The Simple Dollar: “Review: The Complete TurtleTrader” plus 1 more

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Review: The Complete TurtleTrader Posted: 11 Sep 2011 01:00 PM PDT Every Sunday, The Simple Dollar reviews a personal finance or other book of interest. Also available is a complete list of the hundreds of book reviews that have appeared on The Simple Dollar over the years. This is an interesting mix of a book. On one hand, it’s something of a book on how to “beat” the stock market, identifying a set of rules for investing that Richard Dennis and a group of his students used for incredible investing success in the 1970s, 1980s, and 1990s. On the other hand, it’s also something of an oral history of many elements of the investing world at that time (and up to today). To put it simply, I found Michael Covel’s The Complete TurtleTrader interesting in a way that many personal finance books fail to do. It was the story that hooked me, not so much the investment advice. Nature Versus Nurture The book starts by relating an idea held by Richard Dennis, a very successful Chicago commodities trader in the early 1980s, that he could teach the ideas he’d developed to almost anyone and that they would become very successful traders in their own right. In reality, this is something of a question of nature versus nurture: is someone naturally gifted at something like successful stock trading, or do they learn it? Prince of the Pit This section is a biography of Dennis, laying out how he came from a relatively poor background to be a great commodities trader. The impression I got from this story is that he was someone with diverse interests and a keen ability for noticing patterns, the latter of which led to his great success. The Turtles How did he decide who to teach? He gave out an open invitation to anyone who wanted to try, then filtered them with a questionnaire and interviews. Essentially, Dennis wanted people with a high math aptitude and a willingness to take on reasonable risk (but not unreasonable risk). The Philosophy This section, and the one that follows it, outlines the basic investing philosophy he taught. The basic procedure behind all of it is the scientific procedure – question, hypothesis, testing, conclusion, and repeat. As long as you keep asking questions and come up with sensible tests to determine if your hypothetical answers to those questions are true, you’ll end up doing well in investing. The Rules In essence, all the Turtles cared about were the numbers. They largely ignored the news media and essentially focused on a form of technical analysis of the stock market, where they look for lows and highs and make trades in response to those. In the Womb The Turtles were given a (relatively) small fund to invest with and largely failed at first. Their motivation to keep going came from watching Dennis use the exact same principles and succeed. What was the difference? A honed eye for what trends to actually jump on board with. Who Got What to Trade Eventually, the students began to get very good at the system. Over time, a few of them began to notice flaws in the system, particularly one that exposed everything to too much risk. Dennis, largely because he’d been so successful during the bull market of the 1980s, seemingly blew off this result. Game Over Of course, blowing off things like that has consequences. When the stock market turned into a bear in late 1987 and early 1988, Dennis took on some major losses (a 55% loss in one month, for instance) and decided to quit the investing game, largely ending the Turtle program. Out on Their Own Many of the Turtles, having gotten their feet very wet in investing, chose to keep going. Some of them were hired by other investment houses. Others joined in the nascent hedge fund movement. A few just stopped being involved at all. One of them sold everything he knew. Dennis Comes Back to the Game Eventually, Dennis returned to trading in the 1990s and had a spectacular run. By the end of the decade, though, he crashed into the same dot-com bubble collapse that many other traders fell into and his fund closed. Of course, if he had continued following his rules into the subsequent decade, he would have seen years with a 100% return. It seems that the system he uses both exaggerates gains and losses – you can have crazy years on both sides of the coin. Seizing Opportunity Over time, some of the Turtles succeeded incredibly well, with a few even exceeding the original success of Dennis. Others failed miserably and stopped investing. Nature or nurture? Clearly, the system works to some extent, but there’s also a huge amount of influence from the character and personality of the investor, too. Failure Is a Choice Do some people choose to fail? Some of the failures happened because of issues outside of trading, such as personal character flaws. Some were just crooked people and the law caught up to them. Others were simply poor judges of character. In each case, a person made decisions that pulled the rug of success out from underneath them. Second-Generation Turtles Interestingly, there are quite a handful of successful “second generation” Turtles, people who learned from the original group of students. This seems to be an indication that the system works quite well if it’s matched to the right person. Of course, I think that’s true of almost any investment system. Model Greatness The one big philosophical question this book raises is whether or not you can duplicate and model the things that make for runaway success. I think, in a limited scope, you can, but after a while, the element that makes it exceptional becomes commonplace. The thing you can’t model is that initial spark that causes someone to break out of the mold, and there’s a lot of serendipity to being there at the right moment when that type of event happens. You can duplicate the path of successful startups to a certain extent, like HP, but you can’t duplicate Bill and Dave in a garage. Is The Complete TurtleTrader Worth Reading? I don’t think that The Complete TurtleTrader is a book you want to read if you’re focused on nothing but strategies for earning more money. The rules set out in the book for investing are sensible, but they’ve been so incorporated into the models of hedge funds and Wall Street that you really can’t get an edge with them at this point. Here’s the truth: whenever some investor begins to beat Wall Street regularly, it doesn’t take long for others to start figuring out what he’s doing and doing it themselves. This causes the advantage to disappear. Instead, what’s interesting and valuable about this book is a look at how someone discovered that edge, how he taught it to others, and how the cat got out of the bag. The Complete TurtleTrader succeeds greatly as a fascinating and enjoyable story about investing, one that you might not get a ton of actionable investment advice from, but one that you’ll enjoy reading as a page turner. Check out additional reviews and notes of The Complete TurtleTrader on Amazon.com.

