Would you like to inspect the original subtitles? These are the user uploaded subtitles that are being translated: Preface �Trading was more teachable than I ever imagined. Even though I was the only one who thought it was teachable . . . it was teachable beyond my wildest imagination.� Richard Dennis This is the story of how a group of ragtag students, many with no Wall Street experience, were trained to be millionaire traders. Think of Donald Trump�s show The Apprentice, played out in the real world with real money and real hiring and firing. However, these apprentices were thrown into the fire and challenged to make money almost immediately, with millions at stake. They weren�t trying to sell ice cream on the streets of New York City. They were trading stocks, bonds, currencies, oil, and dozens of other markets to make millions. This story blows the roof off the conventional Wall Street success image so carefully crafted in popular culture: prestige, connections, and no place at the table for the little guy to beat the market (and beating the market is no small task). Legendary investor Benjamin Graham always said that analysts and fund managers as a whole could not beat the market because in a significant sense they were the market. On top of that, the academic community has argued for decades about effi cient markets, once again implying there is no way to beat market averages. Yet making big money, beating the market, is doable if you don�t follow the herd, if you think outside the box. People do have a chance to win in the market game, but he or she needs the right rules and attitude to play by. And those right rules and attitude collide head-on with basic human nature. This real- life apprentice story would still be buried had I not randomly picked up the July 1994 issue of Financial World magazine, viii Preface featuring the article �Wall Street�s Top Players.� On the cover was famed money manager George Soros playing chess. Soros had made $1.1 billion for the year. The article listed the top one hundred paid players on Wall Street for 1993, where they lived, how much they made, and in general how they made it. Soros was first. Julian Robertson was second, at $500 million. Bruce Kovner was fifth, at $200 million. Henry Kravis of KKR was eleventh at $56 million. Famed traders Louis Bacon and Monroe Trout were on the list, too. The rankings (and earnings) provided a crystal- clear landscape of who was making �Master of the Universe� money. Here were, without a doubt, the top players in the �game.� Unexpectedly, one of them just happened to be living and working outside Richmond, Virginia, two hours from my home. Twenty- fifth on the list was R. Jerry Parker, Jr., of Chesapeake Capital�and he had just made $35 million. Parker was not yet forty years old. His brief biography described him as a former pupil of Richard Dennis (who?) and noted that he was trained to be a �Turtle� (what?). Parker was described as a then twenty- five- year- old accountant who had attended Dennis�s school in 1983 to learn his �trend- tracking system.� The article also said he was a disciple of Martin Zweig (who?), who just happened to be thirty- third on the highest- paid list that year. At that moment the name �Dennis� was neither more nor less important than �Zweig,� but the implication was that these two men had made Parker extremely rich. I studied that list intently, and Parker appeared to be the only one in the top hundred advertised as having been �trained.� For someone like myself, looking for ways to try and earn that kind of money, his biography was immediate inspiration, even if there were no real specifi cs. Here was a man who bragged that he was a product of the �Virginia boondocks,� loved country music, and preferred to keep as far away from Wall Street as possible. This was no typical moneymaking story� that much I knew. The common wisdom that the only way you could find success was by working in eighty- story steel- and- glass towers in New York, London, Hong Kong, or Dubai was clearly dead wrong. Jerry Parker�s offi ce was absolutely in middle of nowhere, thirty miles outside Richmond in Manakin- Sabot, Virginia. Soon after reading the magazine, I drove Preface ix down to see his office, noting its lack of pretense, and sat in the parking lot thinking, �You have got to be kidding me. This is where he makes all that money?� Malcolm Gladwell famously said, �There can be as much value in the blink of an eye as in months of rational analysis.� Seeing Parker�s country office was an electrical impulse for me, permanently dispelling the importance of location. But I knew nothing else at the time about Jerry Parker other than what was in that 1994 issue of Financial World. Were there more of these students? How did they become students? What were they taught? And who was this man Dennis who had taught Parker and others? Richard Dennis was an iconoclast, a wildcatting Chicago trader not affiliated with a major investment bank or Fortune 500 firm. As the �locals� were fond of saying on Chicago trading floors, Dennis �bet his left nut.� In 1983, by the time he was thirty- seven, he�d made hundreds of millions of dollars out of an initial grubstake of a few hundred. Dennis had done it on his own terms in less than fifteen years, with no formal training or guidance from anyone. He took calculated risks leveraging up huge amounts of money. If he liked a trade, he took all of it he could get. He lived the markets as a �betting� business. Dennis figured out how to profit in the real world from an understanding of behavioral finance decades before Nobel prizes were handed out to professors preaching theory. His competitors could never get a handle on his consistent ability to exploit irrational market behavior throughout all types of markets. His understanding of probabilities and payoffs was freakish. Dennis simply marched to a different drum. He eschewed publicity about his net worth even though the press speculated about it extensively. �I find that kind of gauche,� said Dennis.1 Perhaps he was reticent to focus on his wealth because what he really wanted to prove was that his earning skills were nothing special. He felt anyone could learn how to trade if taught properly. His partner, William Eckhardt, disagreed, and their debate resulted in an experiment with a group of would- be apprentice traders recruited during 1983 and 1984 for two trading �classes.� That �Turtle� name? It was simply the nickname Dennis used for his students. He had been on a trip to Singapore and visited a turtle- breeding farm. A huge vat of x Preface squirming turtles inspired him to say, �We are going to grow traders just like they grow turtles in Singapore.� After Dennis and Eckhardt taught novices like Jerry Parker how to make millions and the �school� closed, the experiment morphed into word- of- mouth legend over the years supported by few hard facts. The National Enquirer version of the story was captured in 1989 by a Wall Street Journal headline, �Can the skills of successful trading be learned? Or are they innate, some sort of sixth sense a lucky few are born with?� Since the 1980s are long past, many might wonder if the Turtles� story still has relevance. It has more relevance than ever. The philosophy and rules Dennis taught his students, for example, are similar to the trading strategy employed by numerous billion- dollar- plus hedge funds. True, the typical stock- tip chaser glued daily to CNBC has not heard this story, but the players on Wall Street, the ones who make the real money, know. The inside story has not been told to a wider audience until now because Richard Dennis is not a household name today, and because so much has happened on Wall Street since 1983. After the experiment ended, the characters, both teachers and Turtles, went their separate ways and an important human experiment fell through the cracks, even though what took place is as significant today as then. The effort to get the real story out there started to gain momentum in 2004, when I was invited to visit Legg Mason�s headquarters in Baltimore following the release of my fi rst book, Trend Following. After lunch, I found myself in a classroom on the top floor with Bill Miller, the fund manager of the $18 billion Legg Mason Value Trust fund (LMVTX). Beating the Standard & Poor�s 500-stock index for fi fteen years straight put him in a similar league as Warren Buffett. Miller, like Dennis, had taken extraordinary calculated risks and more often than not been proven right.2 On this day he was lecturing a roomful of eager trainees. Out of the blue, Miller invited me to the lectern to address his class. The first questions, however, came straight from Miller and Michael Mauboussin (Legg Mason�s chief investment strategist). They were, �Tell us about Richard Dennis and the Turtles.� At that moment, I realized that if these two Wall Street pros wanted to know more about Preface xi Dennis, his experiment, and the Turtles, it was clear a much larger audience would want to hear the story. However, as someone not there in 1983, I knew the task of telling a complete story from an objective vantage, with so many competing characters and competing agendas, was going to be a serious challenge. Getting those who lived the experience to talk, coupled with sleuth-like research to corroborate everything, was the only way to make this story really come alive. That said, behind the scenes the soap opera of those Turtles who worked hard to prevent this book�s publication is a saga in itself. Still, the biggest problem with a story like this is that most people don�t want to actually understand how the real pros make big money. They want the road to riches to be effortless. Look at the collective public fascination with Jim Cramer�a man who is the polar opposite of Richard Dennis and Jerry Parker. Cramer is no doubt intelligent, but tuning into his extremely popular Mad Money TV show is like watching a traffic accident. There is a live studio audience that hoots and hollers at Cramer�s fundamentally driven buy signals and wild prop-smashing antics. In one word: bullshit. That said, a lot of people, many highly educated, believe that Cramer�s way is the way to get rich. Instead of employing a statistical thinking toward market decisions, the general public keeps investing based on impulsive �feelings,� letting an assortment of emotional biases rule their lives. In the end, to their detriment, people are always risk- adverse toward gains, but risk- seeking toward losses. They are stuck. The average newbie investor�s method for success is not pretty. He gets in because his friends are doing it. Then the news media start up the stories of little guys doing well during a bull market. They all start to �invest� by picking stocks with �low� prices. As the market roars in their favor, thoughts of crashes never enter their mind (�With all the money in there, it could never go down!