The Complete TurtleTrader

by Michael W Covel

  Mark Abraham, Salem Abraham, Jody Arlington, Christian Baha, Randy Bolen, Peter Borish, Ken Boyle, Sarah Brown, William Brubaker, Lindsay Campbell, Michael Carr, Michael Cavallo, Eva Cheung, Rebecca Clear, Jerome Covel, Johanna Covel, Jonathan Craven, Gary DeMoss, Sam DeNardo, Jim DiMaria, Adam Elend, Elizabeth Ellen, Charles Faulkner, Ethan Friedman, Michael Gibbons, Jeffrey Gordon, Roman Gregorig, Christian Halper, Martin Hare, Esmond Harmsworth, Larry Hite, Scott Houdek, Grace Hung, Withers Hurley, Ken Jakubzak, Ajay Jani, Erle Keefer, Peter Kline, Jeffrey Kopiwoda, Eric Laing, Charles Le Beau, Eleanor Lee, Jeff Marks, Howard Lindzon, Michael Martin, Michael Mauboussin, Bill Miller, Brian Mixon, Archie Moore, Robert Moss, Jerry Mullins, John O’Donnell, Robert Pardo, Jerry Parker, T. Boone Pickens, Paul Rabar, Barry Ritholtz, Chris Roberts, James O. Rohrbach, Tom Rollinger, Jay Rosser, Bradley Rotter, Mike Rundle, George Rush, Jack Schwager, Paul Scrivens, Ed Seykota, Tom Shanks, Michael Shannon, Mark Shore, Barry Sims, Aaron Smith, Larry Smith, Peter Sparber, Bob Spear, Celia Straus, Randall Sullivan, Gisete Tay, Irve Towers, John Valentine, David Wachtel, Sol Waksman, Robert Webb, Herschel Weingrod, Joel Westbrook, Paul Wigdor, Cole Wilcox, Thomas C. Willis, Thomas R. Willis, Rika Heidemann, Angie Lee, Paloma Martinez, Erica Nemmers, and Ben Steinberg.

  Throughout Turtle Trader I have sourced material extensively. Material not sourced (i.e. assorted Turtle quotations and comments) was direct from interviews conducted specifically for this book.

  Afterword

  “Inside baseball is a colloquial term in American English referring to ‘behind-the-scenes’ conversations or dialogue that the average member of the public would have no way of being privy to.”

  Wikipedia.com

  At one time or another four Turtles (so far) have threatened lawsuits over some aspect of my writing about them. Their reaction should immediately put in context how much of a wild ride it was to put together The Complete TurtleTrader. It’s always satisfying for an author when reviewers like their work, which has been, to my pleasure, the case for TurtleTrader during the past months. But for me the experience of getting this book to print might be my favorite story covering the Turtles. Wall Street loves to create moneymaking gods for public worship. Sometimes those gods deserve adulation, and sometimes they don’t. Discovering who is deserving and who is not is what makes my job fun. By the time my Turtle research was over a story had been assembled that some Turtles would want deciphered and disseminated while others would work hard to bury with all of the secrecy of a Cold War-era CIA operation.

  Plenty of people knew the behind-the-scenes story would be fascinating. Once final drafts of The Complete TurtleTrader started making the rounds feedback from one individual in particular struck a chord. Bob Pardo is a seasoned trader. He is also a skeptic, exactly the kind of individual you would want to pore over a book to ferret out the weaknesses.

  Pardo confronted me with a number of questions. He postulated why some Turtles did not want Dennis to talk and wondered if there weren’t further lessons to be drawn from Dennis’s fund management blowups. He also suggested that what smacked of paranoia from some Turtles warranted further exploration.

  During an ensuing phone conversation I told him that many of his questions and concerns were part of an unpublished Afterword, but that my publisher had elected to leave it out saying essentially that it was “inside baseball.” Upon reflection that was a mistake and perhaps a harder fight should have been fought to include more of the behind-the-scenes drama—especially when to this day some Turtles spin a story contrary to the truth.

