Hello, and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway and I'm Joe. Joe, what is the best financial movie of all time? Uh? The best financial movie also happens to be the best movie period, which is Trading Places. Of course, there's no question. I am so glad you said that. I was worried you were going to go with something else. The best movie, the best financial movie, and the best Christmas movie are all the same thing. It's all Trading Places, and anyone who hasn't seen it needs to press pause right now and watch it and then come back to this. Alright, So, Joe, you're clearly a fan of this movie. Um, you remember the basic premise of it. Right, There's two really wealthy commodities traders, and they make a bet about whether or not trading is something that you're born with or something that you know your upbringing kind of gives you, or whether anyone, any man on the street can be taught how to trade. We're lucky to have you managing our firm for us. Hot Wash Exeter Harvard. He's the product of good environments. It's got nothing to do with environment. With his genes, you can put Winthorpe anywhere, and he's gonna come out on top, breeding Randolph, same as in racehorses. It's in the blood, right. It's sort of a classic story. There's two very patrician heads of this commodity brokerage in Philadelphia, the Duke brothers, and they have this star trader who's played by what's his name, that actor d uh dan Ackroyd. And then one of them says it's a result of his genetics, that he's really, you know, just sort of naturally gifted, and the other one says, not nonsense, it's pure upbringing and anyone could be trained to do what he does. And so they of course find Eddie Murphy, who they find on the street basically, and they trained him to be a great trader given the right surroundings on encouragement, I'll bet that that man could run our company as well as your young Winthorpe. Are we talking about a wager Randolph? Okay, So that movie came out in nineteen three. What if I told you that around that same time there was a real life trading places experiment going on, I would be completely fascinated, and I would love to know what the results of that experiment was okay, okay, well there was. And I'm so excited because we've been trying to do this podcast for about a year now and I'm really really happy that it's finally happening. Now. When I say there was a real life trading places, I am not kidding. There were two commodities traders that essentially made the same bet as in trading places. One of them was Richard Dennis. He thought that trading skills could be taught. Another one was Bill Eckhart. He thought that people were just bored with these sort of innate intrinsic skills. And they ended up finding a group of want to be investors, want to be traders, and seeing whether or not they could successfully trade. And we are going to today not just talk to one of those former traders, were also going to talk to the author of a book, a very good book on this complete saga. He is Michael Covell. He is the author of The Complete Turtle Trader How twenty three novice investors became overnight millionaires. Joe, you can sense my excitement, right, I am just as excited as you. Michael. Thanks so much for joining us, Hey, thank you for having me, so, Michael, um, shall we start with that intro? Did we get the gist of that bet right? And is the trading places analogy the right way to think of it? There is conflicting stories, but the best of my research over the last twenty years is that Rich Dennis and Bill Eckhart went to that movie and essentially Rich said to Bill, I can do that. I can take him off the street. I can train them. And you know, Bill Eckhart said, no, impossible, And I don't think there was a monetary bet like in the movie. But they placed ads in the Baron's Wall Street Journal. Thousands of people responded, I mean at this time the biggest trading names on Wall Street where George Soros and Rich Dennis. So even though Rich Dennis has not been in the public eye for a long time, he was huge at this point in time, having made several hundred million dollars by the you have have thirty seven eighty three, so essentially, you know, really really successful. They took thousands of resumes, they hired about twenty people, gave him a couple of weeks training spread out over two years, and really pretty much out of the gate using what they would call a trend following system. These students, ranging from like nineteen to late thirties, all started to make money, huge money, a lot of money, in fact, millions of dollars. And one of those students was Jerry Parker, an accountant at a cp A firm. I answered an ad in the Wall Street Journal in the fall of nineteen eighty three. M. Richard Dennis, the famous commodities trader in Chicago, wanted to hire people, trained them, give them money, and teach them how to trade, and put them on their own. And I sort of knew that that would sounded like really good since I was an account it and a c p A firm, not having fun, wanting to get out of that as quickly as possible, leaving a small town in Virginia going to Chicago. I mean, it couldn't be any better. Um. I had heard of Richard Dennis through a Business Week article. I believe it was called the Barefoot Trader. Rich like to trade with no shoes on, I guess, so I knew it was legitimate and that this was a great idea and something that I would learn things that I would would only learn, uh by having a great mentor and a real famous smart person teach me and not something I'm gonna like learn in school or anything like that. So I I knew I was on the right track. And then it just became, you know, how do we get this job? Before we get to the training aspect of recruiting part, you said, they put ads in barrens, just asking people who if they wanted to become a trader. What were they looking for? Any qualities in those people? Were there any sort of initial screens that sort of helped them, you know, find people more predisposed to success. They did give a test, so to speak. They had true false questions and essay questions. The true false questions were essentially the types of questions that you might ask a quantitative systematic trader, because that's what they were doing. So they wanted to get people that could think in terms of odds, you know, chances, and people that could think in terms of risk. Perhaps that was in their background. There was some you know, a Dungeons and Dragons author, there were some blackjack players, there was a c p A. So they did go for people that were fairly grounded in numbers, because at the end of the day, what they taught and what they learned, what they applied, and to this day you can still see was all grounded in something that frankly, again to this day, Wall Street doesn't really pay attention to, which is this quantitative systematic trend following trading this, you know, forget the earnings reports, forget the crop reports. Who cares about the fundamentals? Were literally just trading the price of the instrument at hand. Everyone who applied, I think a thousand people in Nree, every everyone was sent a test true false test. The second part of the test was maybe five discussion questions that you had to answer in one sentence. That was a recurring theme whenever we were asked certain questions it had to be responses in one sentence. But so a hundred true false psychological type questions, trading questions, um, you know, sort of getting at the route. How do you think about life? What do you think about the markets? So I carried this trip, this test around with me for a few weeks to the audits, and you know, I was trying to delay as as much as possible sending this back in. And then I finally sent it in and I got a call to come to Chicago for an interview, walk us through what the training was like. So, two weeks of this trend following training, as you point out, it must have been pretty numbers based. It must have been pretty rigid. It can't have been that complicated if it took place within fourteen days or so. Yeah, you're you're looking to give people basic rules that would tell them when to enter a market, for example, a moving average, crossover, a breakout. You were looking to give people that that same rule could be used for your exit. Then let me get a little more complicated on position sizing. So for example, if these students and they did have limited capital, how much should