The Complete Turtle Trader
Posted on July 16, 2008 by Richard Beddard
Filed Under Investing, Reading list |
I’m going to start this review of The Complete Turtle Trader with a little mystery. Why does Bill Miller endorse the book on the jacket cover?
Bill Miller runs the legendary Legg Mason Value Trust. He describes himself as a long-term contrarian investor, which is about as far away as you can get from Turtle Trading. Turtles buy strength (rising prices) and sell weakness (falling prices). They’re short-term momentum traders who cut their losses and pyramid their profits. Value investors buy weakness and sell into strength, so why is Mr Miller endorsing this book?
Mr Miller’s also at something of a crossing, if you’ll pardon the pun. His Value Trust beat the market for fifteen straight years until 2006 but since then it’s done less well and this year he’s not far off the kind of losses that put Richard Dennis out of business, twice. Richard Dennis? He’s another legend. He’s The Chicago trader whose story Michael Covel tells in The Complete Turtle Trader.
So I’m reviewing a book endorsed by a fund manager ranked bottom of hundreds of peers about a trader who lost 55% in one month (April 1988) and was down 50% again in 2000 when his clients pulled their funds. A book that claims to contain, within its 190 pages and two appendices a hitherto (fairly) secret system that is both proven and reproducible by almost anyone, so long as they have the discipline to follow it.
Sometimes Mr Covel’s faith in the Turtle system, which he documents in chapters four and five, strains credibility but it’s also a thrilling book to read, and you can’t say that very often about financial books.
It describes a “real life social experiment”. Mr Dennis recruited a team of traders, few of them with financial backgrounds, and taught them his trend-following rules. Over a period of five years, they made him a fortune. When he laid them off in 1988, some went on to set up their own firms and even spawn a second generation of Turtles. Mr Covel presents some of their trading records as proof that:
- stock markets are not efficient (i.e. investors can possess knowledge - in this case rules - that enable them to beat the stock market)
- momentum trading works.
I’d call it evidence, rather than proof. It’s not even always clear who was in the program, and who was not, Mr Dennis changed the rules by allocating different amounts of cash to different Turtles, and the Turtles who continued trading also changed the rules once released into the wild.
Any private investor seeking to emulate the Turtles now would have to ensure that the rules still apply in today’s markets, that trading costs wouldn’t eat up trading profits, and that armies of professional technical traders wouldn’t beat him to the draw.
The Complete Turtle Trader isn’t much help with these issues, but then despite the blurb, I don’t think Mr Covel wrote the book to teach us to be Ninja Turtles. He wanted to tell the story of Richard Dennis and the Turtles, and explain how markets can be beaten if you have a good enough system and the discipline to follow it.
Curiously, Dennis, not the Turtles, lacked the discipline. When he closed the operation in April 1988, his Drexel funds were down 55% but the Turtles typically lost only 10-12% that month. Some Turtles, who did well when compelled by Dennis to follow his rules, failed when they were in control. While a few Turtles believed Dennis stopped trading to pursue his political ambitions, others believed he couldn’t stick to his own rules.
Mr Dennis wondered out-loud if he had a fatal pressure point:
I really am a contrarian at heart, and that’s really probably not good if you’re mechanical trend follower.
Bad omen, says Mr Covel, which brings me back to the legendary contrarian, Mr Miller. In 2004, he invited Mr Covel, who’d just published his first book Trend Following, to his headquarters:
After lunch, I found myself in a classroom on the top floor with Bill Miller, the fund manager of the $18billion Legg Mason Value Trust fund (LMVTX). Beating the Standard & Poor’s 500-stock index for fifteen years straight put him in a similar league as Warren Buffett.
Bad omen?
_
You can buy The Complete Turtle Trader from the Interactive Investor Bookshop
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Good news for Barrat Developments -
As quoted by the Sunday Express, 27th July, 08.
Barrat house builders are set to build a joint venture with its bank to become one of the country’s biggest landlords.
It would see the builder selling empty homes to the bank at cost price. The bank and builder would then rent them out and share the profits. This would create two things for Barrats:
- One is a new income stream.
- and two, more importantly, release the cash tied up in unsold homes which would considerably improve their balance sheet.
Barrats has already secured a four year funding package with its bank.
This is just another great step forward for the group to ride the credit crunch!
Bad omen indeed.
[...] in the build up, I wanted to say it’s all been done before. This is the experiment conducted by Richard Dennis in the 1980’s, to prove a point to a colleague. [...]