Top Turtle’s Trading Tips (w/ Jerry Parker) | Skin In the Game

You can’t be a Marine by reading a book. You can’t really be a turtle trader– as good
a turtle trader as you would, unless you worked for Richard Dennis and Bill Eckhardt. Systematic trend following has a tendency
to make money when we see things that have never happened before. I heard Paul Jones speak in 1988 at UVA. And he talked about being short Japan and
making a lot of money in that stock straight. And his response was, what people don’t want
to hear is that I was short 5 times before that and took small losses each time. We don’t vol target. We’re kind of traditional classic trend followers
where we risk a small amount, but if the volatility gets higher and higher as the trade becomes
very, very profitable, we don’t have a tendency to get out of any of it. We just sort of let it go. And so you’ve got to be a little different. [MUSIC PLAYING]
Richard Dennis is one of the world’s most famous traders from the Chicago pits of the
1980s. He knew his proven trading strategy could
be taught to others. He gathered a group of 11 traders in Chicago
to teach them this system. These people became known as the turtles. Jerry Parker is arguably one of the most successful
of these turtles. Taking his newly learned trading strategy,
he founded his own CTA, Chesapeake Capital. I had the pleasure of sitting down with Jerry
recently to discuss his background as a turtle and his trend following trading strategy. Please enjoy this episode of Skin in the Game. So here we are in Skin in the Game with Jerry
Parker, CEO and founder of Chesapeake Capital, and one of Richard Dennis’ original turtles. Want to play a game? Yes, I do. All right. Let’s do it. [BELL RING]
What color you want to be? Gold, of course. Gold. All right. You want to go first? No, you go first. All right. I got it. Let’s see. I’m going to pretend that this is Virginia
in last year’s playoffs when they went out in the first round. Oh my– nice– thanks for those memories. And likely they’re going to do the same thing. So Jerry, let’s start at the beginning. Take us back to 1983. Tell us your background. What were you doing then before you saw the
ad from Richard Dennis to become a turtle? Living in Richmond, Virginia, working in public
accounting, destined for lots of boredom, and no fun. So it was pretty easy for me to figure out
that I wanted to do something different in the markets and trading, and stocks, or bonds,
or currencies, or commodities. I had a very open mind about where and what
I wanted to do. So you had an open mind, and you saw his ad
in the newspaper? Yeah. I was looking at the ads in the Wall Street
Journal the summer– fall of ’83. And Richard Dennis wanted to hire people and
teach them how to trade futures, give them a stake, money, and pay them a percentage
of the profits. Probably the most important thing is I had
heard of Richard Dennis, so I knew it was totally legit. And I thought futures, well, that could be
OK, currencies, commodities, stocks, bonds, long and short. That sounds good. More diversification. But, of course, I was mostly living and reading
and wondering about the stock market, but totally open to leverage in shorts and diversification. So Jerry, tell me this, where did the name
turtles come from? Good question. We’re 12 people in the room trading, and there
is a big apparatus around us with the clearing and now the C&D commodity people, and the
brokers, and they wanted to start nicknaming this group. And, of course, we want a nickname. So it was the 12 Apostles– no, that’s no
good. But evidently, Rich was traveling in Singapore,
and they come across a turtle farm, or a place where they’re raising turtles, and someone
said, hey, Rich, that’s just like you, raising traders in Chicago. So that’s the truth. And there’s so many different explanations
of turtles– was there a bet? I’d say there was no bet– if trading could
be taught– Rich, did not bet Bill. But you can take my word for it, that’s how
the turtles came about. OK. Now we know. Now we know. Now we know the origin of–
Great name. Great nickname. I do get embarrassed in the middle of meeting
brand new people, and my wife goes, he’s a turtle. Like, oh my God. Oh, gracious. Oh, gosh. I need to think in other terms here. Oh, I like that. I like that. So how did it go? How did you get to become one of his turtles? Well, like I said, most important thing was
seeing the ad. I had been reading a lot of books. And sort of was interested in Marty Zweig,
who’s a sort of a famous guy who was– he does some trend-based and sentiment-based,
which ended up being very similar to Richard Dennis. So I was pretty knowledgeable on paper about
how to trade and what worked. I mean, I thought trend following was wonderful. The more I heard about it, the more I liked
it. And so I just took a guess, well, hopefully,
if I get an interview, Richard Dennis would be a trend follower as well. So that was– I didn’t really know for sure,
but that ended up being very fortuitous. It sure did. So you went out to Chicago, and you learned
from Richard Dennis while you were there. Yeah. Well, I went for an interview, and so maybe
1,000 people applied for this job in the end of ’83– they did it again in ’84. And so I went to Chicago for the interview. I think they maybe interviewed 40 people. They had sent out a test. When you sent your resume in, you got a test–
