The Turtle Trader Origin Story | with Richard Dennis, Jerry Parker, and Brian Proctor

imagine spending an world's greatest trainers imagine learning from their experiences their successes and their failures imagine no more welcome to top traders unplugged the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level before we begin today's conversation remember to keep two things in mind all the discussion will have about investment performance is about the past and past performance does not guarantee or even infer anything about future performance also understand that there's a significant risk of financial loss with all investment strategies and you need to request and understand the specific risks from the investment manager about their products before you make investment decisions here's your host veteran hedge fund manager niels castro Larson [Music] welcome to another edition of top traders Roundtable a podcast series on manners futures my name is Nils kostas and I'm delighted to welcome you to today's conversation with industry leaders and pioneers in managed futures which is brought to you by CME Group now today is a very special episode not just for me but for the whole managed futures industry because for the first time in a very long time we have brought together some real pioneers of systemic trading and trend following strategies who you may say changed the way the world came to learn about this investment strategy through the countless articles and books that has been published about the experiment that became known as the turtle program but where I think until today very little has been shared by the creator of this incredible success story in the world of finance so I'm very pleased and super excited to welcome Richard Denis who really don't need any introduction but for those of you who don't know rich is the creator of the turtle program and the original mentor to my other two guests here today because I'm also joined by brian plata a turtle and managing director of emc Capital Advisors and last but not least one of my own mentors when I got started in the managed futures industry many years ago namely jerry parker and other turtle founder and president of Chesapeake Capital first of all welcome and thank you ever so much for joining me today for this truly special conversation about managed futures and trend-following Before we jump into today's conversations which for obvious reasons will take us back to the 1980s I want you to share with our listeners a little bit about each of your backgrounds and leading up to the year 1984 where the turtle story really begins now since you rich had a lot more trading experience than Jerry and Brian back then why don't we start with you what twists and turns had your career exposed you to leading into 1984 that's a good question well I had been a floor trader for 14 years and had gone off floor about four or five years before the turtle program started and it's clear to me that he needed to trade more markets than one or two that you can run around in within the pit so we started to trade from the office sure and the the thing about Trent you know Trent falling clearly became sort of your style of trading rich and I'm curious to know what was your first introduction to trend-following I mean were you inspired of some of the earlier pioneers like Richard Duncan build on or Keith Campbell to name a few or or how did that get into your life well not sure it was quite legal but I was started to trade when I was about 17 and there are some books but they were by people who are long gone about trend-following and we just started to do research just by hand way back then okay okay and so you didn't come across any other people doing the same thing because this is something that I've heard from a lot of people actually that you know they were doing their own thing and they didn't really realize that other people were doing the same right I came to know the people you mentioned that well after I had started trading and really some of the people who talk about the turtle program and that I didn't even know that they were commenting on it at the time right right and and the same thing actually it's interesting because he over here in Europe h-l one of the first CTAs on our side of the Atlantic was formed actually at the same time as a turtle program began and when I interviewed one of the founders Martin Lewis he also said that he did not recall having really heard about a us-based trend-following community before they got started so very interesting now Gerry since you joined the turtle program in late 1983 in the first class of the turtles why don't you share with us what life was like for you leading into this truly life-changing experience so I was in Richmond Virginia and I was working for an accounting firm and going for my CPA certificate knowing full well that that's something I wanted to not do very long and so what it was a hobby I would read books about the stock market and watch Wall Street week and get the Mardis wide newsletters so Marty slack was sort of a trend follower type and so that was my first introduction to sort of trend and but I would maybe read a book about futures and I thought oh features that's good good leverage has got to be okay I can understand that and currencies commodities interest rates I mean more diversification being able to go short that's made perfect sense to me so I sort of thought okay I sort of see how this thing works now it's are the large profits gonna pay for the small losses and so I probably said at my desk and that this accounting firm had just started seeing health how fast you know $1,000 would compound that it will have a percent per year so I thought yeah this is gonna be a lot of fun this is really a great idea and then I actually did read an article about rich I think it was in Business Week so in late nineteen maybe August or September 83 when I saw the ad at the Wall Street Journal I thought this was just a totally legitimate situation you know it seems too good to be true but I knew that this was something I should apply for and wanted to do yeah and do you know what the article about rich actually was was talking about I mean what fascinated you about the article to remember then probably you know