Pod Insights Michael Covel's Trend Following Ep. 1341: Turtle Talk with Michael Covel on Trend Following Radio About this episode Please enjoy my monologue Turtle Talk with Michael Covel on Trend Following Radio. This episode may also include great outside guests from my archive. --- I’m MICHAEL COVEL, the host of TREND FOLLOWING RADIO, and I’m proud to have delivered 10+ million podcast listens since 2012. Investments, economics, psychology, politics, decision-making, human behavior, entrepreneurship and trend following are all passionately explored and debated on my show. To start? I’d like to give you a great piece of advice you can use in your life and trading journey… cut your losses! You will find much more about that philosophy here: https://www.trendfollowing.com/trend/ You can watch a free video here: https://www.trendfollowing.com/video/ Can’t get enough of this episode? You can choose from my thousand plus episodes here: https://www.trendfollowing.com/podcast My social media platforms: Twitter: @covel Facebook: @trendfollowing LinkedIn: @covel Instagram: @mikecovel Hope you enjoy my never-ending podcast conversation!
Transcript 0:00 Speaker 00 So Richard Dennis, the famed trader, originally profiled in the book The Market Wizards, was originally featured in a New York Times piece in 1976. Something I actually went on eBay and found a copy of. Fascinating. How this guy knew what to do at such a young age, 25, 26. And then, of course, he became even more famous in that 1983 time period for starting the turtle experiment. Now, perhaps you are millennial, perhaps you are Gen Z, and you hear something about 1976 or 1983 and you think, "What the fuck, Mike? This has nothing to do with me.
0:44 Speaker 00 This is dated. This is whatever. Not important." You know, as a Gen X guy, that's probably how I felt about World War II. Something so far away that I had no feeling for it, no sense of relevance. But in the trading world, in the trend-following world, there is a timelessness. And so when you have something that's timeless, it doesn't make a difference what year. What you're looking for are examples and data that give you the confidence to do something. And to do something in this case is to be a trend-following trader.
1:27 Speaker 00 Which is what I help people do for the last 20 years in books, my podcasts, and my courses. So this guy, Richard Dennis, this famed trader, does this experiment where he teaches students how to trade. And yes, maybe you've heard little bits and pieces and slight details here and there. I see the threads on X. They attempt to summarize, for example, my book in a couple posts. It doesn't work that way. Because if you're a learned person, if you actually want to know the nitty-gritty to have true confidence, you really got to go there. So today, in the spirit of going there, I want to share Chapter 3 of my book,
2:12 Speaker 00 The Complete Turtle Trader, the audio version of Chapter 3. Now, of course, if you like this, you should go ahead and buy the whole book. Why not? Over a million copies have been sold. That says something right there. There's not many trading books that can say that.
2:30 Speaker 00 And of course, I know there's the skeptics out there. "Well, if a million people have read a book, then there must not be anything interesting or original in there, or it's all been mined or arbitrage, and there's no opportunity." Yes, if you think like that, you've already failed. I will guarantee you, you've already failed. You've got to do the work. You have to investigate. You have to find out what happened before you. And damn it, that turtle trader story is one of the most motivational, inspirational stories about making money that you will ever find on Wall Street. It should be a movie. I should make it. Patience, one day. Without any further delay and without any more nasally voice from me, excuse my flu
3:15 Speaker 00 or COVID or whatever the hell I've got, without any more delay, jump in, enjoy. And if you have any questions, drop me an email, [email protected] .
3:38 Speaker 01 Chapter Three. The Turtles. How much of a role does luck play in trading? In the long run, zero. Absolutely zero. I don't think anybody winds up making money in this business because they started out lucky. Richard Dennis. Over the years, almost every time the subject of Dennis's training experiment, starting in winter 1983, comes up, those people who have heard of it invariably compare it to the spring 1983 classic movie Trading Places, starring Eddie Murphy and Dan Aykroyd. Millions have seen the movie over the last 20 years, either in the theater or on television.
4:23 Speaker 01 The idea for the movie appears to have sprung from Mark Twain's 1893 short story, The Million Pound Banknote. Twain's famous story speculated on what would happen if a perfectly honest American visitor was turned loose in London with nothing but a million pound banknote in his pocket and no explanation of how it got there. In trading places, ultra-rich commodity brokers, brothers Mortimer and Randolph Duke, make a bet that they can turn a blue-blood, Ackroyd as Louis Winthrop III, to crime and turn a street hustler, Murphy as Billy Ray Valentine, into a successful trader.
5:04 Speaker 01 In the movie, Mortimer, arguing against human lock, exclaims, "With his genes, you could put Winthrop anywhere and he's going to come out on top, breeding, same as in horse races. It's in the blood." When I was trying to nail down with 100% certainty that the screenplay came before Dennis's turtle training experiment, the film's screenwriter, Herschel Weingrod, shed some light. He flatly said that he had never heard of Richard Dennis when his script was completed in October 1982. He was researching and writing a script in the early 1980s about Chicago trading and didn't immediately hear of Richard Dennis? That seemed implausible.
5:47 Speaker 01 Yet it's very plausible to assume the movie's basic premise had an influence on Dennis's experiment. I wasn't alone in that view. Mike Carr, one of Dennis's students, often received the same reaction when the subject of the experiment came up. Whenever you describe the program to anybody, they say, "Oh, it's like trading places." And of course, that's a logical parallel. I think you'd have to ask Rich and Bill, but I never viewed it as anything other than coincidental.