they bet of their limited capital? Now at the time, at the time they were trading the most liquid futures markets. Um, that was probably, you know, less than twenty or so. Today that universe is much wider. And that was essentially what they were really learning. And it was frankly, not as much about the rules. They were important, but it was that discipline to follow the rules. Because here you have Rich Dennis who says, here you go two weeks of training. The rules are straightforward. Now I'm gonna give you my money. You have to follow these rules or you're out. You know, we have a two week course, three weeks maybe three week course, um, and we're taught everything we need to know about how to trade. Um. It's right around Christmas time. So the the final exam question was delivered at the Christmas party verbally to all of us, and that is something like if you get a sell signal and soybeans, but you hear through the grapevine that Richard Dennis is long, what are you going to do? And of course that obviously answer is we're going to follow the rules and sell those soybeans. So a lot of people describe the essence of what or what rich and Bill were trying to get out of this was can trading be taught? Rich said maybe yes, Bill said maybe no. UM, But I think in the final analysis it wasn't can it be taught? Of course, you can teach anyone the rules. These were not complicated rules. But really it is how hard is it to follow those rules all the time, regardless of how bad it gets? So, Michael, when you say they learned the exact right amount to bet, are you talking about something like the Kelly criterion? They would not have got that in depth. It would have it was something more robust and more more basic. But yeah, essentially I tell people, look, if you have uh, you know, a million dollars capital, and you're gonna go place a bet or place a trade, how much you're going to bet on each trade? You're gonna bet ten percent on each trade five. I mean, look, if you get ten losers in a row, and you're betting ten percent per your toast, because you know you're gonna get a string of ten losers, especially with the type of methodology that Rich Dennis and Bill Eckhart taught their students. So the idea was to bet small and too when you got a breakout or an entry, to take it and ride that trend as far as it could go, and within their risk management, within their position sizing, they would pyramid. So the idea would be, at the end of the day, if you had a huge moving coffee uh in X, y Z year, you would just make a fortune from coffee. Now, your other trades might be break evens, small losers, et cetera. But the idea was that each year you were going to try and capitalize on an unforeseen trend in a big liquid market, something that no one could predict and to this day, that's what they do. Did you say they would pyramid? What does that mean? Well, for example, let's say you get an entry signal. I used coffee. Let's say you got an entry signal into coffee. You take a position and coffee. If it starts to go your way, the rigid mathematics behind Eckhart's reasoning was that you would put on more, and so you might. You might start with an initial small bet, but if that trend kept going your way, you would risk more up to a limit. So they had they had certain risk management limits. Um. But that was that was the idea that you would you would pyramid, and you would increase your position if the trend that you entered kept going your way. Got it. So, talk to us a little bit about the just sort of the initial results you said they did really well, what do we know specifically about how much money was allocated to these amateur traders and how quickly and how much returns they started seeing. Well, you know, I went back and I was able to find their actual track records while they were under Dennis's management. Uh, their accounts sized ranged from you know, a few hundred thousand dollars to a million to several million, and frankly, even to this day, some of them don't understand how that money was allocated to them. And there there's not necessarily any any rhyme or reason as to how some of some of those allocations were made. But in terms of performance, I mean, these were they were blowing the doors off. This was This wasn't just twelve percent a year. They were trying to make fifty a year, a hundred percent a year. This was shooting for make a lot of money. Trick Dennis believed so strongly in this experiment that he gave them, Um, gave the traders some of his own money. Well it's significant, some of his own money to trade with, right, Yeah, absolutely, absolutely he was. They didn't have money. I mean, the deal was they were going to sign a contract, they were going to be quiet, non disclosures, and they were going to trade his capital with his rules, and they were gonna get a percentage of the cut. I think it was something in that neighborhood. And so a lot of them made several million dollars working for Witch Dennis during this almost four year time window, and they all they all went out on their own around somewhere in that neighborhood. It was the great story, frankly, of of nurture trumping nature. We talked about the Trading Places movie. But that's the great lesson for everybody here is that this isn't an innate talent that you're born with. You can be taught. You can be taught to be a great trader. And this story is so timeless for that very fact alone, Michael, we mentioned this in the intro um. But on that note, these traders, these amateur traders, were known as the turtle Traders, right, and Richard Dennis came up with that name. How did he actually come up with that? You know, there's differing stories about that name from differing turtles. Frankly, the one that's most popular is that I think this is the one that rich Dennis signs off on, is that he was in Singapore and was that a turtle breeding farm and made the off the cuff comment that I'm going to grow traders like they're growing turtles here in Singapore. Now. I also heard from one turtle that he was very fond of the musical group the Turtles. So there's differing, differing thoughts there. Uh so you mentioned it went from four to nine four years, how and why did it end? And then what did the Turtles do afterwards? You know, I don't think in hindsight Rich Dennis and Bill Eckhart ever would have ended it. But at the time, it's a long time ago, perhaps they didn't see how great of a story it was going to be. So what happened was it ended and Rich Dennis kind of closed down retired. Look, he made a fortune, and most of the Turtles when it had to register with the government as fund managers. I went to Wall Street, walked around and tried to raise money. I remember walking around and you know pay phones back then, that's you know, many many years ago. And I remember calling up the head of managed futures at Merrill Lynch and I said, um, got his assistant and she said, who are you. I said, Jerry Parker, and I like to meet with the head of the managed futures department. And she goes, um, no, no, he's very busy, and I'm and I said, well, please tell him that it's that um a turtle. And so she gets back on the phone and started and she's laughing and she's like, yeah, yeah, come on up. So one of the great things that we had coming out of those four and a half years was a legitimate track record that we could Maybe it's kind of crazy two a year, but you know, when we started raising money, it was helpful to at least have that background and that track record. And then you start toning it down trying to make fift and then you're out on your own in Richmond, Virginia. Rich is not my backstop anymore. So I'm maybe exercise a little more discretion, more my style, and so you're like, wow, this is very interesting to leave that cocoon for the for the scary world. And frankly, what's so great about this story is not only was it just the turtles, but the turtles inspired fund managers that are massive today, that are managing multibillion dollar accounts. This story wasn't just something that kind of die. Not only did the turtles call the money and make a lot of money when they left to go trade for their own accounts and trade for other customer accounts, but so many other trend following type traders. The strategy that they were using they inspired traders all around the world that today run multibillion dollar accounts, Michael, was every single turtle trader successful? Was