident in their ability to estimate reality.

  Trend trading thrives on that overconfidence. Abraham made this point using the recent surge in the price of oil over the last few years: “What you see in trend following is people’s mistaken mindset of what’s a high price and what’s a low price. It all has to do with a very limited set of experiences. People make assumptions for a small sample size. To think that crude oil could go from $20 to $70, you say, ‘that’s nuts.’ To buy crude oil at $55? That’s a hard bet to do when it’s never been to $56. Never in the history of the world has it been to $56 and you say, ‘It hit $55 today, I’m buying it.’”

  Can you imagine buying a market that is making an all-time high, without any knowledge that it will keep going up or come crashing back down? Abraham put the focus where it really counts: “I care about the statistics.” He gave me an example. Pretend a physicist walks in with a coin and says, “This coin will always come up 50-–50 heads or tails.” A statistician, however, walks in and says, “Yes, but I flipped it one million times and 65 percent of the time it came up heads.” The Harvard-trained physicist says, “That is impossible; it’s a 50-–50 coin.”

  Abraham asked, “Who do you believe?” He had many college professors with plenty of good reasons why that coin should not be coming up heads 65 percent of the time, but at some point you have to say, “I don’t know why this coin is coming up 65 percent heads, but I’m willing to bet after a million flips that the 65 percent rate will hold true even when on the face of it, it shouldn’t.” Abraham added, “Just because I don’t understand it doesn’t mean I’m not going to bet on it.”

  Ultimately, Abraham was saying the same thing that Tom Willis had said years before, which was to just trade the “numbers.” The empiricist in Abraham was driving at the concept of the unexpected big event; the nexus of his trading profits derived from trading “price.” Is the world due for another large unexpected event that will give him a chance to profit? He did not blink: “Yes, but it will be one that we’ve never seen before. It’s always a different one.”

  Boil the Ocean

  Abraham might not be in Wall Street’s top ten in terms of earnings yet. He might not be managing a billion-dollar fund at this moment in his life, but he has done exceedingly well. Sitting in his office, filled with evidence of his eclectic interests ranging from oil and gas leasing projects to the restoration of antique books and papers, he has made a life for himself that includes family, friends, and a company of like-minded people drawn from his local community.

  His hiring practices come very close to mimicking Dennis’s original Turtle hiring process. No one at Abraham’s firm has an Ivy League degree. Most employees have backgrounds working at the area’s feed-lots or natural gas-drilling companies. For example, Abraham hired Geoff Dockray as a clerk from one of those very feedlots. Dockray appreciated the opportunity to work in Abraham’s office. He said, “This beats shoveling manure at 6 A.M. in the morning. The financial markets are complicated but they’re not as relentless as dealing with livestock all the time.”5

  Maybe it is that down-to-earth perspective gleaned from living in handshake country that gives Abraham a clear perspective. Sitting in the Cattle Exchange steakhouse located in the historic Moody Building, which he owns and where he has his office, he had no doubts that it is his entrepreneurial tenacity: “I think they [the winning Turtles] have a self-confidence or charisma to run a business. There’s a drive to go out and do it. Then there is a drive to want to do it. Some people [the losing Turtles] will just say, ‘Oh, hey, I made some money. That’s all I need.’”

  However, if you are going to boil the ocean (in other words, if you are going to use all means and options available to get something done), especially if it is a very competitive and lucrative endeavor, there will be ups and downs. Salem Abraham’s experience has been no different. Twice during his trading career, clients left after down or flat performance periods. He regrouped and made new equity highs each time. During trying times, he handled curve balls in his career by working on other ideas to make money. He always focused on his trading, but he also cast a wider net and caught other kinds of fish.

  As with trading, not everything works out. One project was a water deal that he almost cut with billionaire T. Boone Pickens (“Couldn’t agree on the price”). Pickens and Abraham’s ranches are right next to each other in the Texas panhandle (even though they are separated by forty miles, their ranches touch) and they have become friends over the years; Pickens was not shy about praising Abraham’s entrepreneurial guts when I talked to him in his Dallas office.

  There were other deals that turned out to be big winners. Abraham was humble about them: “I sold water rights to the city of Amarillo. I invested $1.5 million and I got $9 million out. I said to myself, ‘That’s a cool idea.’ Then I did the Chicago Mercantile Exchange deal [CME Initial Public Offering]. I put $1.5 million in, and got about $13 million out. You recognize opportunities where you see them.”

  This kind of thinking and risk-taking is how to make your first million by age twenty-five—which Abraham did. Still, it’s not enough to simply spot opportunities. The confidence to act on them is mandatory. You need a killer instinct. When faced with real life and death, even with chickens and pigs, it is never easy to pull the trigger or snap a chicken’s neck, even for dinner. You have to be able to pull the trigger when there is blood on Wall Street, especially if the blood is yours.6

  Jerry Parker could not have known Salem Abraham would have the prerequisite killer instinct when they first met. Parker was probably thinking, “Okay, this young guy has got a rough idea of what I do. I’ve given him some pointers. If he’s serious, he’s going to figure it all out and ‘just do it,’ but I will be surprised if he hangs around.”

  Unlike the original Turtles who won the job lottery—who were given the exact winning rules and allowed to practice on Richard Dennis’s dime, all in the womblike atmosphere of C&D Commodities—Abraham was on his own from the get-go. He is tougher for it. There is far more to learn from the attitude and actions of this second-generation Turtle than from any one original Turtle.

  14

  Model Greatness

  “Are Turtles grown, or can they be taught? Do they have a magic sixth sense or something? The jury is in, isn’t it? They’d be better off having the knowledge implanted than relying on a sixth sense. I think I could take a kid who wasn’t my son and say, ‘Do this, I’ll pay you $50,000 a year, or you’re fired if you don’t exactly follow it.’ He’d beat me every day, every week, every mon
th and every year.”1

  Tom Willis

  The Turtle story breaks down into two parts. Part one takes place during the experiment, when the Turtles are on the relatively level playing field designed by Richard Dennis. His experiment proves nurture trumps nature. Part two takes place after the experiment, when the Turtles have to face the real world as individuals and human nature reenters the picture.

  While the experiment itself is what made headlines, some people familiar with the Turtle story recognized the greater significance of part two, the experiment’s aftermath as Turtles attempt to carry on solo. Larry Hite called me late on a Friday afternoon after we’d had lunch near his Park Avenue office. Hite, who founded Mint Capital and was instrumental in the early successes of the multibillion-dollar Man Financial hedge fund, had more feedback for me about my Turtle book (i.e., the one you’re reading now).

  “I have been thinking about this new book… .” He laid it out: “The people who are very good and long-lasting are tough. If life goes against them, they stick to their game. There is a certain amount of mental toughness to have clarity. Toughness is just the ability to roll with the punches. They don’t get disappointed by losses. Some people when they lose, they don’t get back up. Think about the Turtles who failed at trading. What did the failures have in common? Maybe the ones who failed just gave up. They were not tough.”

  Dennis demanded that the Turtles be mentally tough as long as they worked for him, but once he pulled the plug they had to face head on what Dennis was not providing them. Hite saw it. He brought up the memo (see chapter 7) sent out by Dennis telling the Turtles to cut back their leverage by 50 percent. He observed that Dennis had made an error, ignored any knock against his ego, acknowledged the mistake, and fixed it. That was “an act of mental toughness” in Hite’s book.