�). They never see their own slaughter coming, even though their market bubble is never different from past ones. The media tell us that average investors now supposedly understand the concept of risk, yet worrying about possibilities while ignoring probabilities is at epidemic levels.3 People gamble away fortunes on xii Preface money- losing hunches or double down when logic says to fold. At the end of a lifetime they are never any closer to learning how to do it right. But outside of the herd there are the special few, who have the uncanny knack for knowing when to buy and sell, combined with an uncanny knack to properly assess risk.4 Richard Dennis mastered that uncanny knack by his early twenties. Unlike the general public wedded to their �feelings� to make decisions Dennis used mathematical tools to calculate risk and used it to his advantage. What he learned and what he taught students never resembled Jim Cramer barking stock tips. More important, Dennis proved that his ability to make money in the markets was not luck. His students, mostly novices, made millions for him and themselves. What was the real story, and how did the Turtles learn their craft? What trading rules were they taught, and how can an average trader or investor use those insights today in his portfolio? What happened to them after the experiment, in the ensuing years? Finding the answers to those questions, with and without Dennis and his students� cooperation, has kept me passionately curious since 1994. I am not alone in that curiosity. As author Steve Gabriel wrote on Yahoo! Finance recently, �The experiment has already been done that shows that we can all learn to trade for a living if we want to. That is why the �Turtles� matter.� The Turtles are an answer to the age- old question of nature versus nurture, the living proof of the single most famous Wall Street school for making money. Acknowledgments �Do not speak to me of rules. This is war! This is not a game of cricket!� Colonel Saito, from the movie The Bridge on the River Kwai Justin Vandergrift assisted in bringing the Turtle trading rules to life, and also developed many of the accompanying charts. Celia Straus served as editor extraordinaire for the life of the project. Justin and Celia�s value as sounding boards can�t be stated strongly enough. A special thanks goes out to Shaun Jordan for finding me �access� and to Art Collins for all of his invaluable insights. Sara Sia, Tricia Lucero, and Maria Scinto provided help along the way. The following people also made significant contributions that allowed this book to come to life: Mark Abraham, Salem Abraham, Jody Arlington, Christian Baha, Randy Bolen, Peter Borish, Ken Boyle, Sarah Brown, William Brubaker, Lindsay Campbell, Michael Carr, Michael Cavallo, Eva Cheung, Rebecca Clear, Jerome Covel, Johanna Covel, Jonathan Craven, Gary DeMoss, Sam DeNardo, Jim DiMaria, Adam Elend, Elizabeth Ellen, Charles Faulkner, Ethan Friedman, Michael Gibbons, Jeffrey Gordon, Roman Gregorig, Christian Halper, Martin Hare, Esmond Harmsworth, Larry Hite, Grace Hung, Wither Hurley, Ken Jakubzak, Ajay Jani, Erle Keefer, Peter Kline, Jeffrey Kopiwoda, Eric Laing, Charles Le Beau, Eleanor Lee, Jeff Marks, Howard Lindzon, Michael Martin, Michael Mauboussin, Bill Miller, Brian Mixon, Archie Moore, Robert Moss, Jerry Mullins, Robert Pardo, Jerry Parker, T. Boone Pickens, Paul Rabar, Barry Ritholtz, Chris Roberts, James O. Rohrbach, Tom Rollinger, Jay Rosser, Bradley Rotter, Mike Rundle, George Rush, Jack Schwager, Paul Scrivens, Ed Seykota, Tom Shanks, xiv Acknowledgments Michael Shannon, Mark Shore, Barry Sims, Aaron Smith, Peter Sparber, Bob Spear, Celia Straus, Randall Sullivan, Gisete Tay, Irve Towers, John Valentine, David Wachtel, Sol Waksman, Robert Webb, Herschel Weingrod, Joel Westbrook, Paul Wigdor, Thomas C. Willis, and Thomas R. Willis. Throughout TurtleTrader I have sourced material extensively. Material not sourced (i.e. assorted Turtle quotations and comments) was direct from interviews conducted specifically for this book. 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� doctor, 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 1-2-3, 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 fi rm, 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. 2 TheCompleteTurtleTrader 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 chainreaction flow of Craig�s List ads that attract in thousands of r�sum�s 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, unbe3 Nurture versus Nature lievably, 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 profi ts. 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 defi nitely 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, 4 TheCompleteTurtleTrader 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 nature5 Nurture versus 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- 6 TheCompleteTurtleTrader 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 fi nal 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 signifi cantly 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 7 Nurture versus Nature 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 peers of Dennis (not trained by him), men of similar macro trading backgrounds such as Bruce Kovner, Louis Bacon, and Paul Tudor Jones, are to this day regularly the highest paid on Wall Street. Of course, the $3 billion traded by Dennis�s trading progeny doesn�t seem that large when headlines today scream out with stories of new hedge funds launched with billions out of the gate. When Jon Wood, formerly of UBS, started his new fund with more than $5 billion and 8 TheCompleteTurtleTrader when Jack R. Meyer, the former investment manager of Harvard Uni-versity�s assets, raised more than $6 billion for Convexity Capital, the $3 billion from Dennis�s associates sounds less impressive.8 In fact, some argue that Dennis�s �lack of pedigree� approach has been passed by. One recent story profiled a twenty- seven- year- old trader from Goldman Sachs. A �well- bred� product of Massachusetts�s tony Deerfield Academy and Duke University, he was described as having all of the ingredients of a grade- A trader. One of his peers gushed. �He�s smart, competitive, and a hard worker. Keep your eye on this kid.�9 That praise has to be put into perspective. If a trader starts a career with a prominent investment bank, he becomes valuable by using Goldman Sachs�s money, offi ces, and connections. The access he has sitting in the catbird seat at a top bank is a major secret of his success. Investment banks were simply never the career paths of the great entrepreneurial traders. That is why Dennis brings hope. Independent-minded rebel traders, like him, never got to where they were by moving up bureaucratic ladders. They did not bide their time for twenty years engaging in office politics. Dennis and his peers were never part of a Fortune 500 hierarchy. They had one objective: to make absolute-return money trading the markets on their terms. It was high risk and high reward. Dennis�s Turtle experiment proved, all things being equal, that his students could learn to trade to make millions. However, all things being equal, after they learned the �right� trading rules to make those millions, if they did not exhibit, like Boston Red Sox slugger David Ortiz does in baseball, a �walk- off home run� mentality every day, they would fail. Great training alone was not enough to win for the long run. In the end, a persistent drive for winning combined with a healthy dose of courage would be mandatory for Dennis�s students� long- term survival. Before getting into what really happened with the Turtles, who the winners and losers were and why, it�s crucial to get acquainted with what made Dennis tick in the first place. Knowing how a regular guy from the South Side of Chicago made $1 million by the age of twentyfive in the early 1970s and $200 million by the age of thirty- seven in the early 1980s is the first step toward understanding why nurture won out. 2 Prince of the Pit �Great investors conceptualize problems differently than other investors. These investors don�t succeed by accessing better information; they succeed by using the information differently than others.� Michael J. Mauboussin, chief investment strategist of Legg Mason Capital Management Nineteen eighty- six was a huge year for Richard Dennis. He made $80 million (about $147 million in 2007 dollars). That kind of moneymaking put him squarely at the center of Wall Street alongside George Soros, who was making $100 million, and then junk bond king Michael Milken of Drexel Burnham Lambert, who was pulling in $80 million.1 Profits like those for Dennis came with heartburn. He was down $10 million in a single day that year before bouncing back, a roller- coaster ride that would have made mere mortals lose serious sleep. Yet Dennis cockily said that he slept like a baby during all that volatility.2 His moneymaking style was about mammoth home runs and many smaller strikeouts. If there was a �secret,� he knew that you had to be able to accept losses both psychologically and physiologically. Still, 1986 was a long time ago, and memories dull when an old pro starts talking about the benefits of taking �losses.