  However, more behind-the-curtain glimpses into the research and writing and research process had definite pros and cons. Would more drama be perceived as petty and inconsequential? Or would these insights reveal missing details of human frailty that further clarified the dividing line between Turtle winners and losers?

  In my opinion, especially given the mythical Turtle legend that existed for over two decades, opening up the blinds and letting sunshine in could only help investors without Turtle-like access and success to realize that the Turtles were human. If the original Turtles could learn, the ones chosen off the street, anyone could. Yes, the trading rules they were taught were critical, and yes, some were very intelligent, but the human element can’t be ignored when analyzing the experiment’s results from 1983 to 2008. So after much internal debate, and after the initial printing of the hardcover version, it was clear that an Afterword was needed for the paperback version.

  Digging down into the Turtle vault was like entering the matrix filled with unexpected twists and turns that I doubt even the best Hollywood scriptwriters could have dreamed up. It was like a marathon session of Nintendo’s Mario Brothers 3 when you enter new worlds where secret clues and hidden meanings pop up each step of the way, but only if you’re willing to venture into uncharted territory where there are no guarantees that your risk will pan out.

  That being said in 2006 while investigating the Turtle story it seemed attitudes had finally changed and Turtle openness was in vogue. One Turtle said he would be happy to do an interview, “by phone if necessary.” Another said that he would be happy to discuss the Turtle experience. Another Turtle only wanted to provide written answers to questions, but at least he was talking. Yet another said he wouldn’t mind if the circumstances were right. Ultimately those responses resulted in thoughtful and incisive interviews. Maybe my gut fear was wrong all along. Maybe this was going to be fun.

  As my research gained steam, a new Turtle I’d never heard of appeared. For example, there was Rudolf Papirnik. Robert Moss, Dennis’s trading-floor chief, called Papirnik a Turtle. Papirnik worked for Dennis before, during and after the Turtle program. He definitely had “Turtle knowledge.” A known Turtle, Jim DiMaria, backed Moss’s contention that Papirnik was a Turtle too.

  Moreover, once the Turtles started talking they were quick to express concern that Dennis would be portrayed as their primary if not only teacher. They didn’t want me to diminish the importance of Bill Eckhardt to their success. Take Jeff Gordon who was emphatic, “Bill [Eckhardt]. Very smart guy. It seemed like every time he spoke, I learned something. And there are very few people in the world that I have ever met that I can say that about. I was always learning things from him.” Time and time again, Turtles kept coming back to the importance of Bill Eckhardt’s teachings.

  Besides properly crediting Eckhardt, several Turtles gave different versions of the genesis of the original “Turtle” nickname. Mike Shannon contradicted the legend that Dennis named his students after seeing a turtle-breeding farm in Singapore: “Our original name, in the first year of our existence, was the Disciples. Because it was the name, at the time, of a prominent street gang on Chicago’s West Side, we agreed to go with the ‘Turtle’ idea.” Accurate? No one else told me that story, but then again Shannon had told me many other things that I later confirmed as true that no one else had told me. On the other hand, Lucy Wyatt Mattinen, one of the two female Turtles, said the name actually traced back to Richard Dennis’s fondness for the music of the ‘60s pop group The Turtles.

  Despite the initial cooperation and despite these colorful asides clear resistance to my effort to write a book was slowly taking shape after initial openness. It was soon clear that some Turtles just did not want an objective treatment of their story made public.

  Then there were the contradictory interpretations of their confidentiality agreement with Dennis depending on who wanted their story made public and who did not. The agreement signed by all Turtles had long since expired. It’s floating around the Net for all to see. But when trying to contact Turtle Philip Lu, who is now working as a college teacher, he threw a curve ball. Through his Edgewood College email address Lu was blunt, “It is my belief that my confidentiality agreement with Richard Dennis is still in force. Therefore I do not give interviews.”

  Lu is an intelligent man (graduate of Brown). He apparently made millions as a Turtle and is well respected by many other Turtles, but what was wit
h the ludicrous confidentiality assertion? One Turtle sprang to Lu’s defense saying that Lu could have been in the same league as Turtles Jerry Parker and Paul Rabar, “Phil actively chose not to take over a certain amount of money. He didn’t want to manage a billion dollars.”