just the amount of money that he had made or something like that there was my speculation that but trading in general I thought was certainly a something I wanted to do I don't know why or how it got into my head I thought this was and then the technical part of it and looking at trends just you know so often now and past 25 years and talking to clients or potential clients we need to we feel like if we don't word it exactly correctly they won't allocate money to us and we have to convince them and show them and maybe we're not educating them enough I mean I I thought this was the greatest thing everyone when I first started learning about it and didn't need anyone to sort of kind of image to me yeah yeah absolutely how about you Brian I'm interested in finding out you know what your career was like and and where it was heading back then and and and how you ended up in the second class of the turtle program which started I think a year after Jerry that's right in 1982 I graduated from Miami of Ohio and thought I'd get into Investment Banking at that time but there was a recession in 1982 a pretty bad one and so there were no banks hiring and I happened to just be lucky enough to to meet a guy named maverick lip who ran an FCM and where a lot of locals the guys who traded in the pit for themselves worked and he was kind enough to show me around the Board of Trade and make an introduction to a newly formed firm C&D commodities which was the C was stood for Larry Carol's name and the D for rich Dennis so I actually started working for reg as a runner a phone clerk a back office trade checker pretty much whatever there was to do with regards to the trading operation so I got to see the first wave of turtles come through and be very successful and when when rich and Bill were thinking about a second round I had a conversation with rich and he told me it'll probably be in my best interest to forego my thoughts of making the way into the pit and trading filling paper for principles of C and D and and kind of make the next step to the next level and learn how to trade off floor so I I didn't have to go through the whole process that the first group of turtles do per say the interview process and I did too I did look at all the questions and it's fun to look back at those but I had an entree that was a little bit different sure sure no absolutely it's funny that all of you or at least I think rich and you Brian mentioned this thing about trading off the floor was that the way you thought about it back then rather than trend following I mean did the term trend following was that even part of your vocabulary back then or was it just the fact that here's a method to trade without being in the pit well I certainly heard about it obviously from reg and so the partners at C and D who were who had all started I believe on the floors and moved off floor to trade a diversified set of markets and and see and take a and take the opportunities to trade in markets that were moving and trending sometimes the grain markets would be rather dull and quiet and there be other markets in New York that were more volatile and provided more opportunities so when I first started it was obviously just getting to know the the mechanisms of the floor and then obviously finding out there were other ways to be successful in the business sure no absolutely and I guess of course that you know your story Brian also when talking about that we shouldn't forget about the founder of EMC namely Elisha Val I think the only female turtle as far as I recall but who of course had they passed away only a few years ago how did you end up working with her meaning were you close with her even back then during the program itself well I think all of us got to know each other pretty well during the program and still some pretty good friendships there as far as keeping in touch with with some of the Turtles I do and I did Liz was one of them and I had just come back from trading for a hedge fund in New York and was temporarily working at Morgan Stanley where they had a managed futures fund offering with multiple CTAs of which liz was part of it and i just reached out to her to talk about that particular group of CTAs that morgan stanley had put together and tell her that i was looking around for another opportunity and a few months later she called and said how would you like to work here so sure that's all that ever now today we'll cover a number of different topics around the turtle story and what the whole debate about nurture versus nature means in the world of trading today but I'm also hopeful that we will be able to put some of the myths to rest about the turtle experience before we all forget what really took place back then so I want to come to you again rich for my next question now the has over the last three decades been so much talk about how this trading experiment was named what the inspiration for the turtle name really was some people say it was related to you seeing a turtle farm in Singapore I think I heard and another story I heard was it was related to a rock band called the turtles that were formed back then why don't you put us all out of suspense and share with us the true story about how the name came about I'm gonna stick with the first story about the turtles in Singapore okay that's how they got the name it was a kind of a misnomer but it's sort of stuck I mean if I had a dollar for every plastic turtle the people who have given me I'd be indeed rich but but also talking about the name itself and and and I and I wonder whether you know seeing the turtles in in Singapore or something that happened you know years before you you actually did the program but I also wanted to talk about the inspiration for the idea behind creating the turtle program because again we hear so many stories relating to one in particular that seems to be very popular is that you and your back then bill a cot having seen the movie trading places with Dan Aykroyd and Eddie Murphy where there was a bit made about whether or not you could train anyone to be successful in trading heavens no on that one oh good excellent except well can you share with us how the the whole idea behind the trader turtle program came about sure so one lazy Sunday afternoon I was hanging