A Few Brief Thoughts on 9/11 Posted: 11 Sep 2011 07:00 AM PDT Ten years ago today, I arrived at work without knowing anything of what was going on in New York and Washington. One of my coworkers told me about it (there was still some genuine confusion as to what was going on, so he thought there were planes also headed to crash into the White House) and I thought he was pulling my leg, as he often did. I actually worked normally for an hour, but I did notice that none of my coworkers were anywhere to be found. I shrugged it off for a while until I tried to check cnn.com for the news – and it wouldn’t come up. Neither would several other news sites. Eventually, I did find a site that confirmed what was going on. Like a lot of other Americans, I spent much of that day watching the news coverage in shock. How could this happen here? What happens now? That day (and the events afterward) taught me four real lessons. You can’t predict the future Very few people saw 9/11 coming. It changed the lives of almost all of us in some way or another, either due to the incident itself or due to the actions taken in the aftermath. One very good friend of mine has served multiple tours of duty in Iraq and Afghanistan, as has one of my best friends from my childhood, and both have had effects on their children, their spouses, and their friends. Many other people have had far deeper connections than that, losing family members and loved ones due to the events resulting from that fateful day. The other consequences are less severe, but present. Airport security immediately comes to mind. 9/11 is just one strong example of how you can’t predict the future. It’s never the smooth ride you envision it to be. You can, however, prepare for it Simply put, you can’t predict the future. The best thing you can do is put yourself in a position to handle the widest range of things the future can throw at you. This means having a healthy emergency fund. This means having a skill set that’s useful in a wide variety of situations. This means having enough of a handle on your financial situation that a job loss wouldn’t be devastating in the short term. This means having adequate life insurance and, if you’re in a good financial position, long term care insurance. This means having a great circle of friends and business acquaintances. Be prepared for whatever may come. The person across from you isn’t really all that different than you The people I disagree with the most politically today are the same people I sat there with on 9/11, with all of us feeling socked in the gut by what had happened. Those people want a bright future for everyone, just as I do. They want a safe future for everyone, just as I do. Just because we believe in different paths to get there doesn’t mean that the other person is stupid or wrong. It just means we need to set aside our disagreements and actually have a rational conversation about it. There is no winner here except us. If we keep playing the “my team” versus “your team” game, no one wins. If we can put it aside and actually try to solve the problem, everyone wins. This is true in every aspect of life, not just politics or business. Almost always, the person opposite you is pretty similar to you. They have some things that they believe in. They have a goal they want to achieve. The end result of achieving that goal, to them, isn’t all that much different than the end result of you achieving your goal. Keep that in mind the next time you’re upset at someone who doesn’t seem to agree with you. What’s their goal? What do they really want? There is no better day than today to reach out and take action Since you can never be sure what tomorrow will bring, today is the day to start taking positive actions. Get in touch with that old friend you disagree with. Cancel a few frivolous bills and start building up an emergency fund. Come up with a debt repayment plan. Decide where you want to be with your career, then start getting the education and connections you need to get there. These are the steps to take to ensure a brighter tomorrow, and today is the day to take them.

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