100 true/false questions about trading and psychology and how to think about the world
and markets. And so I took this test, sent it back in. And when I went up there, they said, well,
how do you think you did on this test? I said, I think I did pretty well. And they said, yeah, you had the highest score
out of 1,000 people. That story has been misstated many times that
somehow I had a perfect score– not true– just the highest out of 1,000. But they wanted to hire people who had done
well on the test than people who did poorly. But had other things going for them, like
back-gamblers, backgammon players, actors, a lot of normal people. But that was my claim to fame, doing well
in the test. Thankfully I was sort of prepared. And then they asked me– another question
they ask, I think, most people was, how much do you think you already know about the markets? And so my answer was like 95%, which is kind
of laughable, of course, didn’t take me long to realize that was wrong. I think one other person said 99%. Oh, really? Yeah. And then Liz Cheval, the only woman they hired,
of course, she said like 0%. So kind of a good lesson there. But yeah, they took pity on us, and they hired
me anyways. And then we had like a two or three week course. And then January the 2nd or so, 1984, we started
trading. That was a nice one, but I have little kids,
so I know that move. I feel like I should close my eyes. So you started trading after the course there. And then how long were you there trading for
him? That program lasted 4 years. And I lived in Chicago for 2 and 1/2 years. So the program was preset already that would
be a 4-year program? I think it was originally a 5-year program,
but I think, at the end, they kind of got tired of it, or decided the experiment had
ended, which was, can you teach trading? I think that was one of the ideas they had,
they would like to know if you just get sort of random people, or maybe people who are
a little bit smarter than random, can you teach them trading? And since it was rules-based, it was basically
that, can you teach these rules? And of course, you can. So I think the most important thing that was
decided was, when you teach 20 people the rules, how many of them are going to continue
to follow it, or even follow it from the beginning? There was all sorts of reactions to losing
money. And did Rich tell us all of the rules? Are they withholding rules? We’re having draw-downs. We’re losing money. They must have other rules they haven’t told
us about. A lot of silly stuff, but it was really fun
being there in a room. All the turtles were in one room. A lot of ping pong playing, and a lot of fun
times. Did you talk about your trades with each other? Well, I think it– another thing that happened
was, I think they wanted people to be different, and maybe take the rules and expand upon them
a little bit, add some flair. That was a word they throw around a lot, flair. Add your own kind of style, not too far–
don’t drift too far away from what we were taught. But I think with everyone being in the same
room, people perceived more risk in being different. So almost when a certain soybeans became a
trade, 20 people picked the phone up at one time. That’s not too far off. Although, when we get together, we tell stories
about some of the things that happened, and some people were like, that never happened. So maybe my memory’s not that good. So tell us more about when you left Richard
Dennis’ program. What did you do next? Oh, we had to raise money. We had no experience doing that. We had the greatest client of all time, who
loved everything we did, because it was his, and we were just there to carry it out. And we loved doing that. But we’re back into the real world. We had a great track record, so we could show
people 200% years frequently. People are greedy. They want to give you money, do this for me. Once I was walking around Wall Street, and
this is before cell phones. And I’m going up to the pay phone, and I call
the head of Merrill Lynch Managed Futures. And I say, Jerry Parker, can I come up and
talk to your boss about Chesapeake? And she goes, no, you cannot. And I said, OK, well, just tell him that I
am a turtle, Richard Dennis, turtle. She says, hold on. She comes back. She’s laughing. Yes, please come up. So life was easy and good because of Rich
and because of the track record. And the whole turtle story helped us a lot
for a long time. It carried you along. It carried us, yeah. That’s great. All right. So you were there for 4 years. And then you left and you went and started
your own CTA. That’s right. We had an incredible asset when we left. We had a good track record. We had a track record, which is very important. Sure. We had a good track record. But trading was much different back then. It was trend, diversification, but it was
shorter term, massive amounts of leverage. I would say that most of the time the performance
in the room was around 200% plus for everybody. Everybody was in that range. Once again, everybody had the same rules,
the same opportunities, and so there was really no reason for me not to do well. I was just momentarily not doing what I should
do. And so, yeah, we had a good track record,
lots of experience. And it was a pretend environment. It was– I’ve often said it’s kind of like–
it’s a bad analogy, but sort of like, you can’t be a Marine by reading a book. And so you can’t really be a turtle trader–