out with Johnny Walker Black and I started to think about my own trading and realized that a lot of it was just sort of rules that you know were informal and that I noticed that other traders operated according to rules also and some of those rules were very bad like a lot of traders at that time their one rule was always buy soybeans but having thought about my trading and the rules it seemed to me that at that time I just to put a number on I thought the two two thirds of trading was following rules and maybe one third was the intuition the dreaded flair that we talked about during the course and that so as the ice cubes melted I started to make some notes about what I thought was true but what you could do to prove it and because because it could turn out to be one of these endless debates that never come to any conclusion and it seemed to me that we could resolve the question by trying to train people and giving them rules and talking to them about intuition and things like that and that was the genesis and nobody told me it was a great idea but nobody wanted to tell me it was stupid either so we did it sure sure how long before the actual program started was this was this something that you reacted on very quickly I said yeah this is great ID let me let me do it or did it have to sink in for a while so to speak before you created the program it was only a couple of months before we put the things in motion like advertisements in newspapers that led to starting about in January of 84 so not such a long period of time after I thought of it fantastic I think I think that's a great story and thankful finally putting the record straight on on this point now Jerry I want to bring you back at this point because you were obviously one of the first people who saw the famous ad that Richard mentioned in The Wall Street Journal now the process wasn't just about apply here and you're in tell us about the process you had to go through in order to get selected you know one of the funny things about recollecting all of this is everyone has a different recollection and so that's the disclaimer I feel like I should make but so you get the test we've seen your resume and get the test back and a hundred true/false and some discussion questions that you have to answer in one sentence well Jerry don't be modest I think you got all the questions right which was you were the only person that did I suspect it was an open book test on your part but yeah I carried this test around with me to all the audits you know for weeks and would work on it and show it to my friends and say what do you think and it's a false ID say nah think that's true so I held on to it as long as I could I sent it back in and then I got a phone call and I was always looking at the Wall Street Journal and reply to ads invest here and get a free book on how to tread follow or something like that so I got this phone call I just thought it was there's somebody else and so I sort of ignored the phone call that I got another phone call from Chicago and I was like oh maybe crap that could be a phone call I should take so I finally took the call and went for the interview with Chicago and my head was just full of these facts all that cramming for an exam which was totally ridiculous isn't necessary so got up there and had no for the interview and yeah I thought I did pretty well and I thought I'd done well the test and I thought I had showed some passion and desire so it was a great situation yeah no absolutely now Brian you joined a year after Jerry and tell me that did you and your fellow turtles so to speak have to go through exactly the same process as Jerry did or had it changed from class 1 to class 2 I think it was pretty much the same rich could verify that but I mentioned I was already working for C & D and for rich for a couple of years prior to that so when the next second batch of turtles came along I just had a conversation with reg and Heath he suggested that it was a better career path for me not to go down to the floor but to be part of this and so I took the same questions obviously I pretty much knew a lot of the answers before that because I had been working there and understand began to understand what the partners at C and D how they thought about trading so for me it wasn't the big formal process that I think most of my peers had to go through know that makes sense now returning to you rich clearly the application process was intended to give you a variety of applicants I think there's a very different backgrounds from from my recollection share with us what you were looking for in this diverse group of people and were there any particular skillset that they all had to have for for you to select them well there was no sort of killer aspect to it that one per thing he needed to know or not know we had you know informally I guess in our heads a few different things we preferred people who hadn't actually been on the floor and traded because that was kind of a detriment it wasn't what they know is what they knew for sure that just wasn't right right so that was one thing another thing is we look for people with statistical aptitude we wound up with a lot of blackjack player professional blackjack players okay who are if nothing else new odds and we thought that was good we did ask some questions to get to learn something about generalized intelligence but I do have to say I'm not sure that we did a great job of selecting people and we selected people and had various sort of expectations how well they would do almost all of which were not true which fits into another part of the story really the more I think about it the more I think the turtle thing worked and I think in general to trade at all and have it workers you have to be rule-oriented so we took people who you would have said this person has no chance and this person should be good and we couldn't pinpoint it at all interesting very interesting now speaking about that and maybe we come back to you Jerry you got as far as I understand you know very little training so to speak tell us a little bit about that but also you know tell me whether when you were taught these rules initially I mean whether this made sense to you the first time you heard it so to speak or or did it did it