6:17 Speaker 01 It is easy to see why Carr would say that. Dennis was an empiricist before the movie was on the drawing board. But at a bare minimum, the movie must have been a catalyst, the trigger for him to take action. When he was asked whether his training experiment was inspired by Trading Places, Dennis denied it. "Oh, God, no. Actually, I think the movie came after. I certainly hope that's true. I did like that movie more than I wanted to. We did the experiment because everyone believed in intuition, including Bill, who was a very logical guy. And I thought about intuition and about trading, and it didn't seem right."
6:56 Speaker 01 A third student of Dennis's, Mike Shannon, with respect for Dennis in his voice, disagreed wholeheartedly with Carr. "Let me put it in this way, and bluntly. You bet your ass it had a freaking role in the experiment. It absolutely did. Whether he denies it or not, of course it did." Despite Dennis's denial, the parallels seem to be too close to be coincidental. Dennis was watching Randolph and Mortimer play out his debate on the big screen. Randolph was convinced Eddie Murphy's character was the product of a poor environment. Mortimer thought that view was babble.
7:36 Speaker 01 Unlike the movie, the exact nature of Dennis and Eckhart's wager, if any existed, is not known. However, the movie Trading Places did gross over one hundred million dollars before the training experiment was even on the drawing board.
7:53 Speaker 01 Dennis was about to become the new Willy Wonka. He was about to let people into his factory, C and D Commodities, just like Wonka let kids into his chocolate factory. There were risks for him. His students might let him down, or, worse, steal his secrets. He was undeterred. "Some people tell you no, but I think it, trading, is transferable. It seemed to me so clear that it is transferable, that there are no mysteries. If it isn't a mystery, then I ought to be able to get people to do that. I don't want to spend so much time working anymore, and also I want to prove to people that there's no great mystery to it."
8:36 Speaker 01 Life is random, sometimes. People were willing to do just about anything to get Dennis's attention. Of all the approaches his students took to get themselves admitted to his trading school, Jim Melnix was the most extreme and inventive. He was an overweight, working-class guy from Boston who was living over a saloon in the Chicago suburbs. However, Melnick was determined to get as close to Dennis as possible. He actually moved to Chicago just because he'd heard about Richard Dennis. He ended up as a security guard for the Chicago Board of Trade, and every morning would say, "Good morning, Mr. Dennis", as Dennis entered the building.
9:19 Speaker 01 Then, boom, the ad came out, and Melnick got selected. Dennis, who was loaded with millions and power, took a guy off the street and gave him the opportunity to start a new life. The story of Melnick is pure rags-to-riches. How did he know that getting that close to Dennis could lead to something? He didn't, of course, but he hoped it would. His self-confidence was prophetic. Another of Dennis's students described Jim's "everyman qualities": "He reminded me of a truck driver and like magic became a turtle, and he still couldn't believe why or how. As far as where he is today, I have no clue at all."
10:01 Speaker 01 Mike Shannon, a former actor who had left school at the age of sixteen, made it to Dennis's door too. He recalled, "I was working as a broker, and I was a very bad commodity broker." Through a bunch of floor brokers, Shannon found out about the ad, but he knew his resume was problematic. He had a solution to that. "I made up a phony resume and sent it off to Richard Dennis. I used the School of Audacity to get the job." People get fired, or at the very least, don't get hired because of falsifying a resume. But that was not how it worked with the eccentric head of C and D Commodities.
10:41 Speaker 01 On the other hand, Jim Di Maria, a Notre Dame graduate and family man, straight from the Ozzy and Harriet backlot, was already on the trading floor working for Dennis when he applied. Di Maria remembered that every now and again, there would be a "one thousand lot", jargon for a huge order of one thousand futures contracts, that would come through on the trading floor. Finally, he said, "Who is this client with the enormous orders?" He thought he'd heard it was a rich dentist, which was plausible since doctors often dabbled in trading. Eventually, he put two and two together, realizing that "rich Dennis" was the "rich dentist".
11:24 Speaker 01 Dennis, however, was not looking solely for doormen and floor traders. He went after the highly educated, too. Michael Cavallo had a Harvard MBA. With a mop of brown hair and wire-rimmed glasses, he was a preppy corporate warrior, working in Boston when he caught wind of the ad that would change his life. When he saw the ad, Cavallo had already heard of Dennis. He recalled, "I nearly fell out of my seat when I saw it. He was looking for starting shortstop. I couldn't believe it. This is sort of a dream job for me." I immediately responded. There was plenty of serendipity as other potential students learned of the experiment.
12:06 Speaker 01 Former US Air Force pilot Earl Kiefer's path to Dennis was pure coincidence as well. He was sitting in a New York sauna when he picked up a newspaper and spotted the Dennis ad. At that moment, the female star of the movie Trading Places, Jamie Lee Curtis, was sitting in the same sauna with her boyfriend. Kiefer was sitting there reading Barons. "I am looking at this ad, and I knew who Rich was. I said, "Wow, this guy did it." Kiefer thought there was little chance he would get accepted.
12:38 Speaker 01 In the strictly man's world of commodities trading in the early 1980s, women did apply. Liz Chevelle, the diminutive and flamboyant Katie Couric look-alike, was one of them. She must have known that she would stand out from other applicants by being female. At the time, she was actively considering a career in filmmaking, even though she was working for a brokerage firm as a day job. Chevelle's former boss, Bradley Roder, knew the offer was a big deal. "Dennis had already been managing some money for me, and I did very well. Liz came to me and said she was thinking about applying, and asked whether or not she should do it, and I said absolutely. It was an opportunity of a lifetime."
