How to Train a Turtle: Lessons from a Rogue Trader

When it comes to investing, there are many ways to skin a cat, like my friend likes to say. Investing is a discipline that has many different styles and variations. Whatever the style or variation, whether it’s value investing or futures trading, there is a process.

To be successful, you need to focus on the process rather than the results. Particularly in the short term (a few years perhaps). If you have a great process, the results will come. Gains are a byproduct, not the focus.

Turtle Training: Trust the Process

Richard Dennis was a trader of some note who knew this. He made his money trading futures contracts, turning $5000 into $100 million. That’ll get your attention! Some people equate futures trading with a winner-takes-all mindset and extremely high risk. But that’s not always the case, as you will see.

It seemed to Dennis that the investing methods that made him very wealthy were so simple that he could teach anyone to do them. Hence, he and his partner Richard Eckhart decided to run a little experiment. They would teach a random group of “students” to trade using their methods. After a 2-week training course, they would turn their trainees loose with $1M of real money. They nicknamed their traders’ Turtles. Dennis had been to Singapore where he witnessed farmers efficiently raising turtles. Instead of racing to the sea, so to speak, these “Turtles” would work for Dennis and Richard, or start their own firm.

Over the 2 weeks, Dennis taught his traders their investing method. It was very analytical and data-driven. The purpose was to remove any bias or emotion that entered into their psyche. “Know what your plan is going forward. Know what you will do if the market moves against you or even with you.”

My Turtle Trader Course in Trend Following

Michael Covel was fascinated with the Turtle Trader story so he decided to further document it. What followed was a book titled, Trend Following, which launched in 2004. It was so popular that he has published five more editions since. In fact, the entrepreneurial Covel became kind of an industry pied piper, speaking at conferences, extolling the virtues of Turtle Trading while profiting handsomely along the way. Soon thereafter he launched the Turtle Trading course. A comprehensive guide to the methods and process of the original Turtle Traders along with new material and proven strategies. It was through this course that my own turtle trading journey began in 2004.

Most of my adult life has been dedicated to becoming a better investor and having a deeper understanding of markets and what drives them along the way. I simply love the process.

After talking to Micheal, I ordered his Turtle Trading Trend Following course. My course materials consisted of several textbooks and a very comprehensive workbook covering various trading “rules” as well as other useful material. It was clear that Mr. Covel had done some serious work. This wasn’t some schlocky notebook that he had copied from someone else or just thrown together.

When most people hear futures trading they think high risk-taking large positions and pursuing big gains. They picture traders jumping up and down on the trading floor. Vintage 1980s stock trader gunslinger mentality. But the truth is that Turtle Trading, or Trend Following, as it’s known more commonly today, is not that way at all. It’s just the opposite.

I learned the most successful traders are obsessed over risk. Never make a bet that will wipe you out. One position should never be more than 10% of your capital. I learned that if a trade moved against you, you needed to get out. This wasn’t a feeling or something you did on the fly but was a predetermined data point. Removing the emotions of the markets was critical.

I learned the trading floors of these trend-following firms were quite docile. Not the jumping up and down and yelling that you see on TV. One trading firm automated its trading (which was unusual in the 1980s). When a trade was triggered, a bell would go off. The head trader read books on philosophy during the downtime only coming up when the bell rang. The trade was predetermined.

Don’t Follow the Emotions of the Market

Turtle Traders don’t make market calls. They don’t care at all what’s driving the price or what could happen at the next Fed meeting. They don’t care at all whether markets go up or down. They can make money either way. They are market agnostic.

So I dipped my toe in and started trading with a small $10,000 stake. I stuck to all the trading rules. Be patient, build a position over time. Use predetermined entry and exit points. I traded up and down not caring whether I was long or short. I ignored commodity “news” such as where economists thought things were going. I managed my risk carefully. Each new trade would be a 2% position — a maximum of five 2% positions per commodity built up over time. I established stop losses ahead of time to get out of the trade if it moved too far against me. I moved my stop losses up as the trade went up, thereby locking in gains and reducing my risk.

My first year was very successful. My $10,000 account had grown to $32,000. Not any big gains but I cut my losses quickly and let my winners run. I was proud I had followed the discipline. The next 18-24 months were tougher. I was whipsawed back and forth, my positions would be stopped out only to re-enter the trade and be stopped out again. But, I didn’t have any big losses. Just lots of small ones. My account value went down to $25,000 as I followed the system. Which emphasizes another point…

Not every investing system or discipline works ALL the time.