� During his heyday in the 1970s, 1980s, and mid- 1990s, Dennis was described in a number of ways by those who knew of him. There was Dennis the legendary fl oor trader, Dennis the trading system�s trading guru, Dennis who started funds with investment bank Drexel Burn-ham, Dennis the philanthropist, Dennis the political activist, and Dennis the industry- leading money manager.3 He was a difficult man to stereotype, and he liked it that way. 10 TheCompleteTurtleTrader �Dennis the gambler� was the only label that offended him, because he never considered himself a gambler in the Las Vegas sense. He understood financial Darwinism (read: �odds�) through and through. He always played the �game� knowing that everyone else was out to beat him. Financial futures pioneer Richard Sandor put Dennis in perspective: �The name of the game is survival when the markets are this chaotic. From that perspective, he may go down as one of the most successful speculators in the 20th century.�4 Dennis�s success started long before he launched the Turtle experiment. He grew up in Chicago during the 1950s, a street kid from the old South Side neighborhoods. There was no privileged childhood with wealthy parents and well- placed friends. He did not have a silver spoon or the right connections. The teenage Dennis was introverted and wore thick glasses and polyester pants. His first stab at trading, while attending the all- boys� St. Laurence Prep School in Chicago, was to buy ten shares of a $3 �phonograph� stock. The company folded. While his fi rst attempt at trading failed, he was a natural at poker, intuitively understanding the odds. His teachers did not forget him. James Sherman, who taught theology and European history to Dennis, said that he never would take anything at face value. Dennis and his friends enjoyed the mental gymnastics of taking sides in an argument. Sherman added, �If somebody had said back then that Richard Dennis would become a very wealthy man as a commodity trader, I probably wouldn�t have believed them.� His former teacher would have predicted Dennis to be in front of the fire, with a sweater and a pipe, expounding on the cosmos.5 At seventeen, Dennis landed a summer job as a runner ($1.60 an hour) at the Chicago Mercantile Exchange. Each day the exchange floor was mobbed by hundreds of traders fighting and screaming to place their trades. They were exactly like auctioneers buying and selling their wares except that they were in a trading pit battling it out. An indoor game of tackle football would be a good description of the scene. Dennis longed to be there, but to trade on the floor you had to be twenty- one. He found a way over that hurdle by talking his father into 11 Prince of the Pit trading for him. A blue- collar worker for Chicago�s city government, the father became a proxy guided by his son�s hand signals from the sidelines. Despite some trading success in his teens, Dennis headed off to college at DePaul University, where his passion for philosophy (after flunking out of an accounting class) from high school days was rekindled. He was most taken with British philosophers David Hume and John Locke, who had a relatively simple way of viewing the world. �Prove it to me� was their basic perspective. Hume thought the mind a blank slate (tabula rasa) on which experience could be written. He believed that since human beings live and function in the world, they should try to observe how they do so. Discovering the causes of human belief was his key principle.6 Locke, on the other hand, argued that there were no innate ideas. He asked the question, �How is the mind furnished?� He wanted to know where reason and knowledge came from. His answer was one word: �experience.� Both Hume and Locke belonged to the school of thought known as Empiricism. Empiricism is rooted in the notion that knowledge is derived from experiment, observation, and experience. Little nuggets of simple common sense from these two eighteenth- century British philosophers connected with an impressionable college student. They became his idols. Dennis was not shy about his leanings, asserting, �I�m an empiricist, through and through. David Hume and Bertrand Russell. I�m solidly in the English tradition.� Dennis saw Hume as ruthlessly skeptical. Hume took on the sacred cows of his generation, and Dennis loved that attitude.7 It wasn�t only British philosophy that turned Dennis into a skeptic. Growing up in the late 1960s and early 1970s gave him an antiestablishment view of the world. He witnessed protesters being beaten by the Chicago police during the 1968 riots, right next to the venerable Chicago Board of Trade. It was a turning point in his life: Trading has taught me not to take the conventional wisdom for granted. What money I made in trading is testimony to the fact that the majority is wrong a lot of the time. The vast majority 12 TheCompleteTurtleTrader is wrong even more of the time. I�ve learned that markets, which are often just mad crowds, are often irrational; when emotionally overwrought, they�re almost always wrong.8 After graduating from DePaul University he received a fellowship to Tulane University graduate school, but promptly dropped out and returned to Chicago within days to start trading full time. Dennis bought a seat on the MidAmerican Commodity Exchange with money borrowed from his parents (part of it from a life insurance policy in his name). He still needed cash to trade, however. His initial war chest of $100 came from his brother Tom�s earnings delivering pizzas. This was not a family of market operators. Dennis was always honest about his father�s �hatred� of the market, explaining, �My grandfather had lost all his money in the stock market in the Depression. The urge to speculate kind of skipped a generation.� He knew his father�s perspective would never work for him: You can�t have a standard attitude about money and do well in this business. What do I mean by that? Well, my father, for instance, worked for the city of Chicago for 30 years, and he once had a job shoveling coal. So, just imagine coming from his frame of reference, and thinking about losing $50 in a few seconds trading commodities. To him, that means another eight hours shoveling coal. That�s a standard attitude about money.9 It didn�t take long for his father to recognize Dennis�s unique abilities to make money. By the beginning of 1973, at twenty- four, Dennis had made $100,000. Around that time he cockily preached to the Chicago papers, �I just wanted to be able to get up and say, �I once made $100,000 a year, and I still think you are an ass.� That rhetoric may not be wholesome motivation, but I do think it�s part of what drives me.�10 He was making so much money fast that whatever the context or content of an interview, it was outdated in weeks or even days. A rebel at heart, Dennis cultivated being a character from the outset. He was fond of saying that he never liked the idea of sharing a birthday 13 Prince of the Pit with Richard Nixon�a gentle stab at all those conservative traders surrounding him in the pits on LaSalle Street. He was an anti- establishment guy making a fortune leveraging the establishment, while wearing jeans. Society was splintered during the time Dennis earned his fi rst big money. Nineteen seventy- four was a difficult year in which to focus. What with G. Gordon Liddy having been found guilty of Watergate charges and the Symbionese Liberation Army kidnapping Patricia Hearst, it was a wild time of constant turmoil. To top it off, Richard Nixon became the first President of the United States to resign from offi ce. Current events did not stop Dennis from leveraging a 1974 run- up in the price of soybeans to a $500,000 profit. By the end of the year, at age twenty- five, he was a millionaire.11 Even though he downplayed his success, he couldn�t hide it. When he showed up late one day to the soybean pit explaining that his beat- up 1967 Chevy had broken down, other traders gave him flack, knowing full well he could afford a new car hundreds of times over. Not only was his persona different, his trading was different. Dennis read Psychology Today (no government economic or crop reports for him) to keep his emotions in check and to remind him of how overrated intuition was in trading. He took delight in boasting, in contrast to most traders who got up early to read all they could from weather reports to daily Department of Agriculture assessments, that he stayed in bed until the last minute before getting to the exchange just as trading started.12 At one point during this time, Dennis was in the middle of an interview with a reporter as he went to the bank to make a deposit. He was depositing a $325,000 check (in 1976, that represented two to three weeks of work for him). Depositing an amount like that in the mid- 1970s was not normal. Dennis always got hassled when he tried to deposit checks that size.13 He was oblivious to the fact that that the teller was looking at a check that likely would exceed her total career earnings. Yet Dennis, probably younger than she was, couldn�t sign his name straight.14 As his notoriety continued to grow, national newspapers like the 14 TheCompleteTurtleTrader Chicago Tribune, the New York Times, and Barron�s trumpeted his youth and success. This was not standard operating procedure in a tight- lipped world where the big Chicago traders typically kept silent. Dennis enjoyed and even reveled in his upbringing and the unique perspective it afforded him: I grew up in an Irish- Catholic family on the South Side of Chicago. My institutional values were very strong, if somewhat confused. My holy trinity consisted of the Catholic Church, the Democratic Party, and the Chicago White Sox. I would describe my early value system as nourishing, if limited. When my father took me to Hurley�s Tavern, I saw people falling off their bar stools�about what you�d expect from people who called whiskey �Irish pop.