13:21 Speaker 01 Jeff Gordon, an attorney and small business owner at the time, just happened to be thumbing through the newspaper and saw the ad. Gordon, five foot eight, a slender man, who could have been a former member of the Revenge of the Nerds cast, knew the opportunity could be huge. Everybody wanted to be able to trade, to make money like Richard Dennis. Firing off a resume was a coincidental and fortuitous life-changing decision that Gordon made in a heartbeat. Given Dennis's eccentric personality, it was no shock that Jiri George Savaboda, an immigrant from then-communist Czechoslovakia and a monster underdog in most people's eyes, was selected.
14:04 Speaker 01 He was a master blackjack player, beating Las Vegas like a drum long before breaking Vegas and 1990s famed MIT Blackjack team. Dennis also selected Tom Shanks. Handsome, dark-haired, and smooth with the ladies, Shanks was working as a computer programmer for Hull Trading as his day job and beating Vegas at night with his blackjack skills. Shanks and Savaboda knew each other from the Blackjack Underground. When they bumped into each other in Chicago, Savaboda said to Shanks, "Hey, I'm here for an interview with Richard Dennis, have you heard?" Shanks had no clue but said, "You've got to get me an interview." They both ended up getting hired that same afternoon.
14:50 Speaker 01 Earl Kiefer knew about their wild backgrounds. He said, "George ran the check team, and Tom was essentially with the computer in a boot." Shanks used to say, "I never want to see another boot in my life." He had to learn how to take it apart to put the computer in, and was mighty sick of boots after a while. Other inventions allowed Shanks to be almost dead accurate as to the sequence of cards as they were dealt. How could Dennis not hire a guy who had put a computer in a boot during the 1970s? That effort just screamed, "Do anything to win." Mike Carr, on the other hand, built a name for himself at the role-playing game firm Dungeons and Dragons,
15:34 Speaker 01 where he developed a cult following with his wargaming authorship. He also developed a board game, Fight in the Skies, which modeled World War I-style air combat. He just happened to pick up The Wall Street Journal for the first time in six months and saw the ad. He called it Divine Providence. Jerry Parker, who would make the cut, knew the potential life-changing ramifications of being selected. The unassuming accountant and evangelical Christian, with a proper side part to his hair, was not headed down the trading path prior to seeing this C and D ad. He said, "I was a small-town person from Lynchburg, Virginia, and Richard Dennis rescued me from leading a normal life."
16:19 Speaker 01 Before any of the average Joe pupils were officially "rescued", as Parker had so aptly phrased it, they had to continue through the selection process. After sending in their resumes, applicants who made the first cut received a letter and a test. The letter was formal and utilitarian. It reflected none of that Dennis energy and spirit. In by-the-book attorney speak, it said if selected, turtles would get fifteen percent of the profits as salary after they completed a short training period, and then a short trial trading period. All potential students were told that they would have to relocate to Chicago. Perspective students at this stage of the process were asked for their college entrance exam scores.
17:04 Speaker 01 If they didn't have those, they needed to explain why. There was more. Candidates had to complete a sixty-three-question true-false test. The true-false questions all appeared to be easy at first glance, but perhaps tricky on second thought. A cross-section of true-false questions included: One, trade long or short, but not both. Two, trade the same number of contracts on all markets. Three, if you have a hundred thousand dollars to risk, you should risk twenty-five thousand dollars on every trade. Four, when you enter, you should know where to exit if a loss occurs. Five, you can never go broke taking profits.
17:47 Speaker 01 Six, the majority of traders are always wrong. Seven, average profits should be about three or four times average losses. Eight, a trader should be willing to let profits turn into losses. Nine, a very high percentage of trades should be profits. Ten, needing and wanting money are good motivators to good trading. Eleven, one's natural inclinations are good guides to decision-making and trading. Twelve, luck is an ingredient in successful trading over the long run. Thirteen, it's good to follow hunches in trading. Fourteen, trends are not likely to be persistent.
18:32 Speaker 01 Fifteen, it's good to average down when buying.
18:37 Speaker 01 Sixteen, a trader learns more from his losses than his profits. Seventeen, others' opinions of the market are good to follow. Eighteen, buying dips and selling rallies is a good strategy. Nineteen, it's important to take a profit most of the time.
18:58 Speaker 01 Just as on college entrance exams, there were also essay questions to answer. On the back of the true false answer sheet, prospective students had to answer these essay questions with one sentence. One, name a book or movie you like and why. Two, name a historical figure you like and why. Three, why would you like to succeed at this job? Four, name a risky thing you have done and why. Five, is there anything else you'd like to add?
19:32 Speaker 01 Dennis also listed essay questions that asked what good or bad qualities students might have, and whether those would help or hurt in trading. In addition, he wanted to know whether prospective students would rather be good or lucky. There was seemingly no primer to answer these questions. The answers to the fourth essay question ranged from a prospective student who drove an hour to a basketball game without having a ticket, to someone who drove around Saudi Arabia for several months with whiskey in his car trunk. Not exactly something you should do in that part of the world. The person without the basketball ticket was hired, but the person who took a risk for the sake of risk-taking was not.