The success of any investment discipline is focusing on the process. You can’t obsess over the results, especially in the short run. You will have temporary losses. You will have permanent losses. Don’t get emotional about it. Move on and follow the process.

Results have to be measured in years, not weeks or months. The market is fickle. Don’t let it control you.

Most of the famous traders have incurred periods of large drawdowns or losses. They know this is temporary. It only becomes permanent if you abandon your discipline. The system has already been proven.

Use the System That Best Fits Your Personality

While I didn’t abandon my system, I simply decided to shut down my trading activity. You have to use the discipline or system that best fits your personality. Trading was fun, but I wanted to get better at fundamental value investing.

I wasn’t going to trade for clients — getting a license as a Commodities Trading Advisor is a long and brutal process. My clients are mom and pop investors. Plus, I already knew value investing worked. Buying a dollar’s worth of something for 80 cents just made sense on so many levels. And it fit my personality better.

So I traded my Turtle Trader course for Columbia University Business School’s highly respected value investing program. It had been proven, too. Columbia graduates form a who’s who of legends in investing circles.

But what I learned from my Turtle Trading experience has become invaluable. These principles can still be applied to what I do for clients today.

Here are a few key takeaways:
  1. Position sizing – This is simple in principle. Safer securities can be larger positions in a portfolio and vice-versa. Microsoft can be a 10% position due to its financial strength and robust margins. A gold stock like Fortuna Mines should be no larger than 2% cost.
  2. Sector exposure – Too much exposure to certain sectors, such as oil and gas, increase volatility and risk. We limit total position sizes in certain sectors.
  3. Patience and discipline are key – You can’t force a trade. You can only invest in what the market gives you. Time will be your friend if you do the work.
  4. Have a predetermined entry point – We only buy stocks when the price is cheap enough for an adequate return. I love it when a stock I like is cheap and hated, but it should be in an uptrend before you buy. Cheap can stay cheap for a long time. There are clues that tell us when interest is accelerating.
  5. Stop losses can be useful tools for controlling risk. Our inclination is to increase our position in core stocks such as Berkshire Hathaway and Disney when they go down. But stop losses, or selling once down 30-50% can be a useful tool for protecting capital.

Key Takeaway #6 and Whatever Happened to Mike Covel?

Mike Covel still carries the Trend Following banner today. He has written several more books on investing and hosts a monthly Podcast on his network. He lives and works in Vietnam.

As for my trading, I abandoned my discipline prematurely. The years 2008-2009 saw the financial crisis drive the U.S. stock market down 50%. Turtle Traders made small fortunes when the markets fell. (Remember, you can make money when markets go up OR down.)

I left the best year of my investing life on the table. I would have made several hundred percent while the rest of the world was licking its investment wounds. This brings me to key takeaway #6:

Trend Following, when practiced correctly, reduces risk in a portfolio, not the other way around. Managed Futures can act as a hedge against big market losses. That’s usually when they make the most money.

Oh, and I almost forgot…

Key Takeaway #7: What happened to Richard Dennis and the Original Turtle Traders?

The Turtle Trading experiment was a resounding success. In five years, the fledgling “turtles” made a collective $175 million! Many went on to start their own firms. One turtle trader flamed out. He contends he didn’t follow the system and started trading on his feelings.

Even Richard Dennis succumbed to his feelings. His firm shut down after suffering a huge drawdown. (Drawdowns in commodity trading are fairly frequent and can be large. Even hugely successful traders have suffered from at least one 70-80% drawdown.) Dennis admittedly took on too much risk later in his career. And this brings me to my last point:

Drawdowns or temporary losses are inevitable in investing. In fact, it’s been mathematically proven that you cannot extract gains without living through some temporary losses. Only Bernie Madoff avoided this. It was only when Harry Markopolos ran the numbers that he figured out they were bogus. Gains do not always go up and to the right. “The chart of his record told the story,” said Markopolos about Madoff.

How CSH Can Help…

At CSH Investment Management we use many of these tools in our practice. We know how hard it can be to find a trustworthy financial advisor.

  • “I’m afraid my guy is taking on too much risk.” In this market, it’s likely.
  • “My broker doesn’t hedge against a big market loss.” We can help.

Over the years we’ve used everything we’ve learned, from the markets and the masters, to help people hedge against the big losses in the market. If this sounds like something you’re interested in learning more about, give us a call.

Reach Out to Us!

Do you have questions or concerns about your investments, retirement plan, inheritance, business succession, or wealth management? We are obsessed with doing things well and serving our clients as if they were our own family.

Call us at 217-824-4211 or contact us via our website.