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 Buy and hold is
dead! The extreme market volatility over the last decade should make this
abundantly clear to even casual market watchers, but it is something that
good traders have known all along: You trade
securities, you don't marry them. Buying a stock is not a commitment
"until death do you part." A friend once told me the story of a man
he knew who worked at Worldcom during the go-go
90's and had his entire 401(k) invested in the company stock. He was waiting
for his account to hit $2 million, and then he was going to cash out. It was
almost there - $1.8m, $1.9m - something like that when the stock began its
terminal decline. Instead of selling, he held on until the bitter end, until
all was lost. Moral of the story: The market is the utlimate
authority. It does not listen to
you, nor care about your dreams & desires, so you had best learn to
listen to it.
Stories like the above are not uncommon - just ask the employees of Bear
Stearns. These days buy and hold may as well be called buy and hope, which is
definitely not a sound strategy. And while there are a near infinite variety
of potentially successful trading strategies (as the book Market
Wizards shows), some of
the most successful strategies have been mechanical trend following systems. You've
no doubt heard a bit about Richard Dennis, the trend trading pioneer who
discussed his mid-1980's Turtles experiment in Market Wizards. Now, thanks to Michael Covel,
we are lucky enough to have access to the whole story.
Covel's latest book, The Complete
TurtleTrader, is a wonderful
chronicle of the entire Turtle story, starting with Richard Dennis's humble
beginnings as a 19-year old kid in the early 1970's trading on the MidAmerican
Exchange, a now defunct regional commodity exchange that traded mini-sized
agricultural contracts. Dennis was a trading genius and a quick study. Most
traders try to apply the old adage, "buy low and sell high," which
is why most traders fail. How low is low? How high is high? There are no
definitive answers to these questions. But Dennis intuitively grasped the
concept of doing the opposite: buying strength and selling weakness. "Buy
high and sell higher," and "sell low and buy lower," are the
fundamental, but counterintuitive concepts of trend trading. Dennis got rich
- as in running an intial stake of a few hundred
dollars into tens of millions! - trading in the pits this way. By 1983, he
had moved off the floor to trade multiple markets for his own account from an
office. This is where we get to the heart of the Turtles story. To settle a
bet with his business partner about whether traders could be taught or were simply "born," the an experiment was conceived.
Imagine this: You see an ad in the Wall Street Journal: "[Super famous
trader] Richard Dennis seeks commodity futures traders. No experience
necessary, will train." This is the ad that actually ran:
Even though you don't know
a stock from a bond from a futures contract, you apply and get the job! You
move to Chicago,
get two weeks of training and then you're set loose with hundreds of
thousands of dollars to trade for Dennis's account. There are twenty more
like you, just starting out in commodities, all
sitting around trading these huge sums of money. In addition to your salary,
you get a cut of the action! The only condition is that you have to follow
the trading rules exactly as they were taught
in the first two-week training session. The rules are not difficult to grasp
- in fact, in the program's second year, the training for the new recruits
was cut down to just one week! Can you imagine it? What would it be like to
experience something like that?
Michael Covel's writing allows you to live it.
Anyone interested in the Turtles story, in the psychology of trading, or just
a great American story period should read this book. If you're looking for
the Turtle's trading rules, of course those are there too in Chapter 4: The
Philosophy, and Chapter 5: The Rules. Everything the Turtles learned is
there. If you are only interested in making a ton of money trading, you might
think that all you need to do is read these two chapters,
that the secret to successful trading can be found in those few pages.
But if you believed that, you would be mistaken.
In his Market Wizards
interview, Dennis famously declared, "I always say that you could
publish trading rules in the newspaper and no one would follow them." For
the Turtles as a group, it was easy to follow the rules, because it was a matter of social pressure as well as
keeping their jobs! In a bizarre twist to the story, in spite of how rigid
the trading rules were, Dennis's allocation of capital to the Turtles
themselves was not uniform. In some respects, it appeared almost random. He
played favorites, giving some millions while others
only thousands. This created tension, rivalries and confusion among the
group, a fascinating story in and of itself. There was also competition among
the Turtles in terms of performance. Even though they followed the same
rules, there was a wide variation of in each individual's performance.