20:15 Speaker 01 Dale Delutri, who was Dennis's programmer at C and D and ended up as the day-to-day manager of the students, said the hiring strategy had a "wing it" mentality, adding, "We were looking for smarts and for people who had odd ideas. There was some experimental part to it." Dennis, however, was clear about what he was looking for. He wanted people who had high math aptitude and high ACT, American College, testing scores. He wanted people with some interest in computers or market methods. Those who worked to systematize things had an advantage. Dennis added, "The majority of people we wound up hiring had some interest in games.
20:56 Speaker 01 They were chess players or backgammon players, enough so that they would even mention it on a resume."
21:03 Speaker 01 Math ability was not the sole determinant for hiring by any stretch. Dennis and Eckhart, new long-term trading success, did not correlate one-to-one with high IQs. They were trying to assess the applicant's ability to think in terms of odds. The same kind of thinking needed to win at Blackjack in Las Vegas. And they wanted the applicants with the emotional and psychological makeup to treat money abstractly, so they could focus on how to use it as a tool to make tons more. More than anything, Dennis was interested in choosing people who could subsume their egos. None of the chosen few ever would have wanted to be on the cover of Time Magazine, at least that is, when they were chosen.
21:46 Speaker 01 He ultimately chose people who he thought had the ability to accept learning. While they were with Dennis, they had to be tabula rasa, blank slates. It is worth repeating, the selected students were a seriously eclectic bunch. The group was as culturally, sociologically, sexually, and politically diverse as you could assemble. Walt Disney and his famed "It's a Small World" would have been proud of Dennis's open-arms approach.
22:16 Speaker 01 The Interview of Your Life
22:19 Speaker 01 Those candidates who passed the test were then asked to interview in person at CND Commodities offices during the Chicago winter. The process was the same across the board. Dale Delutri escorted them in and out of the room, and both Dennis and Eckhart interviewed everyone. Interviewees were struck by how informal and, in most cases, friendly their interviewers were. Mike Shannon, the candidate with the padded resume, did some serious research in advance of his interview. He went down to the Chicago Tribune basement to learn everything he could about Dennis. He later discovered, over ninety percent of the answers to the questions on the test were in those articles.
23:03 Speaker 01 Shannon even researched what Dennis liked to wear. I knew that he didn't like to wear shoes. He hated suits and all that. I just wore a beat-up old sport coat, pair of jeans, and pair of topsiders with no socks. It turns out Dennis and Shannon had one thing in common. They both grew up playing the board game Risk. Shannon said, "I knew he played when he was a teenager. I think that kind of helped and that definitely broke the ice." For those unfamiliar with Risk, it is a game of world domination where the object is to conquer the world. To win, you must attack and defend, attacking to acquire territory and defending to keep it from your opponents.
23:46 Speaker 01 Dennis may have been quirky, but he lived to win. That was exactly what playing Risk meant. Beat the other guy and win.
23:55 Speaker 01 Paul Raybar, another student candidate, just happened to have been the most experienced trader of all student hires. Raybar had dropped out of UCLA Medical School. Before that, he was a classically trained pianist. However, before being hired by Richard Dennis, he was trained and mentored by Chuck LeBeau. In the late 1970s and early 1980s, LeBeau was a regional director for the E.F. Hutton and Company brokerage on the West Coast. It was there that he taught Raybar. In one of those small world stories, their E.F. Hutton office ended up handling some brokerage for the infamous Billionaire Boys Club, BBC, during the early 1980s.
24:39 Speaker 01 The BBC was started by Joe Gamski, who later renamed himself Joe Hunt and became the focus of several TV movies. Gamski was trading serious-sized money across the Chicago Mercantile Exchange from 1980 to 1984, making a big name for himself. Before he was exposed as a con, Gamski was getting Dennis-like attention on the Chicago trading floors and in the press. He too was called a boy wonder. LeBeau and Raybar, however, did nothing wrong. They were simply brokers placing trades for an assortment of clients. Still, was it possible that Dennis was interested in going through the interview process with Ray Bar,
25:21 Speaker 01 just to see what he may or may not have known about Gamski's trading? That's the kind of opposition research of which Dennis was certainly capable. Ray Bar's interview did evolve into a discussion of the finer points of trading. At one point, Dennis asked a trick question. "What if you get bounced out of the same long trade five times in a row?" Ray Bar was cocksure. "If it goes up again, I will buy again." Ray Bar's knowledge had a lot to do with his hiring, but he was the exception. Dennis didn't want a roomful of Ray Bars. Earl Kiefer, on the other hand, started talking about British empiricism with Dennis. They were discussing "what is reality",
26:05 Speaker 01 and quickly dove into a deep debate about George Berkeley's book, "Hylas and Philinus". Kiefer later learned that one of the things Dennis was looking for was the ability to suspend your belief in reality. Then, quickly, Eckhart changed the subject from philosophy in order to test Kiefer. He asked, "Do you believe in the central limit theorem?" Kiefer replied, "I believe the central limit theorem is like a stop clock, which is right twice a day." He later said, "Little did I realize the game we were going to play." Eckhart was signaling that their trading strategy relied upon the idea that if you were tossing dice, a string of six sixes in a row happens more often than people know or expect.
26:50 Speaker 01 In other words, Eckhart was saying that they were not mean-reversion traders. Mean-reversion traders make bets that markets stay in tight ranges, and that if they veer out of the range, they typically revert to the average or mean. He was saying in plain terms that markets trend, and those trends come unexpectedly. Kiefer knew it meant that they were not options traders. Michael Cavallo had a different vantage on the interview. He said it was the only job interview that he ever truly enjoyed. He didn't care whether or not he got the job because he had this great conversation with people who were incredibly intelligent. Dennis and Eckhart peppered Cavallo with questions.