  Turtle Sam DeNardo clearly respected Lu for saying their confidentiality agreement was still intact. “He knows that that system can still work. And the more people that use it, the less effective it’s going to be. He probably feels blessed like a lot of us that we’ve had the experience.” DeNardo’s contention that widespread dissemination of the Turtle rules would dilute their effectiveness has not been borne out.

  However, the desire to keep things silent did not stop with Lu. As I completed my research I sent out final requests for interviews. Turtle Paul Rabar responded by asking: “how did you get my email address?” I never heard from him again. Another Turtle responded bluntly to an interview request saying he was “not interested.” Months later that same Turtle appeared to warm up when his assistant asked for a list of those who had agreed to cooperate. When I sent him a detailed list of everyone who had participated, his response was, “no.” Unknown to me at the time, the exact list I handed over was then used to contact Turtles who had completed their interviews to persuade them to not talk. That tactic did not work and in fact irked Turtle Michael Cavallo (one of several pressured not to talk after already talking) who told me he thought the story should be out there.

  When I asked another Turtle for an interview he replied: “Thank you for keeping me abreast of your project. It is still unlikely that I will participate, given what I know of Rich’s and Bill’s feelings about it. However, as I’ve indicated before, if [Turtle] and [Turtle] participate, I will too. I am confident the result will be a fine effort either way, and wish you the best with it.”

  That complimentary but odd response said there was strength in numbers. If this group of three participated together, then it would be fine to go against Dennis’s and Eckhardt’s desire for privacy, although the desires of the Turtle teachers were not known to be fact. After all, access had been granted to Tom Willis—one of Rich Dennis’s closest friends dating back to the early 1970s (long before the Turtles)—a man who talked to me about everything.

  However, it was apparent that when it came to interviewing them some Turtles used the defense of wanting to “protect Rich”—whatever that meant exactly—as a means to avoid talking. One Turtle who had talked to me chuckled in disbelief that the ‘Rich protection’ explanation by other Turtles was “bullshit.”

  There were also an assortment of stories surrounding the scene that could best be described as sex, drugs, and rock ‘n’ roll. This was the late seventies and early eighties after all, so debauchery among some was not exactly unexpected (and that is not to say all the Turtles indulged). While not all of those stories made this book, let’s just say there were some wild characters around.

  Jerry Parker

  Seeing Jerry Parker’s original office for the first time might seem trivial, but for me it still brings back the “aha moment” as if it were yesterday.

  Just finding the place was an adventure. While Richmond, Virginia, was only ninety miles from my house and I had a street address, there were no Map Quest turn-by-turn driving directions available back in 1994. A good old-fashioned hard-copy map from AAA was my compass. While it guided me to the general area of Parker’s office, I spent another two hours driving around rural Virginia trying to actually find it. Finally, I stopped at a local country bank to ask if they had ever heard of Parker’s firm, Chesapeake Capital.

  At first my question was met with blank stares, but then one bank teller said that Chesapeake might be a half-mile up on the right side of the street. She was right. Upon reflection it was odd that while the teller sort of knew where Chesapeake was located, she had no clue what they did. She was probably making $35,000 a year (nothing wrong with that), but at the same time Parker was literally a baseball throw away making $35 million a year. My first thought was just to shake her and say, “Don’t you get who is working down the road? Forget teller jobs, go be an intern for Parker and learn how he makes millions!”

  There was no meeting Parker that summer day. All I saw was the lobby and the twenty-something secretary. My first face-to-face meeting with him did not come until December 1995 at Parker’s new suburban Richmond office (about eighteen months later). Pestering him for an informational interview finally paid off when his assistant Jonathan Craven responded with the good news that he would see me. Parker’s private office was surprisingly barren except for a small glass turtle on his desk (outside the office today there is a large turtle-shaped stone sculpture, the only giveaway). I knew I was nervous but to my surprise, he seemed to be too. Parker asked, “What do you want to do the most?” Without clarification I blurted out “Execution.” Parker took that to mean that the broker world was my goal (it wasn’t) and he generously responded by recommending that I speak with his execution broker.

