It’s not about being right…it’s about making money…Lessons from a Turtle..
Years ago CJ spent a weekend with one of Richard Dennis’s original turtles. After he had spent years in research he began to realize that in order to capitalize on your ideas you needed to have a system/process to put your capital to work. CJ began to look into trading systems, money management strategies, and quickly realized how this area was much more important to success in investing than the ideas themselves.
He still believes to this day in order of importance to be successful in investing or trading:
- Is your Mindset
- Is your Money Management Strategy
- Is your Markets/Stocks that you trade
Here is a quick story of the turtles from the tradingblox.com website (By the way tradingblox software is a backtesting software that was created by one of the original turtles which we use in house and would recommend)
In mid-1983 famous commodities trader Richard Dennis was having an ongoing dispute with his long-time friend Bill Eckhardt about whether great traders were born or made. Dennis believed that he could teach people to become great traders. Eckhardt thought genetics were the determining factor.
In order to settle the matter, Dennis suggested that they recruit and train some traders and give them actual accounts to trade to see which one of them was correct.
They took out a large ad advertising positions for trading apprentices in Barron’s, the Wall Street Journal and the New York Times. The ad stated that after a brief training session, the trainees would be supplied with an account to trade.
This group was invited to Chicago and trained for two weeks at the end of December, 1983. They began trading small accounts at the beginning of January. After they proved themselves, Dennis funded most of the trainees with $1 million in February.
“The students were called the ‘Turtles.’ (Mr. Dennis, who says he had just returned from Asia when he started the program, explains that he described it to someone by saying, ‘We are going to grow traders just like they grow turtles in Singapore.’)” – Stanley W. Angrist, Wall Street Journal 09/05/1989
The Turtles became the most famous experiment in trading history because over the next four years, they earned an aggregate sum of over $100 million dollars.
Richard Dennis proved that with a simple set of rules, he could take people with little or no trading experience and make them excellent traders.
One of the first lessons he taught CJ was the importance of psychology and also how they managed their money. While most people seem to be focused on the turtle system in terms of the rules for entries and exits (Buying on a 20 or 55 day breakout/ selling on 10 or 20 day, etc) CJ saw much more value in the way they managed their capital. How they sized their positions and how they would limit their risk through the use of stop losses based on the volatility of the instrument traded. In addition, they managed their capital strategically to avoid the “risk of ruin.” They would reduce the amount of capital they traded as they began to lose money. When you think about it this goes against conventional wisdom which tells you to buy more when you are down.
CJ believes too many investors get caught up in trying to be right on an investment idea instead of realizing the one single idea is just part of your system you are using to make money. This need to be right leads to cognitive errors that are being studied in the field of behavioral finance. For example, an investor who places more importance on stock selection versus money management may be more prone to confirmation bias in which we seek out information that confirms his decision and tend to avoid or ignore information that contradicts his decision. So an investor who buys a stock only to see it fall very quickly may start to pay more attention to the guru on television telling him it’s a good buy and ignoring the fact that the company just warned and is forecasting a slowdown in its business. He will listen to the guru’s careless conviction and tales of terrific times and his sound bites are music to his ears. A glorious symphony which drowns out the facts that are trying to tell him his original thesis was wrong. (Or if you are a technical trader a stock that just fell through support…A Quant would refuse to accept his model could be wrong and ignore the warnings from his risk manager as his equity began to evaporate like a snowman in the sun…How you view the world and what information you pay attention to is normally filtered through your primary discipline)
Here is a quick quiz…
You have a choice between two Investment Managers one who is “right” on his recommendations 30% of the time and is wrong 70% of the time in which his trade results in a loss. The other Investment Manager is right 70% of the time and only takes a loss 30% of the time. Which do you hire?
Stay tuned for Part 2 of Lessons from a Turtle for the answer.
Now that your done reading this send it to some friends and let’s see who finds the answer