27:34 Speaker 01 They asked him how much he knew about markets on a scale of zero to one hundred. He recalled, "I answered sixty," being not just an interview gamesmanship response, just the kind of response where I thought I was at. Later Dennis liked to tell the story that he had asked that question of everybody, and that Curtis Faith had replied, "Ninety-nine," and Liz Cheval had replied, "One." Dennis always fondly said, "I hired both of them because that way I figured I had everything that you could know about commodities." There was obviously no way you could second guess what answers Dennis was looking for. And let's face it, the odds were stacked against potential students if they gave Pat Harvard Business School graduate responses.
28:18 Speaker 01 Cavallo knew in the Fortune 500 world that people would not get a job answering the way Faith and Cheval did. As he commented, a lot of places would say, "Oh, well, this guy is too arrogant, and he thinks he knows more than he does and he's headed for a fall." And they might say, "She's too timid." But in fact, certain things that they liked most, other places wouldn't necessarily like. On the other hand, Mike Carr's answer to Dennis's question about what person he admired the most could easily have been interpreted as politically incorrect. Carr recalled, "I remember Rich asking me, 'Why Rommel?'" "I was the only one who cited Field Marshal Erwin Rommel, the famed Desert Fox, as the person from history I most admired."
29:03 Speaker 01 Despite being a German general during the Second World War, he was not a Nazi. Most telling of all, he was highly respected by military men on both sides, as a general and as a man. After the interview was over, Mike Cavallo was the only turtle to mention that he was on to the clever ploy that the interview didn't end after he left the room. After the interview, Dale Delutri took Cavallo to the elevator and said, "Well, how did it go?" Cavallo told him how great he thought the interview was, but he quickly realized that question was part of the interview itself. "I said I liked Rich and Bill so much, whereas other people might have said, 'Oh, God, they really put me through the wringer,' or something like that."
29:48 Speaker 01 The Dennis Brain Trust was showing their hand. "You had to play their game. The elevator filter must have eliminated students from the process who otherwise would have made it. That's brutal." Perhaps, as they read this, former interviewees who did not make the cut will realize that when they said something foolish to Dale Delutri at the elevator, it was at that point that they were eliminated from the candidate pool. No one ever said life was fair. Mike Cavallo was under no false illusion, and knew that obvious candidates with his type of resume were not what Dennis had in mind. He was surprised that he was even in the running. At the end of the day, Dennis and Eckhart figured too many Cavallos and Raybars would
30:32 Speaker 01 have too many bad habits to unlearn. Those who think a Harvard MBA is the only ticket to business success, wake up. Cavallo was the exception, not the rule. Dennis and Eckhart clearly believed that hiring all Harvard MBAs would have been a bust. All these potential students saw the interview process from different vantage points. Jeff Gordon thought the selection process came down to a games aptitude. "I didn't have a resume at the time, so I wrote him a letter that indicated that I had spent more time playing chess than attending law school. The funny thing is, my girlfriend read the letter and said, 'You can't say that.' I said, 'No, that's not true. Rich Dennis is a different kind of guy.
31:17 Speaker 01 I think he'll be looking for people who are a little bit different.'"
31:21 Speaker 01 During his interview, Gordon was logically assuming that he had a lot to learn from Dennis and Eckhart, but they said to him, "Well, you might actually be disappointed." Dennis was worth hundreds of millions at the time, yet he was self-deprecating and humble. Mike Carr's previous job for Dungeons and Dragons may have been the key to convincing the C and D Brain Trust to hire him, because both Dale Delutri and William Eckhart said their sons enjoyed playing the game and, as Carr commented, "I knew that couldn't hurt." That said, Carr had no real idea of Dennis's style of trading and fumbled through parts of the interview. He recalled, "Richard Dennis was renowned as a technical trader, but I wasn't aware of that at the time."
32:07 Speaker 01 During the interview, he asked Dennis, "Do you trade technically or fundamentally?" Dennis replied, "We trade technically." Carr then said, "Is fundamental trading dead?" Dennis sarcastically shot back, "We hope not."
32:23 Speaker 01 Jim Di Maria, the relative insider already working for Dennis as a broker, knew the importance of his hometown for his trading ambitions. "It's just part of the fiber of Chicago. If I were from Baltimore or Los Angeles, I probably would never have done anything like this." But before Di Maria was ever picked for the experiment, he knew he ultimately wanted to be the person making the trading decisions, not just someone else's floor broker. He had to find a way to get there, and Dennis's experiment was it. Di Maria, however, was completely bamboozled by the selection process. "For whatever reason I was selected, I don't know if anyone knows why they were selected.
33:05 Speaker 01 I've heard that some of the people from Rich's entourage were selected as a control group. Like, let's just grab this guy. Like maybe me? I don't know." All the prospective students knew the chance of a lifetime was staring them in the face, whether or not they understood exactly what they were getting into. For example, near the end of her interview, when she realized she might be making a good impression, Liz Cheval's knees went weak. "I couldn't have gotten through the interview, had I known it might work out. It was like winning the job lottery." She was confident in the interview, because she couldn't believe she had gotten that far. She knew her worst-case scenario if selected
33:47 Speaker 01 was that her resume would be enhanced by even a few weeks spent under Dennis's tutelage. There was nothing to lose. All in all, the hiring process was far from headhunter-precise. Dennis and Eckhart had no formal training in job recruitment, or in developing questionnaires designed to select those people most able and ready to learn. It was one thing for them to trade and make fortunes, but it was a very different thing to execute a "nature versus nurture" experiment with live human beings.