there not a single one out of the twenty three that didn't make it? So it's an interesting question. I believe one or two of them lasted for a year, and after after the program ended, I would say over ninety of them of them went ahead and traded four clients, opened up a fund management firm, and frankly, we're successful. I'm able to find having researched this subject just about more than anybody and knowing the cast of characters, as you might imagine, the human human nature is such that you're always gonna end up with a few oddballs, and you know there was a few personality oddballs inside the experiment, but the results are overwhelming. You know you can because you can actually and you know, some people might say, hey, you know, these are just the lucky survivors, but I would say, hey, look at the few that didn't make it and find out what they did wrong. And it's pretty easy to look at the few that didn't make it and see what they did wrong. So there, it's just one of those great stories. So often when there's a popular strategy, the fear is that more and more people start to do the strategy, and then the strategy doesn't work anymore. And this sort of a common challenge in markets trades that eventually all the money has gone from them. How does that play into this story? If these turtles all were following the same rules and then they inspired all these managers, and then they had their own funds and presumably traders working for those funds learned the strategies. Did these strategies have to evolve or do they just fundamentally continue to work. How did the sort of popularity of them affect the performance? Well, trend following has fundamentally continued to work. My guess is about one quarter of one percent of all investing assets today are in trend following strategies. The vast majority of people believe in the efficient market hypothesis, they believe in indexing, buy and hold, all of these things that when the black Swan swims in like October of two thousand eight, you know, the vast majority of people get crushed. So this is a very you know, counterintuitive, alternate type strategy, and it has not slowed down at all. Now, it can be difficult for for people to perhaps stick with it because you do, you are taking risk you can possibly lose you know, depending on what leverage you're employing, you could lose your capital, perhaps even more. But then again, you know where Buffets taken his share of fifty draw douts. It's just one of these rate under the radar type strategies. And I think, what's really cool. I mentioned October of two thousand and eight. It's the one strategy that made a fortune in that month of October two thousand and eight. So you know, when Nessim Talib talks about the black Swans, this is truly a great black Swan strategy at its foundation, at its core. But if I could play Devil's advocate for a second, if the strategy is so simple that it can be taught in two weeks to novice traders, then why isn't everyone doing this? It's a good question. But that's why Daniel Kaneman won the Nobel Prize, right, That's why amis diversity. If he would have been alive, would have got it as well. That's why behavioral finance exists. Uh, you know, people don't want to look outside of the mainstream, and the mainstream is the vast majority of investing assets are in passive index funds waiting for something bad to happen. So it's just a it's a it's an alternate, counterintuitive strategy that most people aren't willing to accept. Especially. Look if when the stock markets at all time highs, people say, hey, this looks great, I don't have to worry about anything. Mainly, I believe that the trend following that works longer term than it used to be is very unappealing. And um, there's some inherent characteristics of trend folding that make it something that is not something people really want to do. Winning trades. Who in the right mind everyone knows you've got at least have a fift win rate. Uh No, not really. UM is about as well good as you're gonna do. Uh take small losses all the time, so you're always getting in and getting out with the small loss, and then of course it goes right back to the high you have to buy it again. So it's a very painful way of trading. UM. Small profits turned into losses. You're just following that system. You can't say, you know, I want to book a profit here. No, you have to wait for that moving average or break out to be hit big profits turned into small profits. Um, the draw downs are horrible. Um, it's usually, I think, for a lot of smart people the first place to start this trend. Following now, we certainly should be able to improve upon it with little bells and whistles here and there. And I think that's where people get in trouble because I've never tried to really improve upon it. I've just accepted my fate that, Yes, if you're going to have a systematic approach that continues to work, it's in the public domain. They write PhDs, write papers about it about how continues to work. Then it seems only fair that it should produce a fair amount of of pain and suffering and bad periods, and that sort of I think keeps too many people away from it. Do you think the turtle experiment would work again in today's markets? And Joe kind of hinted at this, But in markets that are, you know, full of passive investors, full of high frequency traders, momentum trading, all of that, will the turtle rules and the turtle experiments still uphold well, momentum is that was what they were taught. There's two there's two types of momentum. There's time serious momentum, there's cross sectional momentum, and they were taught time serious momentum strategies I e. Trend following. Would it continue to work? I could sit here and I won't bore you, but I could rattle off the names of the professional fund managers working today. So no, trend following is is never going to go away. As long as we have human nature does this? Does trend following work across all asset classes? So you mentioned that they turtles trade liquid futures, but is there the same principles applied to equities and currencies and uh fixed income assets? Absolutely? Absolutely they Back in the day of the turtles, it was it was commodity markets. You know, your your coffee, your gold, your currencies. That has not changed today. I think the only thing that's changed is perhaps more individual equities have been added to trend falling portfolios. But if you really think about it, since you're just trading price action here, there's no fundamentals involved, it's really hard to make the jump that the the action of markets would be different when you when you look across instruments, because look, these instruments are just representation of people and you know, so it's all humans making making these decisions. So really, if you just think about it that way, there really shouldn't be an expectation that it should behave differently. As long as as long as people are involved in markets, there's going to be extreme moves, and as long as there's extreme moves, strategies like trend following will continue to perform. Well, I want to get back to the trading places analogy, because the way the turtle trading experiment was structured, you put these ads in newspapers and these people responded to them. So I'm wondering if in some respect the turtle traders kind of self selected themselves. I mean, they were all reading Barrens and the Wall Street Journal anyway, so they clearly had some sort of interest in markets, and they were probably reasonably smart people. So when we look at this experiment and the successful outcome, how much can we actually read into that outcome? Like, could you apply this to anyone just the man off the street in training places it was a homeless Eddie Murphy. Would that work? Well? I don't think in any endeavor in life you can take somebody off the street that has no motivation, no drive, no desire for excellence. I don't care whether it's sports or whatever the job is. I mean, you've got to have some internal combustion going on there otherwise it's going to fail. So I think if you just take I'm gonna use a not not a bad word. If you take some dolt off the street who doesn't really care and it's not really interested, they're going to fail and they should fail. You mentioned that it's still a very tiny amount of assets today are in trend following strategies. You're obviously sort of deep in the weeds on this