The turtles were wildly successful, grossing over $150 million in four years.
By 1988 in
addition to the Turtles, Dennis himself was managing two big funds at Drexel
Burnham Lambert for outside clients. At the time he believed that collecting
fee income was an "easy" way to supplement his profitability while
lowering his risk, but his performance suffered. As with anyone who has to
deal with clients, Dennis later changed his mind saying, "I found out
that it was more trouble than it was worth. The costs were not financial;
they were psychological." His trading had grown erratic:
...the Turtles couldn't
figure out why Dennis was overtrading when he had stressed time and again
that overtrading would kill you: "We calculated one day that his risk
was probably one hundred times greater than the risk we were taking."
That Dennis was possibly taking risks over and above his Turtles by a factor
of 100 simply made no sense. He knew enough to make his students do the right
thing, but had a difficult time disciplining himself."
He was also trading against the Turtles at times, something
that made absolutely no sense from the standpoint of the rules. Ironically,
as he was losing in his own account, the Turtles were keeping him afloat. But
when his hedge funds at Drexel went under in April 1988, Dennis suddenly
pulled the plug on the Turtles as well, in dramatic fashion:
Jim Dimaria
(one of the Turtle traders) was bewildered at the Turtle program's abrupt
ending: "All of a sudden, its over. That's how
fast it was. They came in Monday morning and said, 'Friday we're done.' I was
like, 'Oh, better get a job.'"
This was probably the worst
trade of Dennis's entire career. The Turtles were profitable, having grossed
$150 million for him in four years! They were still floating his boat as he
was going to pieces. The program was a cash cow, and in spite of the
rivalries, overall they were happy with their jobs, and they did it well. More
importantly, they were under contract
- they couldn't just up and go work for a competitor. Dennis could have
retired himself and let the Turtles keep raking in the dough. But instead he
cut them all loose, just as the interview in Market Wizards (1989) was giving them ultra high profiles
and putting them into tremendous demand on Wall Street for their knowledge. Dennis's
secret was out and multiplying, but Dennis himself had nothing to show for
it.
No one ever said trading was easy. Most trading books and software programs
try to make it look so simple. "Just do A-B-C; buy on the green arrow,
sell at the red triangle; 90% winning trades!" they claim. Covel has done an excellent job of revealing the
complexities, not only in the trading itself, but the complexities inherent
in human nature that form the context in which the trading takes place. Richard
Dennis had the secret, but ended up taking a nearly a round trip. He made a
few attempts at trading comebacks, but nothing that approached his former
trading glory days. Even more telling is what happened to the Turtles after
being let loose in the world. Covel follows this
thread as well:
The Turtle story breaks
down into two parts. Part one takes place during the experiment, when the
Turtles are on the relatively level playing field designed by Richard Dennis.
His experiment proves nurture trumps nature. Part two take place after the
experiment, when the Turtles have to face the real world as individuals and
human nature reenters the picture.
Some of the Turtles did great, continuing on in the
tradition of successful trend traders, others gave trading a shot but failed
to repeat their prior performance, and still others became near total losers.
What was the difference? The ongoing experiment shows that there is more to
it than just following mechanical trading rules. The true secret is more
fundamental and like human nature itself is neither simple nor easy to
define. The answer takes wisdom and solemn reflection but clues are sprinkled
copiously throughout the book.
This is a fascinating book. Not only is it well written and easy and exiting
to read, but I learned a tremendous amount. For those who like inspiring
books about successful trading, this one is as good as they come. But beyond
the cheer leading, it examines the darker and more complex side of what
winning means and how to keep what you've made for the long run. For these
reasons this book is an easy pick for my list of top ten
trading books of all time.
Excellent work.
Thank you, Michael Covel.
By :
Michael A.
Nystrom
Editor, Bull not Bull
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