34:20 Speaker 01 The Turtle Contract.
34:23 Speaker 01 Once accepted into Dennis's program, turtles had to adhere to a strict confidentiality agreement. It was titled "Synopsis of Contract for Trading Advisor Trainees", and said in part that each participant would have a five-year contract, which could be terminated without notice by Dennis at any time. There was no assurance of staying in the program, but the agreement did clearly state students would not be held accountable for losses that they might generate trading Dennis's money. The trainee will not be obligated to repay advances, which are not covered by earned performance fees, nor will the trainee be liable for losses due to adverse trading performance.
35:05 Speaker 01 And for those students thinking ahead about how to get rich quick, now that they had Dennis's secrets, the agreement had no flexibility. During the term of the contract, they were prohibited from trading for their own account, and prohibited from trading for anyone other than Dennis. The agreement went on to clearly preclude competing against Dennis or disclosing any confidential or proprietary information the participants might learn. Lastly, at the end of the agreement, all students were prohibited from disclosing Dennis's proprietary trading methods for another five years. For those with a legal background, this agreement could have been a deal breaker.
35:46 Speaker 01 That said, no one declined to join the Turtle program even though there were no real guarantees and many potential restrictions on their future activity. Once the agreement was signed, the Turtles headed off to class. Chicago was a different place when the Turtles entered class in January 1984. Harry Carey was the announcer at Wrigley Field, and Ryan Sandberg's rookie year was underway. The Apple McIntosh had just been introduced, and Hulk Hogan defeated the Iron Sheik for the World Wrestling Federation Championship. Politically, Dennis would be very unhappy with Reagan heading toward a landslide defeat of Mondale.
36:28 Speaker 01 In the context of that world, the lucky few chosen to learn how to trade for big money still had to absorb trading rules that would have made investors like Warren Buffett cringe. There would be no buying and holding, or buying low and selling high. What they were about to learn was the antithesis of what was and still is taught in finance departments at the world's finest universities. Run this story by a college finance professor today and take note of his reactions. The Classroom
37:01 Speaker 01 If Dennis had been worth only $100,000 at the time of this experiment, would the Turtles have listened as intently? No. Dennis knew the Turtles were the dumb stumps, and that the only reason that they bought into everything was that he had made $200 million. If he said, "On Monday, you will buy the S&P 500 stock index when it's up exactly 35 ticks, no matter what," all of the Turtles would have gone over a cliff to follow orders. One Turtle said that when a guy has made $200 million and says, "You can walk on water," people are going to say, "Okay, I can walk on water." You have just crossed that unbelievable emotional hump that we all have in our brains.
37:48 Speaker 01 Crossing the emotional hump, whether in trading or baseball, is reaching that point at which you are intellectually and emotionally challenged, and respond by saying, "I can do it." Between Dennis's reputation and the self-confidence that came from being chosen from over a thousand applicants, the Turtles crossed that hump with ease. The bottom line was that two trading superstars had selected them as students. Motivation was a given. That same kind of aura surrounded Jim Leland, manager of the 2006 pennant-winning Detroit Tigers baseball team. This was a team that only a few years prior had lost over a hundred games in one year,
38:32 Speaker 01 a horrendous record. But now they had a manager, Leland, in whom everyone believed. There wasn't a Detroit Tiger who didn't suddenly feel he could deliver in the clutch. "If I walk in there tomorrow and find my name and I'm batting cleanup, I'd expect to get a hit," pitcher Todd Jones said. And of course, pitchers are not counted on to hit. The Turtles had the same attitude. The two weeks of training consisted of Dennis and Eckhart figuratively yelling "Jump", and the Turtles responding "How high?" However, years of legend-building have made the entire process of the Turtles' training sound a great deal more elegant and sophisticated than it really was.
39:16 Speaker 01 They were put up in the Union League Club in downtown Chicago. Mike Cavallo described it as "sort of one of those old-fashioned fancy clubs, where there were elderly people dozing under their newspaper." He was not exaggerating. Tom Willis and I tried to have lunch there in 2006, but we were asked to leave because I was wearing jeans. The Union League Club remains an old-world bastion for those who made their market fortunes way back when. With dark wood paneling, worn Oriental carpets, and leather upholstered furniture, and staffed by elderly union workers moving in slow motion, it is well past its prime.
39:57 Speaker 01 Clearly not much had changed at the club since the Turtles walked in the door. That Richard Dennis should belong to such a club in nineteen eighty-three was amusing, given how anti-establishment he was. However, he was simply being practical, because the club was close to the Chicago Board of Trade and C and D Commodities Offices. The Turtles spent their two weeks of training at the Union League Club as well. They all had to wear a jacket and tie at all times, including Dennis. Only half of the more than two dozen students in the training room were Turtles, if you define Turtles as those students who would trade only Dennis's money. It was HBO's hit show Entourage for sure.