�15 The Church, baseball, Democratic politics, and Irish drinking weren�t only an influence on his youth: How much of my holy trinity informs me as an adult? In the White Sox I have a deep and abiding faith. In the Democratic Party I have shallow and fading faith, which is almost never rewarded. In the church, well . . . I fear 16 years of Catholic education left me a skeptic.16 Look at that 1976 New York Times photo of the then twenty- six-year- old multimillionaire, lounging on the couch with his dad seated to his left, seemingly oblivious to the photographer, and it is easy to see anti- establishment staring into the camera. The photo caption only reinforced Dennis�s differences: �He drives an old, inexpensive car, he dresses in cheap knits; his money tends to pile up, unused.� However, all this press at such a young age left Dennis confronted by something he probably wasn�t expecting: people with their hands out, asking for money. �Most of them were very sad,� he recalled. �One person said, �Help me to learn how to trade. I�m in debt.� Some people made it sound as if $5,000 or $10,000 were all they needed to make them happy. Those were the only letters worth answering�to explain that money won�t really make a difference.�17 15 Prince of the Pit Not many twenty- six- year- olds would have been mature enough to handle the press using such folksy wisdom. Yet Dennis never let the swirl around him interfere with what he was doing to make money. Quite simply, his trading technique was to trade seasonal spreads. In other words, he wanted to take advantage of seasonal patterns in markets like soybeans�his initial specialty. Dennis would hold �long� (bets to profit as the market increased) and �short� (bets to profi t as the market decreased) positions in futures contracts simultaneously in the same or related futures markets. The MidAm Exchange Experience Once he had his MidAm seat (formerly called the Chicago Open Board), Dennis was off and running. Initially he had no clue what he was doing, but he was a fast learner who learned to think like a casino operator: When I started out, I had a system called �having no idea whatsoever.� For four years, I was just taking edges. If someone was giving me a quarter cent edge to buy an Oat contract, I didn�t think he knew anything either. I just knew that I was getting a quarter cent edge, and at the end of the day, the edges would approximately equal my profit. Obviously, on an individual basis that doesn�t have to happen, but over a longer period of time, it will. I tried to be like the house in the casino. It wasn�t that novel. People at the Board of Trade had been doing it forever. But for the MidAm, it was kind of revolutionary because no one would understand that you could balance your risk with a lot of volume. That�s how I started.18 Dennis went from zero to sixty on the MidAm in record time, and no one knew how he learned to do what he was doing. He knew that traders had a tendency to self- destruct. The battle with self was where he focused his energies: �I think it�s far more important to know what Freud thinks about death wishes than what Milton Friedman thinks about defi cit spending.�19 Go down to Wall Street today after work with the hot- shot traders all earning $500,000 a year at the big 16 TheCompleteTurtleTrader banks and you�ll find very few who talk about Freud being the ticket to making millions. However, trading was harder than Dennis let on. The early ups and downs took a toll on him, but he learned the hard lessons within months. �You have to have mentally gone through the process of failure,� he said. �I had a day during which I made every mistake known to modern man. I took too big risks. I panicked and sold at the bottom of every break. I had built my net worth up to about $4,000 coming into that day and I lost about $1,000 in two hours. It took me about three days to work through that experience emotionally, and I think it was the best thing that ever happened to me.�20 It was about this time, in 1972�73, that fellow traders Tom Willis and Robert Moss met Dennis. They would go on to work together for years as close friends and business associates, with Dennis as their leader. The star did not wear a polished Armani suit, nor did his buddies. They sported used- car- salesman jackets, with muttonchops and bad hair, but their appearance disguised calculated gamers looking to beat the pants off their peers every day of the week. Willis, like Dennis, was brought up in a working- class family. His father, who worked first as a milkman and then delivering bread, helped him buy a seat on the MidAm for $1,000 at age twenty- one. Willis had never heard of the exchange until he saw an article in the Chicago Tribune with the headline �Altruistic Grain Trader Successful.� It was about 221/2-year- old Richard Dennis. Willis immediately identified with his peer�s anti- establishment way of viewing the world. Dennis was not afraid to say that he had voted for Eugene McCarthy and didn�t think that just because he had radical ideas he should be driving a cab. Years later, Dennis was even more direct, saying that �the market was a legal and moral way to make a living. Being a trader doesn�t oblige one to be a conservative.�21 Yet Dennis�s political stance was not what first caught Willis�s attention; it was his attitude about making money in a world where class and distinction were always barriers to entry. Without a second thought, Willis hopped in his Jeep and drove to the Fisher Building in the Chicago Loop to check out the exchange. When he arrived at the MidAm for the first time, his soon- to- be role model dominated the landscape: �Rich was in the pit. I knew him by the photo from the Tribune.� 17 Prince of the Pit Willis started trading with his MidAm seat, but had no immediate contact with Dennis even though they were the two youngest traders in the pit. Nearly everybody else was sixty- five to eighty years old, and they actually had chairs and spittoons in the trading pit. A young Dennis, towering above a sea of old guys lounging on chairs, must have been a sight. Situated only a few blocks from the Chicago Board of Trade, the MidAm was a bit player at the time. It was small, perhaps fi fteen hundred square feet. While Willis didn�t know how his start at the MidAm would unfold (he ended up building a thirty- plus- year trading career), he was certain Dennis saw a much bigger future. Even then, big wigs from the Chicago Mercantile Exchange (CME) were coming over in their limos to pick young Dennis�s mind. Ultimately, Dennis approached Willis most likely because he was good enough not to go broke and because they were both about the same age. Dennis told Willis, �If you�re buying wheat and it�s strong and the beans are too low and the wheat is fi ve higher, why don�t you sell soybeans instead of selling the wheat you bought?� It was a very sophisticated insight. In fact, buying �strength� and selling �weakness� short still befuddles investors. It is counter- intuitive to buying low and selling high. Dennis was already sharing his knowledge with other traders. He was a natural- born teacher. Dennis was teaching the young exchange members at either his or Willis�s apartment. Willis would buy two hundred pieces of chicken and a barrel of potato salad. There were fi fty or sixty guys in his one- bedroom apartment with Dennis holding court, explaining how to trade. There was a practical need for this. The MidAm was selling new memberships to all kinds of traders, many with no experience. Dennis and Willis were teaching �liquidity.� To give the market confi dence in the viability of the MidAm exchange, there had to be a critical mass of buyers and sellers. This culture of education was creating a better exchange with better traders. And those better traders were starting to make money. It could all be traced to Dennis. Craig and Gary Lacrosse, Ira Shyman, John Grace, Wayne Elliott, Robert Tallian, and David Ware are all Chicago traders who learned 18 TheCompleteTurtleTrader from Dennis. While they may not be household names, they became hugely successful in part because of the generosity of the young Dennis, who felt no compunction about sharing his skills with others. After the apartment- training sessions everyone would go home, and they would meet the next day in the pits. During market hours they would ask Dennis, �Is this what you meant?� and he�d say, �Yeah.� Dennis freely gave away his knowledge. The Chicago Board of Trade Great experiences and profits aside, it wasn�t long before Dennis needed a bigger playing field than the minor- league MidAm. He was already plotting how to beat the big boys at the Chicago Board of Trade (CBOT), the world�s largest futures exchange. Once at the CBOT, his placid demeanor contrasted sharply with the hoarse shouts and wild gestures of other floor traders, many of whom were millionaire traders with decades of experience. He was soon beating them at their own game with a �betting� style that was often so relaxed that his trading cards would literally slip out of his hand onto the fl oor. Dennis�s move to the CBOT was historic. Willis could hardly believe it: �Richard goes to the Board of Trade and knocks the cover off the ball. They�ve never seen anything like this. I mean this kid takes the whole pit off. Not because he can or not because he wants to show off, but corn is up, beans are up two and the corn is down three and they sell him a million bushels of soybeans up one and a half and the next thing you know they close up seven and they�re talking about him, �Who�s this new kid?