take a while but you know before it sort of makes perfect sense well we got great training sufficient what more than more than enough so our training could not have been better and on top of that we got a lot of time with rich and Phil and support crazy support from but you don't get in the real world so what was the second point of your question no I'm just gonna say sorry so you had this training which is it fair to say it lasts at two three weeks is that from right that's a two or three weeks oh I know it takes some time we had something where we could go up and have lunch with rich and trade with rich and I know some of those were very beneficial because I was able to ask to start understanding more of the philosophy of this going on the trades and how to think about the trades in the markets systems so that was our trader for a day with rich was very important I think and I've said on other podcast that you know it's so important this sort of support we had and maybe an environment that we never have again where if you're doing the right thing you're gonna that's gonna be the bottom line on your performance or your the evaluation of your performance versus please make me some money I don't really care how you do it in fact these rules seem a little stifling you don't really shouldn't probably should loot use more flair it's awful instance which is a typical client but you know I've said before it's a bad analogy but it's kind of like saying if you print the rules any people can follow that more I don't know some good rules but you know you won't be a marine by reading a manual I think that we became much better traders because of our just time spent with rich you know and the way they ran the program was perform far beyond just a set of rules say this about the rules in my old age I've come to believe that mediocre rules are better than good traders judgment and that's because one thing in this business you need is persistence and it's almost impossible to be as persistent using judgment obviously if you follow a system and do everything your being a hundred percent persistent so it's a little it's a part of rural orientation that's underappreciated rich once you have your group of turtles and they've been through their training and I you know I'm assuming that the second group got the same training more or less did you allocate the same amount of money to all of them or did you base your allocation on how well they did or how well they applied the rules that you just taught them what did you reward so to speak well I believe they all started with amount of money but as things went on and we saw their performance talk to them then there was a lot of asymmetry in the allocations okay okay on a slightly sort of separate point but but I'm just curious when did the media first get wind off of the turtles story and and and was it you rich who let them know I mean I've seen an article in the world Wall Street Journal from September 1989 which obviously is after the program ended but I'm not sure if this is the first time the media started reporting on the turtle program do any of you recall well I don't remember ever talking about a while we were doing it and that's one of the things that I've continued to do I've to talk about it but I don't want to sort of talk about exactly what it was that we were doing or anything like that I I could have lived with anonymity that's worth for the whole thing ya know okay now if we just go back to the subject about what was taught back in 1984 I just want to ask all of you if you feel that now some 30 years later that this is grossly out of touch with the reality of how trading should be done because things do change all at the same time in life and in markets a lot of things stay the same feel free to go first any of any of you want on this one well good luck with that one whether the markets have changed a lot I mean what works changing is a bit of a problem but what's more of a problem is a lack of volatility and volatility seems to me sort of as trailed off over the years intermittently and you know I'd rather have the volatility back I'd worry about that I mean that's a variable you can't control but I think it's more important than adjusting the system although adjusting the system is important too sure sure sure I mean maybe I should ask that to Brian and and you Gerry so I flying sort of the the rolled turtle rules in the year 2017 that would still work well I would say the basic philosophy hasn't changed you're you're continuing to do research finding robust systems and that means systems with the least amount of parameters to tell you how to initiate liquidate or stay out of a trade so you know we're always looking to can't build systems that are based on momentum or based on range dependent discrete time frames where you're confirming that a trend is in place so you're always looking to capture directional price movement and obviously managing risk is paramount so you manage risk from the trade size you limited in the markets and sectors that you trade we have a risk management concept that overlays the portfolio that's based on marginal utility so so we're actually harvesting profits along the way which is very different than what we did learn the the original turtle trading programs but we're still doing the same things just a little bit differently than we used to sure sure sure now some people will claim that one of the secrets to success in trend-following is diversification among markets that you put in your portfolio so I'm interested in learning what you know from you where you think that is true and that you essentially should trade as many markets as you possibly can or if there are certain markets such as I guess maybe the VIX index just doesn't lend itself well to to trend-following what about you Jerry what do you think on this one well I've definitely traded as many markets as possible and I think it's probably and of course there are a handful of markets like the VIX that I wouldn't trade like like its I guess if I pretty much our strategy is benefits liquid we'll trade it so now I do think that's setting up the portfolio the risk budget amongst the sectors and the markets so when you start adding more and more bond markets that are 90 percent