40:40 Speaker 01 Right before training began, the Turtles attended a welcoming party, since Dennis liked to throw lavish cocktail parties during the Christmas holidays. The newcomers got a glimpse of what passed for Dennis's Chicago social scene, and had the chance to meet each other. But the party did little to assuage the jitters. The first day of training had many feeling the stomach clutch of starting grade school all over again. They walked into the classroom fully unnerved. Richard Dennis, William Eckhart, and Dale DeLuttre, handled the training the same way they had managed the interview process. It turns out that the C and D Commodities Brain Trust had met each other at Saint Lawrence Catholic High School.
41:21 Speaker 01 As fate would have it, they became close friends only because they were seated in alphabetical order. On the first day of Turtle Class, you could hear a pin drop. Palpable excitement was in the air. The possibility of making money like Dennis had everyone jacked. The first hours consisted of DeLuttre discussing how things would work procedurally, and laying out housekeeping matters for people who had never traded. DeLuttre was assigned the role of Turtle Team Mom. He encouraged the Turtles to ask questions during class, but few did at the outset. To everyone's disappointment, Dennis was not there during that first class.
42:03 Speaker 01 Instead, it was Eckhart who launched into the challenge of managing risk as the first topic. Managing risk was not what new traders would assume as a logical starting point. That Eckhart would choose to begin with risk management was the first indication that the Turtles were starting an unconventional journey. Instead of introducing the course with a lecture on making money, he was laying the foundation for what the students had to do when they lost money. Another C and D colleague, Robert Moss, was brought in on several occasions to discuss order execution. He wanted the class to understand what really was going on in the pit when their orders went in.
42:45 Speaker 01 "I think Bill and Rich wanted them to have a pretty good understanding, given that some of them had never really been involved in the industry before," he said.
42:54 Speaker 01 Once the students were past the initial jitters, there was some give and take, with questions and discussion. However, the class was primarily a lecture with note-taking. The Turtles with experience quickly realized that Dennis and Eckhart knew far more than they did. My cavalo said, "A lot of the stuff that they were talking about I knew, but I had no idea they weighted some stuff at so much more importance."
43:21 Speaker 01 Contrary to popular belief, among those familiar with the Turtles experiment, Dennis's absence that first day of class was not an aberration. William Eckhart taught the Turtles a great deal of what they learned during those two weeks in the classroom. There was only one week of training in the second year. The irony is that while it was Eckhart who bet against people being able to learn how to trade, in the classroom he taught much of the meat and potatoes. It was Dennis who added the succession of trading war stories and anecdotes. To those who saw them up close, Dennis had the capacity to make an observation in an instant that would take someone else weeks of painstaking math to figure out.
44:04 Speaker 01 Even Eckhart marveled at Dennis's knack to intuitively "see it." "Look what this means. Look at the deep axiom in here. It works." That said, Eckhart was the mathematical genius. He was the master of probability. Combining their observations was the magical mixture. Mike Shannon saw the importance of their symbiotic relationship. In fact, a lot of the system developed wasn't Richard Dennis, it was indeed Bill Eckhart. They both hatched it up between them, and they're both certainly responsible for it.
44:40 Speaker 01 To many it seemed Eckhart was along for the ride, appreciating the turtle experiment from a psychological point of view, but he definitely wanted his credit for the turtles after it was over. Today, his regulatory disclosures emphasize that he "co-developed" the systems, "co-taught" to the turtles. Without Eckhart, there would have been no turtles. Mike Cavalo thought there was a more important, though subtle, aspect to their collaboration. Bill did a lot of the real mathematical work on developing the systems. I think he didn't have Rich's trading genius, which is why I think on their discussion, he thought the trading genius was the main part, whereas Rich thought the system was the main part.
45:24 Speaker 01 To this day, Eckhart has had a terrific trading career. He has arguably achieved much greater wealth over the long term than Dennis. His hedge fund is now near eight hundred million US dollars. Yet when Eckhart and Dennis first started working together, Dennis was the one who had made the fortune trading, and Eckhart was the original turtle, learning from him. It was clear to Mike Shannon that Dennis had a massive head start over Eckhart in terms of wealth and trading experience. He said, "Bill was more inclined at the time to intellectually pursue the concept of trading, more so than he was in it for serious financial gain." Over time, Eckhart realized that he had to strike a balance between the business end and the actual trading.
46:10 Speaker 01 Shannon added, "I think Bill probably is worth more, but once you get over being worth a quarter of a billion dollars..." Eckhart always good naturedly admitted that he had lost the nurture versus nature battle, in which he had taken the point of view that their systems could not be taught to kids off the street. I assumed that a trader added something that couldn't be encapsulated in a mechanical program. I was proven wrong. By and large, the turtles learned to trade exceedingly well. The answer to the question of whether trading can be taught has to be an unqualified yes. He also scoffed at the argument that the turtle's success was based on sheer luck.
46:52 Speaker 01 The probability of experiencing the kind of success that we have had, and continue to have by chance alone, has to be near zero. The systems worked for us year after year. We taught some of these systems to others, and it worked for them. Then they managed other people's money, and it worked again. He acknowledged the possibility that their achievement could have been the result of luck, but he saw the probability of that being infinitesimally small. Nor did Eckhart buy into the infinite monkey theorem, that says out of the millions of monkeys in the world, one, simply by randomly hitting the keyboard, would eventually produce the collected works of Shakespeare.
47:35 Speaker 01 To this day, many regularly push the notion that successes, such as Eckhart and the turtles, were simply the lucky survivors from the whole monkey population. Some critics have attempted to explain away the turtles as a careful selection of very smart students. Michael Cavallo, after all, could play five people at once at chess while blindfolded, and beat them fast. He exemplified the fact that brain power wasn't lacking in the C and D office. Eckhart disagreed, saying that he had not seen much correlation between good trading and intelligence.