� � Willis refrained from divulging the names of old- timers that Dennis was beating the pants off when he first hit the CBOT, since many of those losing traders are still around today. One of Dennis�s students said that their teacher believed his physical attributes to be behind his pit- trading success: �You ever heard why he considered himself really successful? He is six feet something and the size of a freight train. He could see over people and more importantly, people could see him. People always knew that he was there. He honestly felt that�s why he was successful.� Dennis�s attributing his height and weight as the reason he was successful is not the full story. There was more to becoming a millionaire 19 Prince of the Pit by twenty- five than being �six foot something� and three hundred pounds plus. Even with excess weight, his peers described him as having cat- quick reflexes on the trading fl oor. The Move from the Pit Trading on the floor, down in the pit, might have been exciting during this era, but today the Chicago Board of Trade floor is silent. That doesn�t mean trading is dead today�far from it. Electronic trading outdated the old ways faster than anyone ever thought could happen. However invigorating the trading floor may have been in the 1970s, the only way for Dennis to expand his trading success was to move away from it. The Chicago trading floors were designed with multiple pits and each pit traded a different market. To trade more than one market, he had to physically move back and forth across the fl oor to the various pits. Dennis�s solution allowed him to remain faithful to buying in strength and selling in weakness. He knew that if his system worked in soybeans and corn, then it would also work in gold and stocks and all other markets. At the same time, he saw Wall Street changing, with new markets appearing fast and furiously as economies around the world opened and expanded. Fixed income futures were launched, and by 1975 the International Monetary Market (IMM) was allowing anyone to trade currencies the way they did stocks. Dennis knew what this would all mean. To trade in that bigger world, Dennis moved into an office on the twenty- third floor of the CBOT, leaving the turmoil of screaming traders behind. Concurrent with his move, in November 1975, Dennis and Larry Carroll formed a partnership. Known simply by the first initial of their last names, C&D Commodities was born. There is little public information on Larry Carroll (they did meet on the MidAm floor). And, although Dennis�s �D� came second, theirs was not a partnership where the decisions and profits were split fi ftyfifty. Dennis was always the man. Within short order, C&D Commodities became one of the largest independent trading firms in the world. They quickly rivaled such established institutional investors as Salomon Brothers and the Pillsbury Company.22 20 TheCompleteTurtleTrader However, other traders who had seen him dominate the pits were shocked when Dennis left the floor. They thought he was crazy. To compete against the likes of Pillsbury and Salomon Brothers was considered suicide, because no one thought he could maintain that floor �edge.� Dennis himself had always said the pit was the safest place to be. The transition did almost sink Dennis. When he went off fl oor, he struggled. In the late 1970s, the markets were getting to him. Tom Willis saw the struggle and recalled, �He was a little disillusioned, a little off balance frankly.� Both men went out to a bar to discuss the situation. Dennis was not throwing in the towel. He looked at Willis and said, �Tom, I got stuff that�s so good that used off floor in the right hands it would make $50 million a year.� In today�s terms, this would be like someone saying he has a way of trading that�s so good he can make $200 million a year. Or think of some number that is fifty times more than is rationally achievable by any normal measure. With anyone else, Willis would have been skeptical: �If I didn�t know Rich. I would have said, �Gee, he really does sound a little more off balance than I�m even thinking.� Saying $50 million in 1979 is a crazy thing to do, but I believed it. And he did it. If an edge is good or the idea is good, let�s get in front of the screen and trade them all. If it�s that good, let�s get in front of the screen and have 20 people do this. As a matter of fact, it�s very, very consistent to expanding geometrically the ability to take advantage of this good idea.� The goal of trading every market he could and making more money in the process was reached within a year, just as Dennis had predicted. Yet making that much more money didn�t change him one bit. His new office was not marble and glass. The outside hallway to the offi ce had dingy brown paneling. On his office door was �C&D Commodities, Richard J. Dennis and Company.� No fl ash. The men�s room for the floor was next door. Martin Hare, a nephew of Larry Carroll�s, was sixteen and in high school when he was working for Dennis. Now an executive with Merrill Lynch in San Diego, he worked in Dennis�s unconventional offi ce environment from 1982 to 1989. Hare still gets enthusiastic when he thinks about his after- school job: �I cut out the Wall Street settlement 21 Prince of the Pit prices for three summers. My weekly salary at C&D was $120. That was up from $90 the summer before. The C&D office was royal blue in color. There was a sleeping room for those that needed to nap, mostly for Rich, and a refrigerator full of the best beer.� Dennis may have physically disappeared from the trading fl oor, but the hermit- like trading wizard hovered over the markets like Zeus. Everyone knew he was there when a huge order came into the pits. Traders also knew not to get in front of his orders, or they could be potentially wiped out. Critics and regulators at times thought he was too big and moved markets unfairly. Dennis scoffed, �Sour grapes.� The criticisms were an excuse for people who had learned to lose. Dennis had no patience for people targeting his success. �I cringe a little when I�m identified as a millionaire,� Dennis said after reading that his $250,000 contribution to Adlai Stevenson was the largest individual political gift ever in Illinois. �If somebody just had $100,000, he wouldn�t be called a thousandaire, and if a pauper gave a dollar, they wouldn�t say, �Pauper gives his last buck.� �23 Although he grew wealthier by the day, he still kept an antinuclear poster hanging in his offi ce and remained outside the chummy atmosphere of the exchanges. He was not prone to travel in the limelight. �We don�t have much contact with him,� remarked one Board of Trade player.24 While his peers collected vintage cars and mansions, Dennis kept wearing those out- of- date polyester pants hiked over an ever- expanding waist. He exercised by eating cheap hamburgers at noisy grills. Dennis in a short- sleeved shirt, no tie, religiously pouring over arcane baseball statistics from the Baseball Abstract, was a common sight. In fact, he would eventually buy a piece of the White Sox baseball team. Once he was an owner, his 1980s attempt to get White Sox management to see the benefits of Bill James�style �Moneyball� fell on deaf ears. One of his students, Michael Shannon, watched his friends try to dress him up by moving him from his South Side studio apartment, and recalled, �Bill Eckhardt and others actually forced him to move into something that was a little bit more parallel to his station.� Money for Dennis was just a way to keep score in the game. He was 22 TheCompleteTurtleTrader frank about it: �Trading is a little bit like hitting a ball. If you�re thinking what your batting average should be, you�re not concentrating on the right thing when you bat the ball. Dollars are the batting average of the trader.�25 This original thinker and big- time baseball fan left a visual image on everyone. Several confi dantes talked about Dennis�s socks. One of his students smiled, �You need to make sure he�s wearing a matched pair of the same color.� Bradley Rotter, a former West Point graduate and often called Dennis�s first investor, witnessed his eccentricity: �I was at his house for a Fourth of July tennis party and Richard Dennis couldn�t be found . . . at the end of the party he came out of his house wearing a white tennis shirt, white tennis shorts, and black shoes and black socks. I�ll never forget that picture.� Rotter was not mocking Dennis. He respected Dennis�s testicular fortitude to trade trends no matter what. In baseball, testicular fortitude means everyone can talk about the game, but if you�re going to get into the game, you must swing the bat. Dennis swung and swung hard. No singles. His was Babe Ruth, home- run, swing- for- the- fences- style moneymaking. However, the Babe Ruth of trading was near oblivious to the basics of everyday life. Mail and personal bills were handled by C&D�s back office because of his inattention. His office would even send over toilet paper to his apartment. The weight room in his Gold Coast condo was virtually unused. �I pat the weights once in a while.� said Dennis.26 He enjoyed using a third of his time to do absolutely nothing. Another Dennis student, Erle Keefer, went beyond his eccentricities: �Rich is probably the greatest trigger puller that I personally have ever known: he has the ability under tremendous pressure to stand there with his own money and pull the trigger when other people wilted. And when he was wrong, he could turn on a dime. That�s amaz-ing�that�s not trading, that�s genetic.� The genetic line was debatable; after all, that was the point of his Turtle experiment. 23 Prince of the Pit Political Ambitions Dennis�s success eventually caused more serious problems. In the mid1980s, critics accused him of strong- arming the market. They blamed him for too much market volatility. Words like �collusion� were thrown around. Dennis was not buying it. He said, �One man�s volatility is another man�s profi t.