When Genius Prevailed

Legendary traders Richard Dennis and William Eckhardt began a trading program in the early 1980s – one that is steeped in lore and one that has put a much needed face on Trend Following: the Turtle.

In his new book, The Complete Turtle Trader: The Legend, The Lessons, The Results, author Mike Covel gives us the complete Turtle backstory where Schwager’s tome left us hanging. Covel’s book has the teeth where Schwager’s had the smile. Covel has the Turtles talking and the result is a well-rounded, thoroughly researched, soon-to-be classic in the vein of narrative nonfiction.

Now if you think the word “Turtle” alludes to the fable of the tortoise and the hare, that’s a good guess. One look at the monthly performance returns in Complete Turtle Trader’s Appendix and you’ll see that there is nothing “slow and steady” about this race. Their style was about “high-performance” trading. Many Turtles had annual returns north of 100% and frequently had monthly drawdowns in the double digits. The most successful Turtle based on longevity, Jerry Parker of Chesapeake, has only had 1 losing year out of the last 20.

Nowadays, you can forget raising money from Institutional allocators with these type of numbers, but then again, the Turtles were effectively unregistered CTAs working for one client – C & D Commodities – Rich Dennis and Bill Eckhardt’s firm.

The Chicago Trinity: The Church, The Dems, and the White Sox

But before there were Turtles, there was Richard Dennis. The way he’s described in the book I immediately thought of Mike Stivic, the character played by Rob Reiner on the hit show, All In The Family. Him, or some stereotype of an Insurance salesman. That’s bias for you.

Sperry Top-Sider’s notwithstanding, he is as close to being a Rock Star as a commodity guy can get (think Nuture). Now a Board member of the Cato Institute (along with another Market Wizard, Jeff Yass – founder of Susquehanna), Dennis’ beginnings were of the humble sort. He was not the one his teachers would have thought destined for success, never mind becoming a centi-millionaire. Yet history shows that he was indeed precocious. At about the same age that Wayne Gretzky was signed by the WHA’s Indianapolis Racers, Richard Dennis had his father signaling his trades in the ring because he did not meet the the Mid Am Exchange’s minimum age requirement. He was 17.

This is my rifle, there are many like it, but this one is mine

Turtles were taught/shown 2 different trading systems, System 1 (S1) and System 2 (S2). Both systems were Trend Following in nature, with volatility-adjusted position sizes based on notional account equity. They were also told which markets they could trade, and effectively how many contracts they could trade for each (4 Units). Turtles scaled in and out of positions most of the time. Most, and I mean most, not all, were allowed to scale in up to 4 times, but some followed their own set of parameters – they exercised Discretion. Some faded the rules, some leveraged the rules and traded stronger based on notional account value. “The feeling that you’re unwilling to feel is your true system.”

All Turtles are equal, but some Turtles are more equal than others

It seemed that favoritism started to evolve within the offices of C & D Commodities. Curtis Faith and Mike Cavallo were favorites according to fellow trainee Jeff Gordon, but it was C & D’s “bat and ball” – they made the rules. By following his own set of rules, ie, neither S1 nor S2, Faith’s erratic behavior began to make his peers wonder what the heck was going on. They became disenfranchised with the program. It became clear to at least a few trainees that there were “Turtle rules,” and then there were “CF rules.” During this time, Faith was quoted as saying “Rich and I were talking last night, and…” The thing was, Dennis wasn’t talking to other trainees at night. It appears from the book that Dennis had a much different relationship with Faith than the other trainees. Faith’s remarks seemed to make the other jealous and such statements probably made Faith as endearing to the group as Yoko Ono was to Paul, George, and Ringo in the recording studio.

Fooled by Randomness – Trainees were born “lucky”

In the famed tome Market Wizards, Jack Schwager asked Dennis, “How much of a role does luck play in trading?” His response was “In the long run, zero. Absolutely zero. I don’t think anybody winds up making any money in this business b/c they started out lucky.” I believe that luck plays an enormous role in both short and long-term trading results, as well as in one’s longevity as a money manager.

It is clear that Dennis and Eckhardt were able to impart these models to their trainees, thus Nuture prevailed. Most were able to follow either S1 or S2 religiously. Several – two according to Covel – “left” the program – wandered too far off the “turtle farm” so to speak. Or maybe they were not compatible with either of the 2 systems they were presented with. They were “unlucky” perhaps in that they did not have the emotional constitution to stick to the rules, even though they could comprehend the concept of mathematical expectation, or the Accuracy versus Expectation argument.