as good a turtle trader as you would, unless you worked for Richard Dennis and Bill Eckhart,
because it was just like do the right thing, do the right trade, but I’m losing money,
doesn’t matter. If you do the right trades and you lose money,
you’ll be fine. But if you don’t follow the rules, and you
don’t do the right trades, but even if you’re making money, you may be in trouble. So it was just a constant encouragement to,
don’t worry about it, you’re doing the right things, you’re doing the right trades. The type of feedback that you never get from
real clients. It’s like, I don’t care how you do it, just
make me money. So Rich designed the systems. He designed the program. We had tremendous training from literally
two genius people. These were geniuses. Every opportunity to do well. And being encouraged– if we lost money, sometimes
they would give us more money to manage. But I think that’s the untold story, is, how
smart these guys were, and how they prepared us for a career, not just, here’s how you
trade today, follow these specific rules. No, you’ve got to evolve, you’ve got to change,
you’ve got to stay alive. And there are some 10 commandments of trading,
or trend trading, but then everything else needs to stay up with the times. It was rules-based. And you took it back to Virginia, opened your
CTA. And was it always market trending? Or did it just kind of turn in to be market
trending because of the way you used it? Well, I think it was initially trend and–
but I don’t think that that was what they meant it to be. I think, many years later, I came to the conclusion
that, as much as I would not– don’t have any interest in doing anything except trend
and momentum, their ideas were, no, this is– your trend works now, this time frame works
now. But it’s really about doing the proper research
and back testing and evolving. And so if that’s shorter term or counter trend,
so be it. But I sort of took it to– trend was the only
thing I was really interested in. So at the time, it was short-term. However, since then you’ve kind of evolved
into more longer term trends. That’s right. I think that’s one of the major changes and
needed evolutions, was to realize, probably in the late ’90s, the shorter trend time frames
were not profitable. And I’ve just often said that it was a lot
of computers, a lot of trend following, a lot of back testing. A shorter term is desirable, the draw-downs
are smaller, let’s say, if it’s a profitable system. But it just– in order to maintain profitability,
the look-back periods had to be extended quite a bit because of the choppiness, and the looking
for people’s stops, or all the shenanigans that goes on. So we’ve definitely become more of a 6-month
to a year holding period. How did you manage– or how do you manage
to stay away from some of these big spikes where people get stopped out in the market,
and some people even go under because of it? Well, I think the two most important things
I was told, and I firmly still believe that are, follow your system, and then trade small. And I think that is the root of a lot of trader
problems. I can’t follow my system, probably trading
too large. Big swings, I’m losing clients, probably trading
too large. Can’t sleep at night– and so that should
not be discounted about how those two kind of go hand-in-hand. You must follow the system, but also risk
an amount that is normal and reasonable for you and for your clients. So is that where your position sizing comes
into play? Position sizing comes into play for sure. That was part of the turtle program. It was the entries and exits are important–
building the portfolio, sizing the trades properly, a lot of details. It’s like building a home. So many details go into crafting a trading
program. So when you’re building your portfolio, how
do you diversify among the different instruments that you trade? Diversification is very important and powerful. And so we do analysis of the markets, back
testing, and other ways to try to get a handle on which markets we should have in the portfolio
and how they’re all correlated, and understanding that these things change. Oh, gosh, they change. So once you get it all squared away, and you
get all the decimal to the fourth decimal place, it changes. Most of the time, if you run an analysis on
heating oil and crude and gasoline, they’re 90% correlated. But the first big turtle trade of all time
was, [INAUDIBLE] heating oil. It doubled. And January heating oil didn’t go up very
much. March heating oil didn’t go up very much. There was a freeze in New York Harbor. They couldn’t get the heating oil in that
one month. So trend following makes money. Systematic trend following has a tendency
to make money when we see things that have never happened before. So you want to build your portfolio safely
and realize crude heating oil and unleaded is pretty much the same trade– oops, not
all the time. Right, right. 1990, December, I made 30% in December, I
made 30% for the year, and I made 30% in the heating oil trade. So this is a dilemma. What are you going to do? You can’t ignore it, but then you have to
be prepared for– in 1987 silver doubled, correlated with gold, 90%, let’s say, but
gold kind of sat there. So these things happen. The markets are weird. I think as much as we look back on history