whole space or what is Do you see a lot of people or do you see interest in these strategies still growing rapidly today, Like especially as people sort of rediscover the story find resources on the internet, has interest picked up? Well? Yeah, absolutely, And I wouldn't say there's been an explosion of assets, but it's a steady growth of assets under management in trend following strategies. The reason for that is most pension firms today understand that if they're long only stocks, they're exposed. There's a certain risk exposure there. So if they can add into their portfolio, this is like Harry mark at what's one on one If you can add into your portfolio something that's not correlated, you know, spending off a different risk return profile, all of a sudden you end up with a little bit more performance and a little less risk. So it makes a lot of sense for everyone for that reason. And you can find these days, there's been quite a few managers that have gone ahead and put together public mutual funds UH public ETFs. So there's different ways for people to participate. Of course, they can go do it on their own as well too. Did Bill Eckert pay Richard Dennis a dollar? I never heard anything like that. I don't know if that was their bet. Maybe if you get rich Dennis on the phone, he can answer for you. I mean, it's it's kind of hard to believe. I can, I can. I kind of hear that in both of you, like, oh my god, this story. You know it's because you know you you got the book in front of you know it's factual. But it's still hard to believe, isn't it. Yeah. I think the part that's hard to believe is not the story of self. Like, I'm not surprised the you know, the period from four to nine in eight that I don't find hard to believe. And I also don't really find it hard to believe that a lot of those um that a lot of those traders went on to have a lot of success and influence. I think the part that feels counterintuitive to me is the idea that there's this strategy that exists out there. The way you say it kind of sounds like picking up free money. That it's more that it works, that it hasn't been diminished by the fact that you wrote this book, and that all of that, this uh, this incident is the stuff of Wall Street legend, that despite all this attention, that the strategy still fundamentally works without a whole lot of innovation. I think that's the part that to me most intensely flies in the face of how we talk about finance. That it shouldn't be not that beating the market is impossible, but that one strategy or one principle can beat the market on an enduring basis for so long. Is the is the part that, um, it's still hard to believe, but I mean I believe it. I just it's just the part that makes me uncomfortable. Does that make sense? Well, I think it's it gets it gets back to I bring up Daniel Kneman again. It's his work. If you were to find a strategy that exemplified prospect theory and a lot of his behavioral work, and then many other great minds that have come after him diving into behavioral finance, that psychological element. Look, you can have the rules. Rich Dennis used to say, he could publish the rules in a paper. It doesn't make a difference if people aren't gonna do it. So we could sit here and talk about rules all day long. And yes, the rules are clever and they're interesting. But if you, anybody, me, you, whoever is listening, if you don't understand those natural biases that you have built into you, and you have not put it in your mind that you're going to stick to these rules no matter what, then it shouldn't really be a surprise that, frankly, a lot of people don't want to do it. I mean, like that's the whole reason why. I mean, Michael Lewis's new book that's out right now, it's the it's the foundation. People are just people, and you know, we're all a little bit crazy, and we really, you know, we want to we want to get rich quick, and we want to we want to trust people on Wall Street telling us about the latest you know, high frequency this, so the latest crop report, and so you know, it's a quantitative strategy that perhaps doesn't make money for two years and then all of a sudden makes a fortune in October of two thousand and eight, or has an up and down period for a stretch. People aren't interested in that, at least the the the uninitiated are not interested in that. I was going to ask you a question which I thought Tracy was gonna ask, but which is, why do we need people to do it? If it's just about having the discipline, If it's just about having the discipline to follow rules, and if it's mainly that the main way you screw up is by letting emotion come into it doing something intuitive in a market dislocation, why not just feed the rules to robots and have them execute the rules without emotion. Absolutely, I think that's exactly right. Once the initial set up and discretionary minor discretionary decisions have been made, let it go. I mean, in my opinion, um, humans are just going to introduce bad things, not tinkering, you know, stop the tinkering, stop trying to make it better. Uh, enjoy the fact that it's not that great and it's very brutal. It's not going to make eight percent a year like the stock market with a draw down because we just have too much diversification, too much risk control. So we'll make eight percent with draw down. That's still pretty painful. So enjoy that and see that as a positive characteristic to suffer what saw losses and big draw downs and you made a lot of money, then you gave it all back. Find joy and comfort and following those rules and quit tinkering. So yeah, I'm not a fan of human humans intervention, and yeah, I agree totally so Joe. I don't know about you, but I loved that episode and I'm so glad that we could finally finally talk about the Turtle Traders. I know you've been wanting to do this episode for a really long time. I'm glad it came together. I mean, I'm such a huge fan of Trading Place, as anyone who knows me knows that I watch it every year or on Christmas. It's my favorite movie. Um, I had no idea that there was anything like that in real life had actually happened. So that simple fact alone blows my mind. But also just the you know, the fact that this strategy persists is still amazing to me. I still like, don't you can't totally wrap my head around around it that there's people that, uh say that they have this strategy that just continues to work year after year. But kind of remarkable. So that's the one thing that makes me slightly uncomfortable about the story, Like this idea that you can get a bunch of people into a room and teach them these rules in the space of two weeks and the rules always work, and they would work for anyone. Again, we we talked about it in the show, but I'm just not entirely sure why if it's that easy, everyone doesn't do it. And again I get the whole behavioral aspect to it, but as you were pointing out, why don't we just have all the robots doing that same strategy. It really is uncomfortable. I think, like, especially as journalists as we are, this concept like we're just sort of our minds are trained and to be skeptical of anything approaching this and so this idea is sort of like pique uncomfortable nous for people like us, the fact that maybe it is the simple, Maybe there is a set of rules, Maybe there is a an investment approach that works decade after decade. I mean, I guess it's not impossible. I've you know, it's interesting that there's there is academic literature that backs up the case for trend following is a consistently outperforming strategy. It's just so it just feels so unnatural to us, Isn't there right? Maybe? Yeah, I think that's right. Maybe we need to do a first person experiment. We need to go out and become turtle traders ourselves and see what happens. Oh, I love that idea that we like. Maybe, like, maybe we'll start a little um odd lodge hedge fund and uh and then uh and then start to start trend following with that. Yeah, let's do that, all right, that'll be fun. All right. Well that was another edition of the Thoughts Podcast. I'm Joe Wisn't thal. You can follow me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. And you can follow Jerry Parker on Twitter at r j Parker. J r zero nine. You can also follow our guest, Michael Covel. He is on Twitter at Covel and you can listen to his podcast. It's called trend Following with Michael Covell. Thanks for listening