�27 When Dennis was a guest on a radio show in 1984, a caller assured him that if he traded long enough, he would give it all back.28 You could feel the anger. Some people simply did not want to hear about a young guy making millions. Even though everyone knew exchanges needed speculators, too many people didn�t want those same risk- takers to make a profi t. Dennis himself appeared before Congress as they investigated the �efficiency of the markets��unable to defi ne what that phrase meant. His detractors were silenced after government regulators testifi ed that the total buying and selling by Dennis did not breach exchange limits. Soon, Dennis would join the political fight at a whole new level. He became one of the largest Democratic donors in the country, often focusing his generosity on standard politicians and assorted underdogs. From donating millions to battered women�s shelters to the decriminalization of marijuana, causes without wide publicity appealed to him (he would give away 10 percent of his earnings every year). While calling himself a liberal libertarian, he once donated $1,000 to former Black Panther Bobby Rush. Dennis did more than just write checks. He became good friends with Bill Bradley and supported Walter Mondale (1984) and Bruce Babbitt (1988) for President. He lobbied hard against conservative stalwart Robert Bork. There was a rational justification in Dennis�s mind for his political ideals: �If it�s something everyone hates but you think is right, those are the important things to do because no one else is going to do them.�29 However, becoming a successful politician on the basis of supporting the have- nots of society was not as easy as trading to make millions. It wasn�t enough merely to fund his causes; Dennis also wanted to �work� them, and immediately ran into roadblocks. Politics was not a 24 TheCompleteTurtleTrader zero- sum game, and he got frustrated. �Politicians, at worse, are mindless replicas of what their constituents think. People . . . don�t want to hear painful truths.�30 When invited to participate in the diplomatic dances that made up Washington politics, he stepped on toes, and seldom refrained from voicing his opinions. Former Federal Reserve chairman Paul Volcker was once introduced to Dennis. He told Dennis that he didn�t �like those casinos you have out there in Chicago.�31 Dennis was well aware that he was being indulged because he was rich and would be listened to only if he had something signifi cant to say. Soon after he founded his new 1982 think tank, the Roosevelt Center for American Policy Studies in Washington, D.C., it began to fl ounder. Washington was a tough market no matter how many millions you had. And now Democrats were frustrating him, too. He said, �My principal irritation with liberals in general: they don�t understand how it can possibly be true that you make the poor richer by making everyone richer. I don�t understand that they don�t even consider that pos-sibility.�32 The problem in a political world was that Dennis couldn�t work the floors of Congress the way he had the Chicago trading floors. It was one thing to own one of the six original copies of the U.S. Constitution (which he did) and an entirely different thing to try to infl uence modern political leaders. He was impatient. Ultimately, over time he would become a board member of the libertarian Cato Institute, serving with such notable peers as John C. Malone, chairman, Liberty Media Corporation, and Frederick W. Smith, chairman and CEO, FedEx Corporation. He also joined the board of the Reason Foundation, another libertarian think tank. Dennis�s political forays were never easy. One political critic of his thought Dennis was a bully because he didn�t adjust his thinking to accommodate others.33 Dennis saw that criticism as coming from a typical Washington careerist being afraid to rock the boat. His stance on the decriminalization of narcotics best illustrated what made him tick. He knew the �drug czar� of the day, Bill Bennett, would never defeat drug violence with his �just say no� approach. 25 Prince of the Pit Dennis thought people should be allowed to do what they wanted to do, even if they injured themselves, as long as they did not hurt others. He commented: The drug war violates the Golden Rule of doing unto others as you would have them do unto you. None of us is free of vice or temptation. Does any one of us really want to be jailed for our moral shortcomings? If our teenaged child is arrested for drug possession�a distinct possibility, since 54 percent of teenagers admit trying illicit drugs�do we really want him or her sent to prison for falling victim to the curiosity of youth?34 Here was a man making millions in the pits by winning as much money from others as possible, but at the same he was clearly worried about others well being. He was a mass of contradictions. Rough Seas Dennis had some severe down periods before that banner year of 1986. Perhaps his political ambitions had caused a loss of focus. Adding to his responsibility, by this time he had moved beyond trading only his own money. He was trading for others, and managing their money was not his strongest suit. He said, �It�s drastically more work to lose other people�s money. It�s tough. I go home and worry about it.�35 This was not what his clients wanted to hear. In 1983, when his assets under management peaked at over $25 million, his accounts for clients hit turbulence. After a 53 percent rise in January, accounts dropped 33 percent in February and March. That drop was enough to prompt George Soros to yank the $2 million he had invested with Dennis only two months earlier. After a partial rebound in April and May, Dennis�s funds dived another 50 percent in value. His 1983-era computer that cost $150,000 did little to console nervous clients. It took many of his investors more than two years to get back to even with their investment. Most didn�t stick around, and Dennis closed down some accounts in 1984. He rebated all management 26 TheCompleteTurtleTrader fees to losing accounts and conceded that trading client money as aggressively as his own money was not something clients could psychologically handle.36 What did that aggression look like on a monthby- month basis? Table 2.1: Richard Dennis Trading Performance: July 1982�December 1983. Date VAMI ROR Yearly ROR Amount Size Jan-83 3475 53.33% Feb-83 3284
5.49% Mar-83 2371
27.82% $18.7M Apr-83 3058 29.01% May-83 3184 4.11% Jun-83 2215
30.42% $19.0M Jul-83 1864
15.88% Aug-83 1760
5.57% Sep-83 2057 16.87% $14.6M Oct-83 2671 29.89% Nov-83 2508
6.10% Dec-83 2160
13.90%
4.70% $13.5M VAMI (Value Added Monthly Index): An index that tracks the monthly performance of a hypothetical $1,000 investment as it grows over time. ROR: Rate of return. Source: Barclays Performance Reporting (www.barclaygrp.com). Dennis was famous for those big returns, and that was what his clients wanted�to become rich like Rich. They got on board knowing full well the voyage would get rocky, but conveniently forgot that fact when rough sailing made them seasick. At the first sign of troubled waters, when they were puking losses, they cut short the voyage and blamed Dennis. He was learning the hard way about people�s irrational expectations. In 2005, Dennis looked back on his troubled times in the fund management arena: 27 Prince of the Pit I think the problem is that a money manager very rarely ever sits down with the person whose money it is. There�s always a representative of a firm of a firm of a firm. When you have customer money, you generally try to please the people who want �passable,� whereas you might be able to explain it to the ultimate end user whose money it is that �this might look brutal, but we�re trying for something spectacular.�37 However, at that time in 1983, Dennis needed a way out of the customer rat race. He wanted to divert even more attention to big- picture strategies, from philosophizing to an even greater focus on decriminalization of pot to anything but being beholden to impatient and uninformed clients. In many ways his Turtle teaching experiment was his second act, and he knew it. He said, �You shouldn�t, I suppose, live in your trading children�s reflective glory, but I am. I think [training the Turtles] is the single best thing I�ve done in commodities.�38 Yet there was no way he could have known at the time that the single best thing he would do would change his life and the history of speculative trading in ways never imagined. Glory and legend aside, in 1983, with a clear plate, Dennis�s most immediate task was to select his Turtle students from the thousands who responded to his want ad. 3 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 make 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, staring Eddie Murphy and Dan Aykroyd. Millions have seen the movie over the last twenty years, either in the theater or on television. The idea for the movie appears to have sprung from Mark Twain�s 1893 short story �The �1,000,000 Bank Note.� 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 bank note 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 (Aykroyd, as Louis Winthorpe III) to crime and turn a street hustler (Murphy, as Billy Ray Valentine) into a successful trader. In the movie Mortimer, arguing against Hume and Locke, exclaims, �With his genes, you could put Winthorpe anywhere and he�s going to come out on top. Breeding . . . same as in race horses. It�s in the blood.�1 When I was trying to nail down with 100 percent certainty that the screenplay came before Dennis�s Turtle training experiment, the fi lm�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 30 TheCompleteTurtleTrader 1980s about Chicago trading and didn�t immediately hear of Richard Dennis? That seemed implausible. 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.� 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 is a very logical guy. And I thought about intuition and about trading and it didn�t seem right.