  Yet before the allotted thirty minutes was up, I did capitalize on the face-to-face opportunity by looking at Parker straight in the eye and asking for confirmation of who had won the Barings Bank sweepstakes earlier in the year. My proffer of a “name” garnered a look of, “I can’t believe you just asked me that in my office,” but his one-word answer was confirmation. In that instant much of my understanding of trend following trading was solidified. He probably never knew how much he influenced me in that moment.

  Later, the broker Parker recommended, Mike Curtis, had me over to his suburban Richmond, Virginia, home for chili. Curtis was a transplanted Chicagoan clearly enjoying financial success in the Deep South. At one point he mentioned that Parker had mentored one of his distant “relatives” in trend following. It would be years before it was clear to me that Curtis was talking about second generation Turtle Salem Abraham.

  My path did not cross Parker’s again for years and long after the website TurtleTrader.com was established. For this visit Parker, John Hoade (his number 2 man), Keith Byers (his marketing man), his IT guru and I met in his conference room. The furnishings of his sparse conference room gave no indication of what Chesapeake Capital did except for a huge Swiss alphorn leaning against the wall. Its “thank you” engraving to Parker and Chesapeake Capital from a Swiss “concern” spoke volumes about his firm’s global reach.

  Why was there that second meeting years later to begin with? Chesapeake Capital was a billion dollar fund at the time, but their brain trust still wanted fresh marketing ideas. They were investigating whether the Internet would enhance their business, and if so, how to use it effectively. Our meeting must have given them some good food for thought because shortly thereafter Parker sought to buy the domain trendfollowing.com from me (Parker did buy the domains trendfollowing.net & trend-following.com and still owned them as of July 2008). It was a wise move not to sell, since the domain name trendfollowing.com became the catalyst in launching my first book, Trend Following, four years later.

  Today Jerry Parker’s firm Chesapeake Capital still has no online presence to speak of, but that has not stifled his success. He is still far and away the most successful Turtle by a long country mile. Interestingly, after the release of The Complete TurtleTrader in the fall of 2007 we did communicate again, when I invited him to appear in a film documentary (which was featuring many of his peers in the trading world plus two Nobel Prize winners). He respectfully declined. It wasn’t that he appeared to have a problem with the message of the film, but rather that having his privacy intruded on by appearing in a film was not his cup of tea.

  Liz Cheval and Lucy Wyatt

  There were two female Turtles. That was news to many since up to the time my book was published the lone female Turtle had been publicly positioned as Liz Cheval. Lucy Wyatt Mattinen was a Turtle as well. It was other Turtles who were the source of confirming Wyatt Mattinen’s Turtle existence. But there was a more detailed backstory and it starts first with Liz Cheval.
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  Cheval initially responded to an interview request for this book in a civil fashion saying that due to other professional commitments she could not support the project. Then three weeks later, with no provocation or contact, she followed up to say that she would pursue legal remedies if references were made about her. Did she think as a public figure in the trading world, someone quoted in newspapers and magazines, that she could simply decree that her name be left out of a story on the Turtles? Apparently she did.

  Soon after news came across my desk that Cheval would be speaking in Chicago at a Managed Funds Association conference. If she would not speak with me, then it was time to go hear her in person and perhaps convince her to ease up and consider an interview.

  Dressed in an eclectic black outfit, almost appearing to be a cape, Cheval was very well spoken and confident. At her luncheon speech that day in Chicago Cheval organized her presentation into two parts:

  Human investment psychology: the ups and downs and

  The mathematical solution.

  For anyone familiar with the Turtles these two big picture points were not a surprise. During her keynote address Cheval also broached the subject of “correlation.” She presented a chart to the audience of ‘Trader A’ and ‘Trader B’. They had, in Cheval’s lexicon, “Perfect Negative Correlation”:

  The logic behind Cheval’s presentation traced back to her time with Dennis. All traders should want as much negative correlation among the components in their portfolio as possible. As long as their portfolio maintains a positive overall return, constantly adding more and more negatively correlated components will decrease the standard deviation (or one way to view “risk”).