to see, where is a pretty good place to buy, where is a pretty good place to sell, I don’t
think history is a great guide in a sense that what’s going to happen in the future
will be much different. These techniques and tools and parameters,
they may continue to work in a similar way, but they’re capturing different trends. And when crude goes up a lot, or when crude
goes down a lot, it’s usually going to– and whenever these markets have big moves, it’s
usually a surprise. No one really sees it coming. Right. It’s interesting because you talk about this,
and from a trader’s perspective, you look at things, and I’m always like, am I in a
trend right now? Is this the beginning of a trend right now? And then you get in it, and you’re in the
trend, and you’re like, when’s it going to end? And you’re like, is this the top? Is this the top of the trend? How do you figure out if it’s the beginning
of a trend or the end of a trend? Hindsight. That’s how you figure it out. Yeah, of course. Right. Exactly. I heard Paul Jones speak in 1988 at UVA. We all got in the car, drove from Richmond
to Charlottesville to hear him give a talk at the business school. And he talked about being short Japan and
making a lot of money in that short Japan stocks trade. And his response was, what people don’t want
to hear is that I was short 5 times before that and took small losses each time. And the same with our crude trade in ’14 where
the CTAs got shorted 90, and it went down to 20 somethings. We had been chopped up in that crude market
for months and months. And then when we sold it at the last time,
we were as surprised as anyone that it had such a big move. So I think that’s another thing about systematic,
or trend, or the way that I look at the markets is that, how can you make money if you’re
going to be surprised? How can you make money if you’re losing on
most of your trades? You get bailed out by these mega winners. So that’s the key, I think, for a lot of traders
is, small losses, be bold with your profits, hang on, and get yourself in a situation where
you can be tough and strong, and not get out too quickly. I think more money is lost anticipating a
trend reversal, even as painful as a trend giveback will be. It’s mostly just embarrassing though, or it’s
just kind of like emotional. It’s not usually a fatal amount of money,
because you’ve made so much in the trend to begin with. Well, you have to have some discipline to
be able to stay in like you were just describing. No, it’s the major requirement. Maybe that’s what we really add to portfolios
and into the whole process, is just that we’re dumb enough to keep doing all these trades. We don’t care– we don’t care if it’s been
5 losers in a row in the same market. I mean, we kind of care, but we’re sort of
committed to doing it. The back test, when you do the back test,
or you look at historical performance, oh, man, I would have done that trade every single
time. Not a problem. You just do it. And then when you get on the firing line,
it’s a different situation. Sure. Yeah. The advantage of going first seems like–
when you go second, you’re always playing catch up. So I saw you speak last year, I believe it
was. And you said that you divide your portfolio
up to be diversified, basically 25% fixed income, 25% commodities, 25% equities, and
25% currencies. Is that mainly how you do it to stay so extremely
diversified, so that you won’t take a big hit? That’s a good approximation. I think, that’s how you want to look at it,
putting together diverse asset classes, like maybe a little bit more commitment to the
commodities or the single stocks, because there’s a little bit more diversification
there than the currencies, or the interest rates. But that’s pretty much what you want to do. We have a big edge by having all those markets
in a portfolio, a really big edge by having shorts on most these markets that are positively
correlated. So things are up a lot, or a whole portfolio’s
down a lot. So having longs and shorts is very important. One of the things that I do is I don’t go
back and look at prior performance, historical performance. So the yen may be the best performer, crude
may be a great performer, but I would never overweight those. It’s just purely based upon the contribution
each market gives me to the diversification. That’s, I think, how you want to set it up. You’re doing back tests, you’re looking at
the past, but the future is going to be different. So that was kind of– leads to my next question. You said, you don’t really look at the back–
the historical data, but you do back testing. We do back testing to get an indication of
what time frame of trend following should we try to adopt, long-term, short-term, medium-term. What does that even mean? What’s the look-back period? What has worked? The markets are choppier now. There– a lot of whipsawing, so it’s probably
better just to be longer term. But when it comes to putting together the
portfolio, we’re just looking at the markets in terms of the diversification properties
that they offer, which can change and fluctuate over time. So it’s not going to be perfect. You can’t predict the future. But if you buy this breakout, and then sell
that breakout, that’s probably your best indication of making money, even though we’re not really
predicting. We’re wrong 60% of the time, so don’t follow
us. If you did the opposite of what we do, you’d