�2 A third student of Dennis�s Mike Shannon, with respect for Dennis in his voice, disagreed wholeheartedly with Carr: �Let me put it 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. Unlike the movie, the exact nature of Dennis and Eckhardt�s wager, if any existed, is not known. However, the movie Trading Places did gross over $100 million before the training experiment was even on the drawing board. Dennis was about to become the new Willy Wonka. He was about to let people into his �factory,� C&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. 31 The Turtles 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.�3 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 Melnick�s 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. 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.� 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 r�sum� was problematic. He had a solution to that: �I made up a phony resume, and I 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 r�sum�, but that was not how it worked with the eccentric head of C&D Commodities. On the other hand, Jim DiMaria, a Notre Dame graduate and family man straight from the Ozzie and Harriet back lot, was already on the trading floor working for Dennis when he applied. DiMaria 32 TheCompleteTurtleTrader remembered that every now and again there would be a �1,000 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.� Dennis, however, was not looking solely for doormen and fl oor 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. Former U.S. Air Force pilot Erle Keefer�s path to Dennis was pure coincidence as well. He was sitting in a New York City 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. Keefer was sitting there reading Barron�s. �I am looking at this ad and I knew who Rich was. I said, �Wow! This guy did it.� � Keefer thought there was little chance he would get accepted. In the strictly man�s world of commodities trading in the early 1980s, women did apply. Liz Cheval, the diminutive and fl amboyant 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.4 Cheval�s former boss, Bradley Rotter, knew the offer was a big deal: �Dennis had already been managing 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.� 33 The Turtles 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 r�sum� 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� Svoboda, an immigrant from then communist Czechoslovakia and a monster underdog in most people�s eyes, was selected. He was a master blackjack player beating Las Vegas like a drum long before Breaking Vegas and 1990�s famed M.I.T. 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 Svoboda knew each other from the blackjack underground. When they bumped into each other in Chicago, Svoboda 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. Erle Keefer knew about their wild backgrounds. He said, �George ran the Czech team, and Tom was essentially with the Dingo computer in a boot.� Shanks used to say, �I never want to see another Dingo 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, had built a name for himself at the role- playing game firm Dungeons and Dragons, where he developed a cult following with his �wargaming� authorship. He had 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.� 34 TheCompleteTurtleTrader Jerry Parker, who would make the cut, knew the potential lifechanging 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 the C&D ad. He said, �I was a small town person [from Lynchburg, Virginia] and Richard Dennis rescued me from leading a normal life.�5 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 r�sum�s, 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 15 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. Prospective students at this stage of the process were asked for their college entrance exam scores. If they didn�t have those, they needed to explain why. There was more. Candidates had to complete a 63-question true� false test. The true�false questions all appeared to be easy at fi rst glance, but perhaps tricky on second thought. A cross- section of true-false questions included: 1. Trade long or short, but not both. 2. Trade the same number of contracts in all markets. 3. If you have $100,000 to risk, you should risk $25,000 on every trade. 4. When you enter, you should know where to exit if a loss occurs. 5. You can never go broke taking profi ts. 6. The majority of traders are always wrong. 7. Average profits should be about 3 or 4 times average losses. 8. A trader should be willing to let profits turn into losses. 9. A very high percentage of trades should be profi ts. 35 The Turtles 10. Needing and wanting money are good motivators to good trading. 11. One�s natural inclinations are good guides to decision making in trading. 12. Luck is an ingredient in successful trading over the long run. 13. It�s good to follow hunches in trading. 14. Trends are not likely to persist. 15. It�s good to average down when buying. 16. A trader learns more from his losses than his profi ts. 17. Others� opinions of the market are good to follow. 18. Buying dips and selling rallies is a good strategy. 19. It�s important to take a profit most of the time. 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: 1. Name a book or movie you like and why. 2. Name a historical figure you like and why. 3. Why would you like to succeed at this job? 4. Name a risky thing you have done and why. 5. Is there anything else you�d like to add? 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 36 TheCompleteTurtleTrader 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.6 Dale Dellutri, who was Dennis�s programmer at C&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.�7 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. They were chess players or backgammon players, enough so that they would even mention it on a resume.�8 Math ability was not the sole determinant for hiring by any stretch. Dennis and Eckhardt knew long- term trading success did not correlate one- to- one with high IQs. They were trying to assess the applicants� ability to think in terms of odds�the same kind of thinking needed to win at blackjack in Las Vegas. And they wanted 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). He ultimately chose people who he thought had the ability to accept learning. While they were with Dennis, they had to be tabulae rasae�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. 37 The Turtles The Interview of Your Life Those candidates who passed the test were then asked to interview in person at C&D Commodities� offices during the Chicago winter. The process was the same across the board. Dale Dellutri escorted them in and out of the room, and both Dennis and Eckhardt interviewed everyone. Interviewees were struck by how informal and, in most cases, friendly their interviewers were. Mike Shannon, the candidate with the padded r�sum�, 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 90 percent of the answers to the questions on the test were in those articles.� Shannon had 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. Dennis may have been quirky, but he lived to win. That was exactly what playing Risk meant: Beat the other guy and win. Paul Rabar, another student candidate, just happened to have been the most experienced trader of all student hires. Rabar 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 Le Beau. In the late 1970s and early 1980s, Le Beau was a regional director for the E. F. Hutton & Co. brokerage on the West Coast. It was there that he taught Rabar. In one of those small- world stories, their E. F. Hutton offi ce ended up handling some brokerage for the infamous Billionaire Boys Club (BBC) during the early 1980s. The BBC was started by Joe Gamsky (who later renamed himself Joe Hunt, and became the focus of several 38 TheCompleteTurtleTrader TV movies). Gamsky 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, Gamsky was getting Dennis-like attention on the Chicago trading floors and in the press. He, too, was called a boy wonder. Le Beau and Rabar, 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 Rabar just to see what he may or may not have known about Gamsky�s trading? That�s the kind of opposition research of which Dennis was certainly capable. Rabar�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?� Rabar was cocksure: �If it goes up again, I will buy it again.� Rabar�s knowledge had a lot to do with his hiring, but he was the exception. Dennis didn�t want a room full of Rabars. Erle Keefer, on the other hand, started talking about British empiricism with Dennis. They were discussing �what is reality?� and quickly dove into a deep debate about George Berkeley�s book Hylas and Philonous. Keefer later learned that one of the things Dennis was looking for was the ability to suspend your belief in reality. Then, quickly, Eckhardt changed the subject from philosophy in order to test Keefer. He asked, �Do you believe in the central limit theorem?� Keefer 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.� Eckhardt was signaling that their trading strategy relied upon the idea that if you were tossing dice, a string of 6 sixes in a row happens more often than people know or expect. In other words, Eckhardt 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. Keefer 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 39 The Turtles whether or not he got the job because he had �this great conversation with people that were incredibly intelligent.� Dennis and Eckhardt peppered Cavallo with questions. They asked him how much he knew about markets, on a scale of a 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. 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. 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 Dellutri 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 ringer� or something like that.