Hello, and welcome to another episode of the Odd Thoughts Podcast. I'm Tracy Alloway and I'm Joe. Joe, what is the best financial movie of all time? Uh? The best financial movie also happens to be the best movie period, which is Trading Places. Of course, there's no question. I am so glad you said that. I was worried you were going to go with something else. The best movie, the best financial movie, and the best Christmas movie are all the same thing. It's all Trading Places, and anyone who hasn't seen it needs to press pause right now and watch it and then come back to this. Alright, So, Joe, you're clearly a fan of this movie. Um, you remember the basic premise of it. Right, There's two really wealthy commodities traders, and they make a bet about whether or not trading is something that you're born with or something that you know your upbringing kind of gives you, or whether anyone, any man on the street can be taught how to trade. We're lucky to have you managing our firm for us. Hot Wash Exeter Harvard. He's the product of good environments. It's got nothing to do with environment. With his genes, you can put Winthorpe anywhere, and he's gonna come out on top, breeding Randolph, same as in racehorses. It's in the blood, right. It's sort of a classic story. There's two very patrician heads of this commodity brokerage in Philadelphia, the Duke brothers, and they have this star trader who's played by what's his name, that actor d uh dan Ackroyd. And then one of them says it's a result of his genetics, that he's really, you know, just sort of naturally gifted, and the other one says, not nonsense, it's pure upbringing and anyone could be trained to do what he does. And so they of course find Eddie Murphy, who they find on the street basically, and they trained him to be a great trader given the right surroundings on encouragement, I'll bet that that man could run our company as well as your young Winthorpe. Are we talking about a wager Randolph? Okay, So that movie came out in nineteen three. What if I told you that around that same time there was a real life trading places experiment going on, I would be completely fascinated, and I would love to know what the results of that experiment was okay, okay, well there was. And I'm so excited because we've been trying to do this podcast for about a year now and I'm really really happy that it's finally happening. Now. When I say there was a real life trading places, I am not kidding. There were two commodities traders that essentially made the same bet as in trading places. One of them was Richard Dennis. He thought that trading skills could be taught. Another one was Bill Eckhart. He thought that people were just bored with these sort of innate intrinsic skills. And they ended up finding a group of want to be investors, want to be traders, and seeing whether or not they could successfully trade. And we are going to today not just talk to one of those former traders, were also going to talk to the author of a book, a very good book on this complete saga. He is Michael Covell. He is the author of The Complete Turtle Trader How twenty three novice investors became overnight millionaires. Joe, you can sense my excitement, right, I am just as excited as you. Michael. Thanks so much for joining us, Hey, thank you for having me, so, Michael, um, shall we start with that intro? Did we get the gist of that bet right? And is the trading places analogy the right way to think of it? There is conflicting stories, but the best of my research over the last twenty years is that Rich Dennis and Bill Eckhart went to that movie and essentially Rich said to Bill, I can do that. I can take him off the street. I can train them. And you know, Bill Eckhart said, no, impossible, And I don't think there was a monetary bet like in the movie. But they placed ads in the Baron's Wall Street Journal. Thousands of people responded, I mean at this time the biggest trading names on Wall Street where George Soros and Rich Dennis. So even though Rich Dennis has not been in the public eye for a long time, he was huge at this point in time, having made several hundred million dollars by the you have have thirty seven eighty three, so essentially, you know, really really successful. They took thousands of resumes, they hired about twenty people, gave him a couple of weeks training spread out over two years, and really pretty much out of the gate using what they would call a trend following system. These students, ranging from like nineteen to late thirties, all started to make money, huge money, a lot of money, in fact, millions of dollars. And one of those students was Jerry Parker, an accountant at a cp A firm. I answered an ad in the Wall Street Journal in the fall of nineteen eighty three. M. Richard Dennis, the famous commodities trader in Chicago, wanted to hire people, trained them, give them money, and teach them how to trade, and put them on their own. And I sort of knew that that would sounded like really good since I was an account it and a c p A firm, not having fun, wanting to get out of that as quickly as possible, leaving a small town in Virginia going to Chicago. I mean, it couldn't be any better. Um. I had heard of Richard Dennis through a Business Week article. I believe it was called the Barefoot Trader. Rich like to trade with no shoes on, I guess, so I knew it was legitimate and that this was a great idea and something that I would learn things that I would would only learn, uh by having a great mentor and a real famous smart person teach me and not something I'm gonna like learn in school or anything like that. So I I knew I was on the right track. And then it just became, you know, how do we get this job? Before we get to the training aspect of recruiting part, you said, they put ads in barrens, just asking people who if they wanted to become a trader. What were they looking for? Any qualities in those people? Were there any sort of initial screens that sort of helped them, you know, find people more predisposed to success. They did give a test, so to speak. They had true false questions and essay questions. The true false questions were essentially the types of questions that you might ask a quantitative systematic trader, because that's what they were doing. So they wanted to get people that could think in terms of odds, you know, chances, and people that could think in terms of risk. Perhaps that was in their background. There was some you know, a Dungeons and Dragons author, there were some blackjack players, there was a c p A. So they did go for people that were fairly grounded in numbers, because at the end of the day, what they taught and what they learned, what they applied, and to this day you can still see was all grounded in something that frankly, again to this day, Wall Street doesn't really pay attention to, which is this quantitative systematic trend following trading this, you know, forget the earnings reports, forget the crop reports. Who cares about the fundamentals? Were literally just trading the price of the instrument at hand. Everyone who applied, I think a thousand people in Nree, every everyone was sent a test true false test. The second part of the test was maybe five discussion questions that you had to answer in one sentence. That was a recurring theme whenever we were asked certain questions it had to be responses in one sentence. But so a hundred true false psychological type questions, trading questions, um, you know, sort of getting at the route. How do you think about life? What do you think about the markets? So I carried this trip, this test around with me for a few weeks to the audits, and you know, I was trying to delay as as much as possible sending this back in. And then I finally sent it in and I got a call to come to Chicago for an interview, walk us through what the training was like. So, two weeks of this trend following training, as you point out, it must have been pretty numbers based. It must have been pretty rigid. It can't have been that complicated if it took place within fourteen days or so. Yeah, you're you're looking to give people basic rules that would tell them when to enter a market, for example, a moving average, crossover, a breakout. You were looking to give people that that same rule could be used for your exit. Then let me get a little more complicated on position sizing. So for example, if these students and they did have limited capital, how much should they