Picture an oak-paneled English drawing room. Two obviously wealthy gentlemen sit in their armchairs facing a roaring fire, puffing on their pipes and discussing their philosophy of trading.
“It is my proposition, Colin, that anyone can be taught to be a superior trader. There is nothing magical about it. There is no rare talent involved. It is simply a matter of being taught the appropriate rules and following those rules. There is no question in my mind that I could train virtually anyone to make a fortune trading.”
“That is nonsense, Duncan. You just think your trading success is due to your system. What you do not realize is that you have a special talent. You could print out your rules in twelve-inch-high letters and have people read them every day for a year, and they still would not be able to do what you do in the markets. Your success is a function of your talent. It cannot be taught!”
“Well, Colin, this must be the hundredth time we’ve had this discussion. Let’s settle it once and for all. Why don’t we just pick ten people, teach them my system, give them each £1 million to trade and see what happens.”
“That’s an excellent idea, Duncan. Pick your ten people, train them, and if by the end of one year they are not ahead, on average, by at least 25 percent—a modest figure considering that you normally make two to three times that per year—you pay me £1 million. If they are up by more than 25 percent, I will pay you the same amount.”
Duncan and Colin then proceed to the window, watching the passersby for potential candidates for their experiment. Each time they agree on an individual, they send their butler out to summon the person.
The above may sound like a fanciful plot for a story or movie. (Actually, it is a very loose adaptation inspired by the delightful Mark Twain story, “The £1,000,000 Bank-Note.”) However, change the setting from London to Chicago, eliminate the monetary element of the bet, and substitute a more sophisticated method for screening candidates, and you actually have a true story. The legendary trader Richard Dennis, who reputedly transformed an initial stake of several thousand dollars into a fortune estimated at $200 million, essentially had the same argument with his partner, William Eckhardt (interviewed in the previous chapter). It was Dennis’s contention that trading success could be taught, while Eckhardt scoffed at the idea.
To settle their ongoing argument, Dennis and Eckhardt decided to run a version of the above experiment. They placed an ad in the Wall Street Journal seeking persons interested in being trained as traders. Through a process of reviewing written applications, evaluating the results of an exam, and interviewing selected finalists, approximately one thousand respondents were eventually whittled down to a group of thirteen. Over a period of about two weeks, Dennis and Eckhardt taught this fortunate group some of their systems. No holds barred, they gave the group all the specifics. After the training, Dennis then funded this group and sent them off to trade on their own.
The first group performed so well during the initial year that Dennis repeated the experiment the following year with a second group of ten. These two groups of traders collectively became known in the industry as the Turtles. This rather curious name had its origins in a trip Richard Dennis took to the Orient during this period of time. At one point, he visited a turtle farm, in which turtles were raised in huge vats. In Dennis’s mind, the image of growing thousands of squirming turtles in a huge vat was a perfect analogy for training traders. The name stuck.
Was Richard Dennis right? Could people actually be trained to be exceptionally successful traders? To answer this question, let’s pick up the scene six years later, when I am preparing to do this book. My first job is to research possible candidates to be interviewed. In the area of futures traders, one reference source I used was the quarterly summary provided by Managed Accounts Reports. This report summarizes the performance of a large number of commodity trading advisors (CTAs), providing a single synopsis sheet for each advisor. At the bottom of each sheet is a summary table with key statistics, such as average annual percentage return, largest drawdown, Sharpe ratio (a return/risk measure), percentage of winning months, and the probabilities of witnessing a 50 percent, 30 percent, and 20 percent loss with the given CTA. To be objective, I flipped through the pages, glancing only at the tables (not the names at the top of the sheets) and checking off the names of those advisors whose exceptional performance seemed to jump off the page. By the end of this process, I had checked off eighteen of the more than one hundred CTAs surveyed. Eight of these eighteen names (44 percent) turned out to be Turtles. Absolutely astounding! Richard Dennis was obviously right. (Admittedly, the results would have been less dramatic a year later, as 1991 proved to be a tough year for many of the Turtles.)