There were a few times in Covel’s book that luck played a material role in the lives of Dennis and Eckhardt, the evolution of the program, and the Turtle Training program’s ultimate success.

First, the whole program may never had begun if C & D did not survive the events surrounding November 1, 1978. Dennis and Eckhardt held large long positions in Gold, Currencies, and Grains. Losses that day exceeded $2MM. This was the first year of business for C & D Commodities. As Covel notes, “…it was touch and go for a while…that day came close to wiping them out.” Luck or intention?

Another was circa 1987 when most of the Turtles were heavily short Eurodollars and the contract opened 250 points against them – “10 standard deviant Black Swans” beyond what any were ready for. Losses across accounts were staggering and the accounts needed to be re-funded. Faith experienced a 70% drawdown alone, a drawdown which may have been exacerbated by his inability to follow the rules. Dennis and Eckhardt added the much needed corpus to the accounts. They were lucky that they had the funds available. Collectively, they were lucky that they didn’t go into “negative equity.” For those not familiar with Futures margin accounts, it is possible for an account’s equity to go “less than zero” whereby the Guarantor must add additional funds just to bring the account back to a zero balance.

When one thinks of the cult of personality that surrounded Dennis, or the math genius Eckhardt, no one would think to question them or their rules. (Truth be told, it was Eckhardt who actually delineated the trading rules to the trainees, although his “bet” was that trading could not be taught – think Nature.) Yet, four members of the second training class did just that and decided to actually put the rules to a computer and see what the results would be. Astoundingly, no one had tested the heuristical model to this point. They found that the Turtles as a group were trading at a risk level that was TWICE what Dennis and Eckhardt had originally thought. Teacher becomes student. Dennis sent out a memo instructing the trainees to cut notional values in half, thereby reducing the risk. Again, you can call it fate, but they were surely lucky that fate fell their way. “Some people were lucky to be born smart, while others were even smarter and got born lucky.” — Ed Seykota

According to Covel, Turtle recruits needed to show “a willingness to take calculated risks” and needed to think like “a Las Vegas handicapper.” Risk Avoiders were not included. Only risk-averse and risk-lovers were interviewed (and then hired). So now we are not talking about just anyone.

Pedigree was to play no role, yet Dennis looked for high ACT scores in Math. Dennis also looked for candidates with a strong knowledge of computers, who could naturally systematize things. These were not random folks or ordinary people, per se, as in “taken off the street.”

Cuius regio, eius religio

Dennis sort of retired (after he blew up) in the late 1980s. Schwager’s title A Legend Retires was a little wimpy, but I’m sure he was just happy to get the interview. Dennis had a massive drawdown of -55% in April 1988. I think this was bad luck. Had Dennis been luckier, he may have had a +200% month with the level of risk he must have been taking on. The funds he ran at Drexel were shut down. It seems unfair that after 18 years of making money, Dennis would be afforded a second chance. Such treatment doesn’t seem congruent for a legendary trader. It’s the equivalent of A-Rod getting booed in the Bronx last year. It was probably written in the offering docs that drawdowns of such magnitude would cause for an automatic liquidation and return of the remaining capital.

Caste of Characters

It’s probably only a coincidence, but Dennis’ favorites Faith and Cavallo were the only ones to suffer monthly drawdowns over 50%. In June 1984 Cavallo took a -57% hit, but followed that with an 86% gain for July. He finished 1988 at -14.50%. Faith had several drawdowns over 50%. These were the worst reported monthly drawdowns suffered by any Turtle of any training class.

Most trainees lost money in April 1988 like Dennis, but not to the extent that he did. It’s not clear why he had such massive losses. He may have been trading several times his actual capital or he may have traded position sizes many times the levels that he taught his students.

Who was the best?

In looking through the book’s Appendix, you can see how each Turtle did on a monthly and annual basis. Annual returns in excess of over 100% seem the norm. Look close and you’ll see that Liz Cheval, Philip Lu, Stig Ostgaard, Jerry Parker, Brian Proctor, and Tom Shanks achieved over 100% RoR at least 2 years in a row. Mike Cavallo and Jim Melnick achieved over 100% on 2 occasions, but not consecutively (what losers!). More shocking was some of the monthly returns. One would expect positive months at least of the same magnitude as some of the drawdowns.

Yet Stig Ostgaard returned 193.50% in one month – July 1985. He finished that year +296.56% – the highest of any Turtle.

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