bet of their limited capital? Now at the time, at the time they were trading the most liquid futures markets. Um, that was probably, you know, less than twenty or so. Today that universe is much wider. And that was essentially what they were really learning. And it was frankly, not as much about the rules. They were important, but it was that discipline to follow the rules. Because here you have Rich Dennis who says, here you go two weeks of training. The rules are straightforward. Now I'm gonna give you my money. You have to follow these rules or you're out. You know, we have a two week course, three weeks maybe three week course, um, and we're taught everything we need to know about how to trade. Um. It's right around Christmas time. So the the final exam question was delivered at the Christmas party verbally to all of us, and that is something like if you get a sell signal and soybeans, but you hear through the grapevine that Richard Dennis is long, what are you going to do? And of course that obviously answer is we're going to follow the rules and sell those soybeans. So a lot of people describe the essence of what or what rich and Bill were trying to get out of this was can trading be taught? Rich said maybe yes, Bill said maybe no. UM, But I think in the final analysis it wasn't can it be taught? Of course, you can teach anyone the rules. These were not complicated rules. But really it is how hard is it to follow those rules all the time, regardless of how bad it gets? So, Michael, when you say they learned the exact right amount to bet, are you talking about something like the Kelly criterion? They would not have got that in depth. It would have it was something more robust and more more basic. But yeah, essentially I tell people, look, if you have uh, you know, a million dollars capital, and you're gonna go place a bet or place a trade, how much you're going to bet on each trade? You're gonna bet ten percent on each trade five. I mean, look, if you get ten losers in a row, and you're betting ten percent per your toast, because you know you're gonna get a string of ten losers, especially with the type of methodology that Rich Dennis and Bill Eckhart taught their students. So the idea was to bet small and too when you got a breakout or an entry, to take it and ride that trend as far as it could go, and within their risk management, within their position sizing, they would pyramid. So the idea would be, at the end of the day, if you had a huge moving coffee uh in X, y Z year, you would just make a fortune from coffee. Now, your other trades might be break evens, small losers, et cetera. But the idea was that each year you were going to try and capitalize on an unforeseen trend in a big liquid market, something that no one could predict and to this day, that's what they do. Did you say they would pyramid? What does that mean? Well, for example, let's say you get an entry signal. I used coffee. Let's say you got an entry signal into coffee. You take a position and coffee. If it starts to go your way, the rigid mathematics behind Eckhart's reasoning was that you would put on more, and so you might. You might start with an initial small bet, but if that trend kept going your way, you would risk more up to a limit. So they had they had certain risk management limits. Um. But that was that was the idea that you would you would pyramid, and you would increase your position if the trend that you entered kept going your way. Got it. So, talk to us a little bit about the just sort of the initial results you said they did really well, what do we know specifically about how much money was allocated to these amateur traders and how quickly and how much returns they started seeing. Well, you know, I went back and I was able to find their actual track records while they were under Dennis's management. Uh, their accounts sized ranged from you know, a few hundred thousand dollars to a million to several million, and frankly, even to this day, some of them don't understand how that money was allocated to them. And there there's not necessarily any any rhyme or reason as to how some of some of those allocations were made. But in terms of performance, I mean, these were they were blowing the doors off. This was This wasn't just twelve percent a year. They were trying to make fifty a year, a hundred percent a year. This was shooting for make a lot of money. Trick Dennis believed so strongly in this experiment that he gave them, Um, gave the traders some of his own money. Well it's significant, some of his own money to trade with, right, Yeah, absolutely, absolutely he was. They didn't have money. I mean, the deal was they were going to sign a contract, they were going to be quiet, non disclosures, and they were going to trade his capital with his rules, and they were gonna get a percentage of the cut. I think it was something in that neighborhood. And so a lot of them made several million dollars working for Witch Dennis during this almost four year time window, and they all they all went out on their own around somewhere in that neighborhood. It was the great story, frankly, of of nurture trumping nature. We talked about the Trading Places movie. But that's the great lesson for everybody here is that this isn't an innate talent that you're born with. You can be taught. You can be taught to be a great trader. And this story is so timeless for that very fact alone, Michael, we mentioned this in the intro um. But on that note, these traders, these amateur traders, were known as the turtle Traders, right, and Richard Dennis came up with that name. How did he actually come up with that? You know, there's differing stories about that name from differing turtles. Frankly, the one that's most popular is that I think this is the one that rich Dennis signs off on, is that he was in Singapore and was that a turtle breeding farm and made the off the cuff comment that I'm going to grow traders like they're growing turtles here in Singapore. Now. I also heard from one turtle that he was very fond of the musical group the Turtles. So there's differing, differing thoughts there. Uh so you mentioned it went from four to nine four years, how and why did it end? And then what did the Turtles do afterwards? You know, I don't think in hindsight Rich Dennis and Bill Eckhart ever would have ended it. But at the time, it's a long time ago, perhaps they didn't see how great of a story it was going to be. So what happened was it ended and Rich Dennis kind of closed down retired. Look, he made a fortune, and most of the Turtles when it had to register with the government as fund managers. I went to Wall Street, walked around and tried to raise money. I remember walking around and you know pay phones back then, that's you know, many many years ago. And I remember calling up the head of managed futures at Merrill Lynch and I said, um, got his assistant and she said, who are you. I said, Jerry Parker, and I like to meet with the head of the managed futures department. And she goes, um, no, no, he's very busy, and I'm and I said, well, please tell him that it's that um a turtle. And so she gets back on the phone and started and she's laughing and she's like, yeah, yeah, come on up. So one of the great things that we had coming out of those four and a half years was a legitimate track record that we could Maybe it's kind of crazy two a year, but you know, when we started raising money, it was helpful to at least have that background and that track record. And then you start toning it down trying to make fift and then you're out on your own in Richmond, Virginia. Rich is not my backstop anymore. So I'm maybe exercise a little more discretion, more my style, and so you're like, wow, this is very interesting to leave that cocoon for the for the scary world. And frankly, what's so great about this story is not only was it just the turtles, but the turtles inspired fund managers that are massive today, that are managing multibillion dollar accounts. This story wasn't just something that kind of die. Not only did the turtles call the money and make a lot of money when they left to go trade for their own accounts and trade for other customer accounts, but so many other trend following type traders. The strategy that they were using they inspired traders all around the world that today run multibillion dollar accounts, Michael, was every single turtle trader successful? Was there