� The Dennis brain trust was showing their hand. You had to play 40 TheCompleteTurtleTrader 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 Dellutri 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 r�sum� 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 Eckhardt figured too many Cavallos and Rabars would 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 Eckhardt 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 r�sum� 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, I think he�ll be looking for people who are a little bit different.� � During his interview, Gordon was logically assuming that he had a lot to learn from Dennis and Eckhardt, 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&D brain trust to hire him because both Dale Dellutri and William Eckhardt 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.� During the interview, he had asked Dennis, �Do you trade technically or fundamentally?� Dennis replied, �We trade technically.� Carr then 41 The Turtles said, �Is fundamental trading dead?� Dennis sarcastically shot back, �We hope not.� Jim DiMaria, 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.�9 But before DiMaria was ever picked for the experiment, he knew he ultimately wanted to be the person making the trading decisions, not just someone else�s fl oor broker.10 He had to find a way to get there, and Dennis�s experiment was it. DiMaria, 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. 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.�11 She was confident in the interview because she couldn�t believe she had gotten that far. She knew her worst- case scenario if selected was that her r�sum� 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 Eckhardt 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. The Turtle Contract 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 42 TheCompleteTurtleTrader 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.� 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 confi dential 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 fi ve years. For those with a legal background, this agreement could have been a deal- breaker. 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 Caray was the announcer at Wrigley Field, and Ryne Sandberg�s rookie year was underway. The Apple Macintosh 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. 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 fi nance departments at the world�s finest universities. Run this story by a college fi nance professor today and take note of his reactions. 43 The Turtles The Classroom If Dennis had been worth only $100,000 at the time of the 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 he 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.� 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 Leyland, 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�a horrendous record. But now they had a manager, Leyland, in whom everyone believed. There wasn�t a Detroit Tiger who didn�t suddenly feel like 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 Eckhardt 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. 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.� 44 TheCompleteTurtleTrader He was not exaggerating. Tom Willis and I tried to have lunch there in 2006, but 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. 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 1983 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&D Commodities� offi ces. 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�includ-ing Dennis. Only half of the more than two dozen students in the training room were Turtles, if you defined Turtles as those students who would trade only Dennis�s money. It was HBO�s hit show Entourage for sure. 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 Eckhardt, and Dale Dellutri handled the training the same way they had managed the interview process. It turns out that the C&D Commodities brain trust had met each other at St. Laurence Catholic High School. As fate would have it, they became close friends only because they were seated in alphabetical order. On the fi rst 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 Dellutri discussing how things would work procedurally and laying out �housekeeping� matters for people who had never traded. Dellutri 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 fi rst 45 The Turtles class. Instead, it was Eckhardt who launched into the challenge of �managing risk� as the fi rst topic. Managing risk was not what new traders would assume as a logical starting point. That Eckhardt 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&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. �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. 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 Eckhardt knew far more than they did. Mike Cavallo 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.� Contrary to popular belief among those familiar with the Turtle experiment, Dennis�s absence that first day of class was not an aberration. William Eckhardt taught the Turtles a great deal of what they learned during those two weeks in the classroom (there was only one week of training the second year). The irony is that while it was Eckhardt 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 a 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. Even Eckhardt marveled as Dennis�s knack to intuitively see �it�: �Look what this means. Look at the deep axiom in here. It works.� That said, Eckhardt 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: 46 TheCompleteTurtleTrader �In fact, a lot of the system development wasn�t Richard Dennis. It was indeed Bill Eckhardt. They both hatched it up between them and they�re both certainly responsible for it.� To many it seemed Eckhardt was along for the ride, appreciating the Turtle experiment from a psychological point of view, but he defi nitely 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 Eckhardt, there would have been no Turtles. Mike Cavallo thought there was a more important, though subtle, aspect in 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 in their discussion, he thought the trading genius was the main part whereas Rich thought the system was the main part.� To this day, Eckhardt 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 $800 million USD. Yet when Eckhardt and Dennis first started working together, Dennis was the one who had made the fortune trading and Eckhardt was the original Turtle learning from him. It was clear to Mike Shannon that Dennis had a massive head start over Eckhardt 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, Eckhardt realized that he had to strike a balance between the business end and the actual trading. Shannon added, �I think Bill probably is worth more, but once you get over being worth a quarter of a billion dollars . . .� Eckhardt 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 unqualifi ed yes.�12 He also scoffed at the argument that the Turtles� success was based on sheer luck: �The prob47 The Turtles ability 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. They then 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 infi nitesimally small.13 Nor did Eckhardt 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. To this day, many regularly push the notion that successes such as Eckhardt 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 brainpower wasn�t lacking in the C&D offi ce. Eckhardt disagreed, saying that he had not seen much correlation between good trading and intelligence: 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.14 Eckhardt 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 1, 1978. President Carter was trying to halt a sinking U.S. dollar. It was a lesson in �emotional fortitude� forever etched in Eckhardt�s memory. There was a rate hike and intervention in the currency markets�not good news for Dennis and Eckhardt, who held large long positions in 48 TheCompleteTurtleTrader gold, foreign currencies, and the grains. The markets collapsed on the open. Gold opened below the $10-an- ounce 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.15 Dennis asked Eckhardt calmly, �What should we do?� Eckhardt panicked and froze at the controls. Dennis shorted silver and seconds later it was limit down, too (a big winner). Eckhardt 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 the subsequent slide in gold.�16 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 the wrong side of the trade and it�s going to send them to the poor house.� 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 percent, their trading decisions become more signifi cant 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: �There are some people who can trade one lot or two lots or 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�s: �When he perceived that 49 The Turtles 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 fi rst day of November. It was touch- and- go for a while. The experience forced Dennis and Eckhardt to reevaluate everything they had learned 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 the one who codifies, the one who turns things into rules. Every idea that�s market- worthy must then be tested.�17 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 $100 million and you lose $2 million, that is not a big deal. If you have $50,000 and you lose $1,000, that is not a big deal. Both losses are 2 percent. That is not to say losses are easy to accept, but Dennis and Eckhardt 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 Eckhardt 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, then sooner or later the probabilities would catch up with them.18 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.19 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. The 50 TheCompleteTurtleTrader Turtles learned that the most important thing was to have a sound trading approach tested in the real world.20 Dennis and Eckhardt had that real world of making money fi gured 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.21121384