48:11 Speaker 01 Some outstanding traders are quite intelligent, but a few aren't. Many outstandingly intelligent people are horrible traders. Average intelligence is enough. Beyond that, emotional makeup is more important. This is not rocket science. However, it's much easier to learn what you should do in trading than to do it.
48:32 Speaker 01 Eckhart was saying that, as with anything in life, most people know what the right thing to do is, but fail to do it. Trading is no different. Dennis's partner and right-hand man personally learned how hard it was to do the right thing as an early acolyte of Dennis, just like the many other young traders in Chicago during the 1970s. His galvanizing experience with Dennis was on the morning of November 1st, 1978. President Carter was trying to halt a sinking US dollar. It was a lesson in emotional fortitude, forever etched in Eckhart's memory. There was a rate hike and intervention in the currency markets, not good news for Dennis and Eckhart,
49:15 Speaker 01 who held large, long positions in gold, foreign currencies, and the grains. The markets collapsed on the open. Gold opened below the $10 announced trading limit, so they could not exit. Silver, though down sharply, was still trading. The COMEX in New York told them they could still trade it. So they started selling silver short, aiming to profit as it decreased in order to protect themselves against further losses from the gold. But they were also concerned that silver might rally. Decisions had to be made, and fast. There was a lot at stake. Dennis asked Eckhart calmly, "What should we do?" Eckhart panicked and froze at the controls.
49:58 Speaker 01 Dennis shorted silver, and seconds later it was limit down too, a big winner. Eckhart enthused, "In my book, that was Rich's best trade ever, because he did it under maximum duress. If he hadn't done it, we both would have been bankrupted by this subsequent slide in gold." One turtle gushed in awe that Dennis still had the balls to execute that trade when they were dumb, deaf, and broke. They were going the wrong way and for Dennis to just totally cover and totally reverse was amazing. He was one of the few people who could pull the trigger on big numbers and pull the trigger intelligently. There are some people that just go nuts and they melt down, especially when they're on
50:40 Speaker 01 the wrong side of the trade and it's going to send them to the poorhouse. Many people can trade small amounts day in and day out and not worry about losing money. But as the size of their trading is increased, say by 100%, their trading decisions become more significant and problematic. They begin to think about how much they're winning or losing and it becomes harder to keep a level head about trading big. Emotions rise to the surface and objectivity becomes harder and harder to maintain. Disassociating the dollars from the trading was a huge part of what was instilled in the turtles. Robert Moss saw the qualities in Dennis that allowed that silver trade to happen.
51:24 Speaker 01 There are some people who can trade one lot or two lots, or trade a five lot and handle that position and perform not thinking about the money. Moss had never seen anybody better. Tom R. Willis, the son of Tom Willis and close enough to Dennis to consider him an uncle, said that Dennis simply had a sense of proportion that was different from the rest of the world. When he perceived that he had an edge, he would go all into a position with mammoth trading size. Dennis may have been able to pull the trigger, but that disastrous first year came close to wiping him out. He lost $2 million that first day of November. It was touch and go for a while. The experience forced Dennis and Eckhart to reevaluate everything they had learned
52:09 Speaker 01 about trading. They began to test by computer every idea or piece of conventional wisdom that had ever passed their way. The successful trader is one who codifies, the one who turns things into rules. Every idea that's market-worthy must be tested. Don't discount this story by saying, "It was $2 million. This is a game for rich people, not me." That is the dead wrong view. There will always be someone with more or less money than someone else. If you have a hundred million dollars and you lose two million dollars, that is not a big deal. If you have fifty thousand dollars and you lose a thousand dollars, that is not a big deal. Both losses are two percent.
52:55 Speaker 01 That is not to say losses are easy to accept, but Dennis and Eckhart taught the turtles not to consider their trading in terms of amounts of money. They wanted them to think of money as a variable, because in that way, regardless of account size, they could make the correct trading decisions at all times. However, first and foremost, Dennis and Eckhart wanted the turtles to understand that their kind of speculation had virtually no external limits. It took place in a limitless environment. They could bet any amount on any potential market movement at any time, but if the turtles entered this no-limit environment and didn't protect their scarce capital,
53:38 Speaker 01 then sooner or later the probabilities would catch up with them. The lessons they put forward in the classroom solved the dilemma of speculation. Since the markets are a zero-sum game, the turtles learned that even a marginally profitable trader must win money from other market players. By definition, they must use different methods than everyone else in the game. What this means is that only when good trades, not necessarily profitable trades, are consistently made over the long run, the chances of profitable results increase dramatically. A bad month, a bad quarter, or even a bad year does not mean much in the grand scheme.
54:20 Speaker 01 The turtles learned that the most important thing was to have a sound trading approach tested in the real world. Dennis and Eckhart had that real world of making money figured out. Their philosophy and rules, taught in the turtle classroom, were the equivalent of a two-week seminar on how to fly a plane without ever getting in the plane.
54:50 Speaker 02 ...awake will understand how to make money in up, down, and surprise markets. Whether a new trader or experienced, college student or financial advisor, protecting against a crash or just trying to make a lot of money, trend following offers everyone an answer in uncertain times. To get started immediately, send me an email, [email protected] . I will send you the right trend following steps to take along with my free video. But if you want to buy and hold, trust the government and trust Wall Street, this is absolutely not for you.
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