not a single one out of the twenty three that didn't make it? So it's an interesting question. I believe one or two of them lasted for a year, and after after the program ended, I would say over ninety of them of them went ahead and traded four clients, opened up a fund management firm, and frankly, we're successful. I'm able to find having researched this subject just about more than anybody and knowing the cast of characters, as you might imagine, the human human nature is such that you're always gonna end up with a few oddballs, and you know there was a few personality oddballs inside the experiment, but the results are overwhelming. You know you can because you can actually and you know, some people might say, hey, you know, these are just the lucky survivors, but I would say, hey, look at the few that didn't make it and find out what they did wrong. And it's pretty easy to look at the few that didn't make it and see what they did wrong. So there, it's just one of those great stories. So often when there's a popular strategy, the fear is that more and more people start to do the strategy, and then the strategy doesn't work anymore. And this sort of a common challenge in markets trades that eventually all the money has gone from them. How does that play into this story? If these turtles all were following the same rules and then they inspired all these managers, and then they had their own funds and presumably traders working for those funds learned the strategies. Did these strategies have to evolve or do they just fundamentally continue to work. How did the sort of popularity of them affect the performance? Well, trend following has fundamentally continued to work. My guess is about one quarter of one percent of all investing assets today are in trend following strategies. The vast majority of people believe in the efficient market hypothesis, they believe in indexing, buy and hold, all of these things that when the black Swan swims in like October of two thousand eight, you know, the vast majority of people get crushed. So this is a very you know, counterintuitive, alternate type strategy, and it has not slowed down at all. Now, it can be difficult for for people to perhaps stick with it because you do, you are taking risk you can possibly lose you know, depending on what leverage you're employing, you could lose your capital, perhaps even more. But then again, you know where Buffets taken his share of fifty draw douts. It's just one of these rate under the radar type strategies. And I think, what's really cool. I mentioned October of two thousand and eight. It's the one strategy that made a fortune in that month of October two thousand and eight. So you know, when Nessim Talib talks about the black Swans, this is truly a great black Swan strategy at its foundation, at its core. But if I could play Devil's advocate for a second, if the strategy is so simple that it can be taught in two weeks to novice traders, then why isn't everyone doing this? It's a good question. But that's why Daniel Kaneman won the Nobel Prize, right, That's why amis diversity. If he would have been alive, would have got it as well. That's why behavioral finance exists. Uh, you know, people don't want to look outside of the mainstream, and the mainstream is the vast majority of investing assets are in passive index funds waiting for something bad to happen. So it's just a it's a it's an alternate, counterintuitive strategy that most people aren't willing to accept. Especially. Look if when the stock markets at all time highs, people say, hey, this looks great, I don't have to worry about anything. Mainly, I believe that the trend following that works longer term than it used to be is very unappealing. And um, there's some inherent characteristics of trend folding that make it something that is not something people really want to do. Winning trades. Who in the right mind everyone knows you've got at least have a fift win rate. Uh No, not really. UM is about as well good as you're gonna do. Uh take small losses all the time, so you're always getting in and getting out with the small loss, and then of course it goes right back to the high you have to buy it again. So it's a very painful way of trading. UM. Small profits turned into losses. You're just following that system. You can't say, you know, I want to book a profit here. No, you have to wait for that moving average or break out to be hit big profits turned into small profits. Um, the draw downs are horrible. Um, it's usually, I think, for a lot of smart people the first place to start this trend. Following now, we certainly should be able to improve upon it with little bells and whistles here and there. And I think that's where people get in trouble because I've never tried to really improve upon it. I've just accepted my fate that, Yes, if you're going to have a systematic approach that continues to work, it's in the public domain. They write PhDs, write papers about it about how continues to work. Then it seems only fair that it should produce a fair amount of of pain and suffering and bad periods, and that sort of I think keeps too many people away from it. Do you think the turtle experiment would work again in today's markets? And Joe kind of hinted at this, But in markets that are, you know, full of passive investors, full of high frequency traders, momentum trading, all of that, will the turtle rules and the turtle experiments still uphold well, momentum is that was what they were taught. There's two there's two types of momentum. There's time serious momentum, there's cross sectional momentum, and they were taught time serious momentum strategies I e. Trend following. Would it continue to work? I could sit here and I won't bore you, but I could rattle off the names of the professional fund managers working today. So no, trend following is is never going to go away. As long as we have human nature does this? Does trend following work across all asset classes? So you mentioned that they turtles trade liquid futures, but is there the same principles applied to equities and currencies and uh fixed income assets? Absolutely? Absolutely they Back in the day of the turtles, it was it was commodity markets. You know, your your coffee, your gold, your currencies. That has not changed today. I think the only thing that's changed is perhaps more individual equities have been added to trend falling portfolios. But if you really think about it, since you're just trading price action here, there's no fundamentals involved, it's really hard to make the jump that the the action of markets would be different when you when you look across instruments, because look, these instruments are just representation of people and you know, so it's all humans making making these decisions. So really, if you just think about it that way, there really shouldn't be an expectation that it should behave differently. As long as as long as people are involved in markets, there's going to be extreme moves, and as long as there's extreme moves, strategies like trend following will continue to perform. Well, I want to get back to the trading places analogy, because the way the turtle trading experiment was structured, you put these ads in newspapers and these people responded to them. So I'm wondering if in some respect the turtle traders kind of self selected themselves. I mean, they were all reading Barrens and the Wall Street Journal anyway, so they clearly had some sort of interest in markets, and they were probably reasonably smart people. So when we look at this experiment and the successful outcome, how much can we actually read into that outcome? Like, could you apply this to anyone just the man off the street in training places it was a homeless Eddie Murphy. Would that work? Well? I don't think in any endeavor in life you can take somebody off the street that has no motivation, no drive, no desire for excellence. I don't care whether it's sports or whatever the job is. I mean, you've got to have some internal combustion going on there otherwise it's going to fail. So I think if you just take I'm gonna use a not not a bad word. If you take some dolt off the street who doesn't really care and it's not really interested, they're going to fail and they should fail. You mentioned that it's still a very tiny amount of assets today are in trend following strategies. You're obviously sort of deep in the weeds on this whole