It seemed clear to me that if I were going to pursue the quest for the ingredients in trading success, I should be talking to the Turtles. The uniqueness of Dennis’s experiment seemed to provide an unusual opportunity to see how different individuals exposed to the same training differed in the way they approached the markets.
Although the idea looked good on paper, the execution proved to be very difficult. First of all, I found that a number of the Turtles simply refused to talk. “Look,” I would say, “I understand your reticence. However, I assure you that I will not print anything until you have seen it, and if you feel that you have inadvertently divulged any trade secrets, I promise not to use that material. The risk is all mine. I can go through the entire interview and editing process, only in the end to have you refuse to grant me permission to use the copy. What do you have to lose?” Despite these assurances, a number of the Turtles simply refused even to consider participating.
Those who refused to talk at all were only part of the problem. The major problem was that the remainder of the group was largely tight-lipped about anything of interest. I was well aware that the group had signed agreements not to divulge any parts of the system, and I hardly expected them to share these secrets with the world, let alone betray a trust. Therefore, in the interviews, I avoided any specific questions regarding the system. Unfortunately, the Turtles’ caution was so extreme that they avoided talking about anything even remotely connected with the system. (I couldn’t help but be reminded of the World War II movies where the downed American pilot responds to all the interrogator’s questions by repeating his rank, file, and serial number.) The following is a representative segment intended to provide a flavor of the typical interview.
How do you pick your trades?
I basically use the system, but I can’t say much more than that.
I know we can’t discuss the specifics of the system, but can you just tell me in general terms why this system tends to do so much better than the vast majority of trend-following systems that are out there?
I really don’t know the other systems.
Well, for purposes of comparison, let’s just use the typical moving average system, which is essentially a trend-following approach. Without divulging any specific trade secrets, in a general conceptual sense, how do the systems that Dennis taught you differ from these more standard approaches?
I’d rather not answer that.
What are the trading rules you live by?
The same general rules I’m sure you’ve heard everywhere. I don’t think there’s anything new I could add.
Let’s talk about a specific trading situation. The recent start of the U.S. air war against Iraq resulted in a number of huge overnight price moves. Were you in any of those markets? Were you watching those markets during the nighttime session?
I was lucky—I was out of the crude oil market at the time.
How about a market like gold, which also had a huge price reversal at the time?
Yes, I had a position in gold.
It’s no secret that Dennis’s approach was trend-following in nature. Obviously then, since the market had been rising for a while prior to the outbreak of the air war, you must have been long at the time. The war started at night, and although gold prices initially rose, by the next morning they were down over $30. Were you watching the market during the night session? And if so, how did you react?
I got out.
Was this because the market received news that should have been bullish—that is, the outbreak of war—moved slightly higher, and then started trading lower?
I can’t say.
I’m hardly talking trade secrets here. The concept that a market’s failure to respond appropriately to important news is a significant price action clue is something that I put in a book six years ago. And I’m sure I was not the first or last person to talk about this idea. All I’m asking is whether this was the reasoning behind taking the loss quickly or whether there was more to it.
There was more, but I can’t talk about it.
Is there anything that we haven’t discussed concerning the concepts and philosophy of successful trading that you would care to comment on?
[Long pause.] No, not really. I can’t think of anything.
OK, you get the idea. Applying the appropriate trading principle, I decided to cut my losses short and stop requesting additional Turtle interviews after the first few. Obviously, the extraordinary sensitivity of the Turtles to the possibility of revealing anything about what Richard Dennis had taught them, even inadvertently, provided a seemingly insurmountable impediment to achieving the type of relatively open discussions I had enjoyed with other traders.
I have, however, selected short excerpts from two of the Turtle interviews I conducted. The following material offers some feel for the Turtle experience and provides a few insights in terms of useful trading lessons or advice.
MICHAEL CARR
After the near paranoia, and even rudeness, I encountered in some of my preliminary interview requests among the Turtles, Michael Carr’s attitude came as a pleasant relief. (He not only graciously accepted the interview request but, upon learning that I was a hiking enthusiast, was thoughtful enough to send me a brochure on the Ice Age Trail, which passes near his house.)
