The Complete TurtleTrader

Michael W. Covel

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061740619
• Topic: Personal Development
• Subtopic: Personal Finance

This is the true story behind Wall Street legend Richard Dennis, his disciples, the Turtles, and the trading techniques that made them millionaires.

What happens when ordinary people are taught a system to make extraordinary money? Richard Dennis made a fortune on Wall Street by investing according to a few simple rules. Convinced that great trading was a skill that could be taught to anyone, he made a bet with his partner and ran a classified ad in the Wall Street Journal looking for novices to train. His recruits, later known as the Turtles, had anything but traditional Wall Street backgrounds; they included a professional blackjack player, a pianist, and a fantasy game designer. For two weeks, Dennis taught them his investment rules and philosophy, and set them loose to start trading, each with a million dollars of his money. By the time the experiment ended, Dennis had made a hundred million dollars from his Turtles and created one killer Wall Street legend.

In The Complete Turtle Trader, Michael W. Covel, bestselling author of Trend Following and managing editor of TurtleTrader.com, the leading website on the Turtles, tells their riveting story with the first ever on the record interviews with individual Turtles. He describes how Dennis interviewed and selected his students, details their education and experiences while working for him, and breaks down the Turtle system and rules in full. He reveals how they made astounding fortunes, and follows their lives from the original experiment to the present day. Some have grown even wealthier than ever, and include some of today's top hedge fund managers. Equally important are those who passed along their approach to a second generation of Turtles, proving that the Turtles' system truly is reproducible, and that anyone with the discipline and the desire to succeed can do as well as—or even better than—Wall Street's top hedge fund wizards.

In an era full of slapdash investing advice and promises of hot stock tips for "the next big thing, " as popularized by pundits like Jim Cramer of Mad Money, the easy-to-follow objective rules of the TurtleTrader stand out as a sound guide for truly making the most out of your money. These rules worked—and still work today—for the Turtles, and any other investor with the desire and commitment to learn from one of the greatest investing stories of all time.

1

Nurture versus Nature

“Give me a dozen healthy infants and my own specific world to bring them up in, and I’ll guarantee to take any one at random and train him to become any type of specialist I might select—, lawyer, artist, merchant, chef and yes, even beggar and thief, regardless of his talents, penchants, tendencies, abilities, vocations, and race of his ancestors.”

John B. Watson,
early twentieth-century American psychologist

In the early 1980s, when Chicago’s reigning trader king, Richard Dennis, decided to conduct his real-life social experiment, Wall Street was heating up. The stock market was at the start of a huge bull market. On the world stage, Iraq had invaded Iran. Lotus Development had released Lotus -–-3, and Microsoft had put their new word processing program (“Word”) on the market. President Reagan, much to the liberally minded Dennis’s chagrin, declared it “The Year of the Bible.”

In order for Dennis to find his special breed of student guinea pigs, he circumvented conventional recruitment methods. His firm, C&D Commodities, budgeted $15,000 for classified ads in the Wall Street journal, Barron’s, and the International Herald Tribune seeking trainees during late fall 1983 and 1984. Avid job seekers saw this:

Richard J. Dennis
of C&D Commodities
is accepting applications for the position of
Commodity Futures Trader
to expand his established group of traders.

Mr. Dennis and his associates will train a small group of applicants in his proprietary trading concepts. Successful candidates will then trade solely for Mr. Dennis: they will not be allowed to trade futures for themselves or others. Traders will be paid a percentage of their trading profits, and will be allowed a small draw. Prior experience in trading will be considered, but is not necessary. Applicants should send a brief resume with one sentence giving their reasons for applying to:

C&D Commodities
141 W. Jackson, Suite 2313
Chicago, IL 60604
Attn: Dale Dellutri

Applications must be received by October 1, 1984.

No telephone calls will be accepted.

Lost in the back pages of national dailies, the ad attracted surprisingly few respondents when you consider what Dennis was offering. But then, people don’t usually expect the road to riches to be in plain sight.

The ad invited anyone to join one of Chicago’s most successful trading firms, making “experience” optional. It was as if the Washington Redskins had advertised open positions regardless of age, weight, or football experience.

Perhaps most stunning was that C&D Commodities was going to teach proprietary trading concepts. This was unheard of at the time (and still is today), since great moneymaking trading systems were always kept under lock and key.

Dennis’s recruitment process took place long before the chain-reaction flow of Craig’s List ads that attract in thousands of résumés within hours for any job. However, it was 1983, and reaching out to touch the world with the flick of a blog post was not yet reality.