space or what is Do you see a lot of people or do you see interest in these strategies still growing rapidly today, Like especially as people sort of rediscover the story find resources on the internet, has interest picked up? Well? Yeah, absolutely, And I wouldn't say there's been an explosion of assets, but it's a steady growth of assets under management in trend following strategies. The reason for that is most pension firms today understand that if they're long only stocks, they're exposed. There's a certain risk exposure there. So if they can add into their portfolio, this is like Harry mark at what's one on one If you can add into your portfolio something that's not correlated, you know, spending off a different risk return profile, all of a sudden you end up with a little bit more performance and a little less risk. So it makes a lot of sense for everyone for that reason. And you can find these days, there's been quite a few managers that have gone ahead and put together public mutual funds UH public ETFs. So there's different ways for people to participate. Of course, they can go do it on their own as well too. Did Bill Eckert pay Richard Dennis a dollar? I never heard anything like that. I don't know if that was their bet. Maybe if you get rich Dennis on the phone, he can answer for you. I mean, it's it's kind of hard to believe. I can, I can. I kind of hear that in both of you, like, oh my god, this story. You know it's because you know you you got the book in front of you know it's factual. But it's still hard to believe, isn't it. Yeah. I think the part that's hard to believe is not the story of self. Like, I'm not surprised the you know, the period from four to nine in eight that I don't find hard to believe. And I also don't really find it hard to believe that a lot of those um that a lot of those traders went on to have a lot of success and influence. I think the part that feels counterintuitive to me is the idea that there's this strategy that exists out there. The way you say it kind of sounds like picking up free money. That it's more that it works, that it hasn't been diminished by the fact that you wrote this book, and that all of that, this uh, this incident is the stuff of Wall Street legend, that despite all this attention, that the strategy still fundamentally works without a whole lot of innovation. I think that's the part that to me most intensely flies in the face of how we talk about finance. That it shouldn't be not that beating the market is impossible, but that one strategy or one principle can beat the market on an enduring basis for so long. Is the is the part that, um, it's still hard to believe, but I mean I believe it. I just it's just the part that makes me uncomfortable. Does that make sense? Well, I think it's it gets it gets back to I bring up Daniel Kneman again. It's his work. If you were to find a strategy that exemplified prospect theory and a lot of his behavioral work, and then many other great minds that have come after him diving into behavioral finance, that psychological element. Look, you can have the rules. Rich Dennis used to say, he could publish the rules in a paper. It doesn't make a difference if people aren't gonna do it. So we could sit here and talk about rules all day long. And yes, the rules are clever and they're interesting. But if you, anybody, me, you, whoever is listening, if you don't understand those natural biases that you have built into you, and you have not put it in your mind that you're going to stick to these rules no matter what, then it shouldn't really be a surprise that, frankly, a lot of people don't want to do it. I mean, like that's the whole reason why. I mean, Michael Lewis's new book that's out right now, it's the it's the foundation. People are just people, and you know, we're all a little bit crazy, and we really, you know, we want to we want to get rich quick, and we want to we want to trust people on Wall Street telling us about the latest you know, high frequency this, so the latest crop report, and so you know, it's a quantitative strategy that perhaps doesn't make money for two years and then all of a sudden makes a fortune in October of two thousand and eight, or has an up and down period for a stretch. People aren't interested in that, at least the the the uninitiated are not interested in that. I was going to ask you a question which I thought Tracy was gonna ask, but which is, why do we need people to do it? If it's just about having the discipline, If it's just about having the discipline to follow rules, and if it's mainly that the main way you screw up is by letting emotion come into it doing something intuitive in a market dislocation, why not just feed the rules to robots and have them execute the rules without emotion. Absolutely, I think that's exactly right. Once the initial set up and discretionary minor discretionary decisions have been made, let it go. I mean, in my opinion, um, humans are just going to introduce bad things, not tinkering, you know, stop the tinkering, stop trying to make it better. Uh, enjoy the fact that it's not that great and it's very brutal. It's not going to make eight percent a year like the stock market with a draw down because we just have too much diversification, too much risk control. So we'll make eight percent with draw down. That's still pretty painful. So enjoy that and see that as a positive characteristic to suffer what saw losses and big draw downs and you made a lot of money, then you gave it all back. Find joy and comfort and following those rules and quit tinkering. So yeah, I'm not a fan of human humans intervention, and yeah, I agree totally so Joe. I don't know about you, but I loved that episode and I'm so glad that we could finally finally talk about the Turtle Traders. I know you've been wanting to do this episode for a really long time. I'm glad it came together. I mean, I'm such a huge fan of Trading Place, as anyone who knows me knows that I watch it every year or on Christmas. It's my favorite movie. Um, I had no idea that there was anything like that in real life had actually happened. So that simple fact alone blows my mind. But also just the you know, the fact that this strategy persists is still amazing to me. I still like, don't you can't totally wrap my head around around it that there's people that, uh say that they have this strategy that just continues to work year after year. But kind of remarkable. So that's the one thing that makes me slightly uncomfortable about the story, Like this idea that you can get a bunch of people into a room and teach them these rules in the space of two weeks and the rules always work, and they would work for anyone. Again, we we talked about it in the show, but I'm just not entirely sure why if it's that easy, everyone doesn't do it. And again I get the whole behavioral aspect to it, but as you were pointing out, why don't we just have all the robots doing that same strategy. It really is uncomfortable. I think, like, especially as journalists as we are, this concept like we're just sort of our minds are trained and to be skeptical of anything approaching this and so this idea is sort of like pique uncomfortable nous for people like us, the fact that maybe it is the simple, Maybe there is a set of rules, Maybe there is a an investment approach that works decade after decade. I mean, I guess it's not impossible. I've you know, it's interesting that there's there is academic literature that backs up the case for trend following is a consistently outperforming strategy. It's just so it just feels so unnatural to us, Isn't there right? Maybe? Yeah, I think that's right. Maybe we need to do a first person experiment. We need to go out and become turtle traders ourselves and see what happens. Oh, I love that idea that we like. Maybe, like, maybe we'll start a little um odd lodge hedge fund and uh and then uh and then start to start trend following with that. Yeah, let's do that, all right, that'll be fun. All right. Well that was another edition of the Thoughts Podcast. I'm Joe Wisn't thal. You can follow me on Twitter at the Stalwart, and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. And you can follow Jerry Parker on Twitter at r j Parker. J r zero nine. You can also follow our guest, Michael Covel. He is on Twitter at Covel and you can listen to his podcast. It's called trend Following with Michael Covell. Thanks for listening