Carr was in the first group of Turtles trained by Richard Dennis. He began trading in 1984, and in his four years of trading for Dennis, Carr averaged 57 percent annually (he was down moderately for the first third of 1988, when Dennis terminated the program). Carr did not begin trading again until August 1989, when he launched his own CTA company. As of late 1991, Carr was up 89 percent from that starting point.
I interviewed Carr at his Wisconsin home, which virtually sits in a lake and is connected to the mainland by a very long driveway. I arrived just as it began to storm. Carr’s office, which has windows all around, offers views of the water in every direction. The combination of the all-encompassing water views and the storm provided a spectacular backdrop. Unfortunately, the setting was far more dramatic than our conversation. Although Carr was quite friendly, our interchange was stymied by the same cautiousness that characterized all the Turtle interviews.
How did you become a Turtle?
I was on the creative management staff of TSR, the game company of Dungeons and Dragons fame. I started with TSR when there were only a few employees. In the ensuing years, the company went through a spectacular growth phase, which culminated with over three hundred people on the payroll. The company then hit hard times and made drastic cutbacks in order to survive. I lost my job along with two hundred other workers. It was around this time that I picked up a copy of the Wall Street Journal. Ironically, that was the same day that Richard Dennis ran his ad seeking trading trainees.
Did you have any prior experience in the commodity markets at the time?
Certainly no trading experience. However, while I was working for TSR, I came up with the idea of creating a commodity game. I thought that the commodity markets had all the necessary ingredients for making a successful game. To get the background information, I had sent away for lots of exchange publications. I also took an extension course, which involved six evening sessions taught by a commodity broker. So I had a rudimentary understanding of the commodity markets, but nothing more.
As I understand it, there were over a thousand applicants and only thirteen candidates were selected. Why do you believe you were chosen?
To my knowledge, I was the only candidate that had worked for a game company. I believe the fact that my background was different from the others helped me get noticed. Also, a lot of commodity trading is based on game theory and probability. Therefore, it’s not much of a jump to believe that someone with experience in that area might bring something to the table.
Who interviewed you?
Richard Dennis and a couple of his associates.
Can you recall any of your responses during the interview that might have helped you get the job?
Nothing in particular. I think, however, despite my having had no background in the business, I was able to ask intelligent questions and respond appropriately. However, there was one exception. [He laughs at the recollection.] I was probably one of the only candidates who knew virtually nothing about Richard Dennis. Although I didn’t know it, Richard Dennis was famous for being one of the world’s great technical traders. During the interview I asked, “Do you trade the markets fundamentally or technically?”
That got a good chuckle. He answered, “We trade technically.”
I responded by asking, “Is fundamental analysis dead?”
Dennis answered, with a smile, “We certainly hope not.”
Obviously your lack of experience didn’t hurt you.
As it turned out, of the thirteen people selected, one-third had no experience, one-third had significant experience, and the remaining one-third had a little bit of experience.
I know you can’t divulge any of the specifics about the training course. However, are there any general lessons that came out of those sessions that you could talk about?
One nugget of advice that I believe is valuable to anyone trading the markets is: Don’t worry about what the markets are going to do, worry about what you are going to do in response to the markets.
Any other advice regarding psychology or attitude?
In my opinion, a large segment of the population should never trade the markets. Although I hesitate to use gambling as an example, I believe it provides a close analogy. Those people who are wise and prudent gamblers would probably also be wise and prudent investors, because they have a somewhat detached view of the value of money. On the other hand, those people who get caught up in the excitement of the amount of the wager, whether it’s gambling or investment, are likely to be destabilized by losses.
Why do you trade?
Part of it, of course, is to make a living. However, trading has many of the elements of a game. For someone like me who has always been interested in games, I don’t think there could be a better job.
HOWARD SEIDLER
Howard Seidler was certainly the most ebullient of the Turtles I interviewed. He exuded a general sense of enjoyment in trading, in emotion as well as in word. During our interview, his attitude toward trading was so upbeat that I naturally assumed he must have been enjoying a profitable streak in the markets. To my surprise, I later discovered that the half-year period preceding our interview was actually his second worst six-month performance ever (he was down 16 percent). Seidler certainly wins my award for the most happy Turtle. As to performance, he has averaged 34 percent (on an annual compounded basis) since he began trading in 1984.