Potential students who were ultimately hired recall being stunned. “This can’t be what I think it is” was a common refrain. It was, unbelievably, an invitation to learn at the feet of Chicago’s greatest living trader and then use his money to trade and take a piece of the profits. One of the greatest educational opportunities of the century garnered responses ranging from a sentence written on a coconut to the mundane “I think I can make money for you.” Let’s face it, guessing what would make a wealthy, reclusive, and eccentric trader take notice of you in order to get to the next step — a face-to-face interview—had no precedent.

This casting of a wide net was all part of Dennis’s plan to resolve his decade-long nature-versus-nurture debate with his partner William Eckhardt. Dennis believed that his ability to trade was not a natural gift. He looked at the markets as being like Monopoly. He saw strategies, rules, odds, and numbers as objective and learnable.

In Dennis’s book, everything about the markets was teachable, starting with his very first prerequisite: a proper view of money. He didn’t think about money as merely a means to go buy stuff at the mall, the way most people do. He thought of money as a way to keep score. He could just as easily have used pebbles to keep count. His emotional attachment to dollars and cents appeared nonexistent.

Dennis would say, in effect, “If I make $5,000, then I can bet more and potentially make $25,000. And if I make $25,000, I can bet that again to get to $250,000. Once there, I can bet even more and get to a million.” He thought in terms of leverage. That was teachable in his book, as well.

On the other hand, William Eckhardt was solidly rooted in the nature camp (“either you’re born with trading skills or you’re not”). Dennis explained the debate, “My partner Bill has been a friend since high school. We have had philosophical disagreements about everything you could imagine. One of these arguments was whether the skills of a successful trader could be reduced to a set of rules. That was my point of view. Or whether there was something ineffable, mystical, subjective, or intuitive that made someone a good trader. This argument had been going on for a long time, and I guess I was getting a little frustrated with idle speculation. Finally, I said, ‘Here is a way we can definitely resolve this argument. Let’s hire and train people and see what happens.’ He agreed. It was an intellectual experiment.”¹

Even though Eckhardt did not believe traders could be nurtured, he had faith in the underdog. He knew plenty of multimillionaires who had started trading with inherited wealth and bombed. Eckhardt saw them lose it all because they didn’t feel the pain when they were losing: “You’re much better off going into the market on a shoestring, feeling that you can’t afford to lose. I’d rather bet on somebody starting out with a few thousand dollars than on somebody who came in with millions.”²

The ramifications of Dennis and Eckhardt’s intellectual experiment opened a Pandora’s box of opinions and biases. Measuring and judging people by their IQ board scores, LSAT, GPA, degrees, or whatever other metric, is the way most of society operates. Yet if an IQ measure or test score was the only ticket needed for success, then all smart people would be loaded, which is obviously not the case.

Stephen Jay Gould, the late great American paleontologist, evolutionary biologist, and historian of science, was always quick to eschew society’s misconceptions about intelligence: “We like to think of America as a land with generally egalitarian traditions, a nation conceived in liberty and dedicated to the proposition that all men are created equal.”³ However, Gould saw America slipping toward measures and ratios as a sole means of predicting life success and was appalled at the increasing predilection of Americans to use a hereditarian interpretation of IQ as a limiting tool.⁴

Dennis, like Gould, was not about to be taken in by a hereditary interpretation of IQ. His aim was to implant his mental software into the brains of his students, and then place them into his controlled environment to see how they would react and perform.

That someone of Dennis’s stature and success would be so determined to prove nurture over nature that he would teach his proprietary trading methods to others was extraordinary. Certainly his partner was surprised that he was willing to put so much of his own money in the hands of amateurs.

With a dark beard and sideburns and a receding hairline, William Eckhardt bore an uncanny resemblance to Lenin and cut a sinewy, energetic figure, the polar opposite of the over-six-foot-tall rotund Dennis. Of the two, he was the true mathematician, with a master’s in mathematics from the University of Chicago and four years of doctoral research in mathematical logic. But for the purpose of their nature-versus-nurture debate, Eckhardt was the unapologetic biological determinist, certain that his partner was a savant, an introverted genius with special genetic talents.

Today, there are plenty of people who would still argue against Dennis, insisting that “biological determinism,” or the notion that genetics predicts the physical and behavioral nature of an organism, can’t be overcome.⁵ That’s bad news for a potentially successful trader or entrepreneur in any field who doesn’t have the so-called pedigree or right IQ score. The irony is that even though Dennis’s experiment proved otherwise over twenty years ago, success in the markets is still perceived by many as a virtual IQ caste system.