correlated you can trade them it's no downside probably but you want not to pay attention to your sector your bond sector allocation for instance so I definitely and then of course I had been very outspoken on trading single stocks they're not trading the indices so I think draw downs are smaller the diversification is better and CTAs in general would never trade the dollar index and no currencies or commodity index fewer commodities so never made much sense to me not to have pretty nice allocation to equities long and short it's three of two or three from each sector build a nice diversified portfolio maybe some non-us adrs etc so and sometimes you know we allocate 25 percent of our risk budget to equities and we made a 25 when they twenty percent in 13 and over 100% of that came from stocks so sometimes stocks are the only game in town and me to it it always baffled me especially over the past eight years when trend followers would badmouth the stock market because I guess the crisis alpha stuff that people talk about but to me it was just another trend that's what was moving we need to be there yeah yeah no absolutely maybe rich I wanted to hear your opinion about this and and maybe your opinion has changed since back then to to the way you look at it now I don't know but in your opinion in in a trend following following portfolio what's the right balance between financial futures markets and commodity futures markets and and and I'm assuming you don't have to worry about you know size liquidity concerns as some you know very large CTAs have to do to do due today so if you could choose your optimal portfolio of markets well what would the balance be between these two well in fact the liquidity so dominates the choice of trading that the balance just winds up being created by picking the liquid markets so I mean when you get down to it you're probably trading 15 or 20 commodities in 15 or 20 financials and that's kind of at least to meet an accident of where the liquidity is I mean if somehow the liquidity shifted I wouldn't bother me to be unbalanced I mean the correlation in trades I mean it's not I mean a wheat and corn are maybe gonna do the same thing but you don't get all that much correlation so they have shifted from 20 commodities to 15 and one up to 25 financials I wouldn't worry too much about that sure sure sure now it seems to me that it's been difficult to get support from many types of investors and other types of investment professionals not to mention the financial press that the type of diversification and trading philosophy the trend-following offers such as providing access to very different and uncorrelated markets being able to go long and short taking small losses and letting the winners run etc etc that this approach is superior to just buying an index of stocks and keep it until retirement so to speak why do you think that with all the evidence that we can show today that only a minority still of investors have embraced trend-following and made it a core part of their portfolio and I can open that up to everyone I'd love to hear all of your opinion do you want to go first Brian on this one sure I would say that the return stream in general for trend-following is much more difficult for institutional investors to stomach some of them have internal rules about how much volatility an investment can have what kind of drawdown a certain investment can have and and for the most part CTAs different you know trend-following CTAs surpass those thresholds so I think that's part of it I think another part is they consider us to be for a lack of a better word a black box which means they don't understand how we do what we do to which I tell them we can show you and predict in which environments our trading style will perform well in which environments have won't and we can show you how we think about the markets and use statistics and probabilities in our favour to me the real black box is the discretionary trader who you don't know what's going through his mind in any given market environment or on any given day that's the real black box but I don't know it's it's always been a mystery to us why more money hasn't flowed into the managed future space what about you rich have you given this a lot of thought don't you have any thoughts about it well I would just say a couple of short things I think that the performance of hedge funds relative to CTAs if you go back 10 years was better and that hedge funds hog doll the allocations now of course they've fallen on some fairly hard times yes so maybe that's over with but that detracts from allocation and also obviously a stock market that goes in more than triples in eight years draws people's attention so those are fairly big things and if even if hedge funds go south or stock start start not to go up you would think that what you're talking about would be reversed but it hasn't happened so far that's true what about you Gerry I know you're not smoking about this full I think it's a fees and expenses historical fees and expenses volatility absolutely much but now I think it and the stock market of course but now I mean I read a lot of articles so I'm a heavy user of Google Alerts so I mean I read something this week that said only inflows and hedge funds will with CTAs last year so now I think it's another question of how large is your firm just refer make me comfortable you how many PhDs do you have it's less about the markets and performance it's more about the there are lots of assets come into CTAs but only four or five thanks for listening to top traders unplugged 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Channel: Top Traders Unplugged

Views: 17,116

Rating: 4.9101124 out of 5

Keywords: investing, hedgefund, trading, trend following, top traders unplugged, niels kaastrup larsen, risk management, turtle traders, turtle trading, trading strategy, jerry parker, richard dennis, brian proctor, futures trading, top trading, turtle trading strategy, investing 2018, future of investing, better trading, investing money, turtle trader system, top investors of all time, successful traders secrets, investment advice 2018, jerry parker trader, stock trading 101

Id: 94nUnXsYpLY

Length: 38min 19sec (2299 seconds)

Published: Mon Jul 23 2018