When did you first become involved in the markets?
My first exposure was actually as a child, since my father dabbled in the markets. When I was in high school, I became aware of the futures markets. Futures fascinated me because of the symmetry of being able to go short as well as long. I was also attracted by the potential for leverage. As I began to read about the futures markets, the general description seemed to be: “Here’s this game, and by the way, hardly anyone ever succeeds at it.” To me, that was like throwing down the gauntlet.
When did you first actually begin to trade the markets?
In high school. Of course, I was too young to open my own account, so I opened an account under my father’s name.
How large was the account?
One thousand dollars. I had saved up that money by doing chores, such as shoveling snow and mowing lawns. It took me a little over a year before I lost it all.
That’s actually a pretty long ride considering the minuscule size of the account and the fact that you were a complete novice.
Of course, I wasn’t too thrilled about it at the time. However, as I got older, I realized that I had really done pretty well considering the circumstances. I certainly did get my money’s worth in terms of experience.
Do any traders from that time stand out as a learning experience?
One trade that I think was quite fortunate was actually a missed profit opportunity. Based on some trading ideas I had developed, I thought that the potato market was going to break sharply. I went short one contract, and the market started going in my direction. Once I had a small profit, I decided to double my position. Now, my account was so tiny that even a one-contract position was pushing it. I really had no business adding to this position.
Shortly after I had sold the second contract, the market started to go up. I became concerned about losing my equity, and I liquidated the contract that I had added, taking the loss on the trade. However, because of that loss, I also ended up getting out of my original contract way before the market reached my objective. Two days after I liquidated my position, the market began a steep collapse, just as I had originally anticipated.
I don’t understand why you termed that trade “fortunate.”
If I had stayed with the entire position and ended up making several hundred percent on the trade, I would have thought that I knew it all. There are certain lessons that you absolutely have to learn to be a successful trader. One of those lessons is that you can’t win if you’re trading at a leverage size that makes you fearful of the market. If I hadn’t learned that concept then, I would have at some later point when I was trading more money, and the lesson would have been far more expensive.
Did you eventually return to trading before you became a Turtle?
Shortly before I saw Richard Dennis’s ad in the Wall Street Journal, I had left my job as an economic consultant to become a full-time trader.
Only about one out of a hundred respondents to the ad were ultimately chosen for the training program. Do you have any idea why you made the final selection cut?
Although they weren’t looking for people with trading experience, by the same token, being a trader didn’t rule you out either. I think that insofar as I did have the trading background, the fact that my philosophy about the markets was similar to Dennis’s probably helped out. Also, and I’m just speculating, I think that Dennis might have been curious to see how somebody with my academic background—an MIT engineering degree—would work out.
What advice would you give someone in regards to being successful in the markets?
I think the single most important element is having a plan. First, a plan forces discipline, which is an essential ingredient to successful trading. Second, a plan gives you a benchmark against which you can measure your performance.
Doesn’t your bottom line equity give you that information?
Over the long run, sure. However, you can be following your rules exactly and still lose money. In that situation, you certainly haven’t performed poorly as a trader. The basic idea is that if you follow your rules over the long run, the probabilities will be in your favor, and you’ll come out ahead. In the short run, however, conformance to a trading plan is more significant than short-term equity fluctuations.
What else is important to succeed as a trader?
You need to have the persistence to stay with your ideas day after day, month after month, year after year, which is hard work.
Why would that be difficult? Why would you want to stray from a winning approach?
Because human beings are human beings. If you get enough negative feedback over the short run, you’re going to be tempted to respond to it.
Any other trading advice?
It’s important to distinguish between respect for the market and fear of the market. While it’s essential to respect the market to assure preservation of capital, you can’t win if you’re fearful of losing. Fear will keep you from making correct decisions.
I realize that this chapter has not provided any definitive answers as to what made the Turtles such a successful trading group. Nevertheless, it does offer an incredibly important message to those interested in trading: It is possible to develop a system that can significantly beat the market. Moreover, if you can discover such a system and exercise the discipline to follow it, you can succeed in the markets without being a born trader.