Skeptics of Dennis’s Turtle experiment have long rolled out barrages of excuses about how serendipitous answering that little ad was. They argue it would have been impossible for anyone, except insiders, to have known that ad was the ticket to cracking Wall Street’s Top 100 paid traders (like Jerry Parker did). How could anyone know that an ad could potentially bypass what Warren Buffett has affectionately called “the ovarian lottery” and give a random group of people the chance to make millions? It’s hard to accept that fact. It’s too much like a Hollywood script.

It’s a Small World

Richard Dennis wanted a mishmash of personalities, similar to MTV’s Real World and their diverse casting calls. He selected both far-right-wing conservatives and bleeding-heart liberals. A high school graduate and an MBA were picked from the thousand-plus applicants who threw their hats into the ring. The wild cross-section of his final Turtle picks demonstrated Dennis’s diversity desires.

There were college graduates from the State University of New York at Buffalo (business), Miami University in Ohio (economics), the New England Conservatory of Music (piano, music theory), Ferrum College in Virginia (accounting), Central Connecticut State University (marketing), Brown University (geology), the University of Chicago (Ph.D. in linguistics), Macalester College (history), and the United States Air Force Academy.

Others Dennis students had recently held jobs at Cushman/Wake-field (security guard), Caterpillar Tractor (salesperson), Collins Commodities (broker), the Ground Round Restaurant (assistant manager), A.G. Becker (phone clerk), Palomino Club (bartender), and Dungeons and Dragons (board game designer). One student simply declared his status as “unemployed.” Earlier job histories of those who made the final cut were even more mundane: kitchen worker, teacher, prison counselor, messenger, accounting assistant, and waiter.

Dennis selected one woman from the ad, a rarity in the 1980s “all boys” world of Chicago trading. He also selected gay students, whether he knew their orientation at the time or not. His picks ran the gamut from mild-mannered, professional academics to regular-guy blue-collar types, to some with wildly volatile personalities.

There were certain things Dennis was looking for. He wanted students who showed a willingness to take calculated risks. Those who stood out from the herd in some kind of an unconventional way had a leg up. This wasn’t a normal hiring process in the early 1980s, nor would it be normal now. Today, MBA types, for example, are geared to the intellectual rigors of running a company but are reluctant to get their hands dirty. They are the ones who think IQ and connections are all they need. They don’t want to do the hard work. They don’t want to really take a risk.⁶

Dennis didn’t want those people. He was searching for people who enjoyed playing games of chance. He was looking for people who could think in terms of “odds.” Think like a Vegas “handicapper”? You were more likely to get an interview. None of this was surprising to those who knew Dennis. Reacting to opportunities that others never saw was how he marched through life.

With a story like this, it’s not hard to imagine the legend that has built up over the years. The experiment has inspired a cultlike reverence, often passed along by word of mouth. However, Charles Faulkner, a modeler of great traders, was instantly struck by the deeper meaning of Dennis’s experiment. He wondered how Dennis knew, saying, “I would have sided with Bill’s skepticism. Even if … it was teachable, it certainly should have taken more effort and a much longer time than Dennis allowed for learning it. The experiment, and more significantly the results, violated all of my beliefs around effort and merit and reward. If something was that easy to learn, it shouldn’t pay so well and vice versa. I marveled at the range of thinking, awareness, and inference, this implied.”

Dennis and Eckhardt taught their students everything they needed in only two weeks to trade bonds, currencies, corn, oil, stocks, and all other markets. Their students did not learn to trade from a screaming mosh pit on the trading floor with wild hand signals, but rather in a quiet office with no televisions, computers and only a few phones.

Each student received $1 million to trade after his classroom instruction. They were to get 15 percent of the profits, while Dennis got 85 percent. No surprise that he would get the lion’s share; it was, after all, his money.

Dennis was honest about taking the majority of the profits when he said in November 1983, right before launching the experiment, that there would be no charity involved. He viewed the experiment as a way to diversify his portfolio. While he knew his “no experience necessary” students could be wiped out, he viewed it all as a way to gain more control of how his millions were being put to use, saying, “I’m tired of investing in someone else’s condominium in Timbuktu.”⁷

Replacing condo investment ideas with a group of surrogates was a smart move. Many of his students went on to make 100 percent or more per year over four years. That’s monster moneymaking. Even more important than those successes from the early 1980s is the current track record of three of the participants. Long after the experiment’s ending, Eckhardt, along with two of Dennis’s former pupils, Jerry Parker and Paul Rabar, manage in excess of $3 billion in 2007. They still trade in a very similar fashion to how they did back in the day.

Beyond Turtles-related successes, there are hundreds of others, traders of big achievements, who owe a debt of gratitude to Dennis for sharing his knowledge and experience. Additionally, men considered to be trading pee...