probably be right more often. How about the markets right now? Is there anything you see that stands out
in terms of each of those asset classes that we just talked about, maybe commodities, anything
you’re looking at right now? I think it’s always kind of problematic for
traders and trend traders to talk a lot about their short trades. Historically, the shorts have not been as
good as the longs. So I’m really focused on, where are some commodity
longs? Where my longs? So there is– maybe the base metals are strong-ish. Seeing– we rode the platinum– I mean, the
palladium. That’s had a big sell off. We kind of rode that. The cattle and the hogs were kind of strong. It’s nice. Weird I know. But lots of diversification in those two markets. But most the commodities are still short–
the greens and the precious metals made a run for it, but getting hit here recently. Currencies– mostly short versus the dollar. Starting to see a little bit of that changing,
which is nice. And the stock portfolio is longs and shorts,
so that’s good. I think that’s one of the edges that we think
we have, is not trading indexes, but trading single stocks where I can go in, and once
again, create a stock portfolio that I create, not what the S&P 500 gives me, and I can take
a couple of stocks from each sector, sub-industry, or whatever, and put myself in a highly likely
situation where I will have some longs and shorts. It’s kind of odd, like, why don’t you just
try to find just the longs? Stocks are going up. Yeah, I agree. I should try to find that, but my primary
goal is to seek diversification. All these trades in the trend following world,
they’re going to make about the same amount of money over time. We certainly don’t believe that stocks are
superior. They should be in their portfolio, because
they offer diversification. In 2014, the CTAs did really well, and mainly
because of stocks. Sometimes it’s the only thing going. But certainly, the last 10 years are much
different than the 10 years before, where it does seem that diversification has been
penalized to some degree. But I’m sure that’s going to change, hopefully. Oh, no. Congratulations. Am I allowed to– am I allowed to win? [LAUGHTER]
You’re one of the few CTAs that will trade single stocks. Is that correct? We are. I think just from the very beginning, and
from the turtle program it was just a tremendous emphasis on diversification. Trading single names just seemed an obvious
thing to do. It’s a pain in the butt. It’s much easier to just trade the indices. And all of your markets are in this FCM account. It’s just a piece of cake. Clients kind of prefer it. But you need to stand up and try to do something
better and different, even though the client’s not asking for it. And maybe they complain about it a little
bit. I’ve definitely had people complain that–
while I understand the trend following of the currencies, and the commodities, and the
bonds, it’s getting a little too close to me for you to say, oh, just follow these trends
in the stocks. And I don’t really think that’s right. And so we’re like, well, sorry, we’re going
to do it. And we’ve had a lot of success with it. I’d imagine that diversification held you
out from some of those– or maybe you didn’t lose as much during some of these big equity
sell-offs that we had in the fourth quarter of last year. You don’t lose as much. You don’t make as much. When the markets are in a big uptrend, it’s
hard to beat the S&P, or the FANG stocks. You don’t make it on the upside. But it directly reduces the draw-downs. And in the same way that I would not desire
to trade the dollar index, or the euro only, or commodity index, I like having longs and
shorts. I complain when I don’t have longs and shorts
in the currencies. So yeah, it makes perfect sense in the stocks
as well. So people are your clients because they like
the stability that you offer, besides you’re making them money. Yeah, yeah. Exactly. It’s different. And we do things differently than others. We don’t vol target. We’re kind of traditional classic trend followers
where we risk a small amount, but if the volatility gets higher and higher as the trade becomes
very, very profitable, we don’t have a tendency to get out of any of it. We just sort of let it go. And so we’re a good complement to all of the
European CTAs who are vol targeting. And so you’ve got to be a little different. Right. What would you say is the largest drawdown
that you’ve ever had? Well, definitely Richard Dennis. I lost 60% in one day. 1986– we’re just making so much money. And I knew we were up 200%. And I went home on Friday at peak equity,
and my bonus was $1 million, and I was just on top of the world. And Monday was just this day of all the markets
going against us. We had made so much money so quickly, and
just like, oh, well, such is life. If Rich approves of it– he’s telling us to
do– we think we’re doing the right thing, then it must be right. But I quickly figured out in 1988 when I started
Chesapeake that maybe 200% was not what I should go for in order to have a stable business. But I do remember being jealous and hearing
my other turtle friends who had not made that transition quite yet are doing really well
and that grained the drought in 1988. So yeah, it’s an evolution over time. A lot of positives from the turtle program,
and a lot of things that you have to get out of your head when you trade, sort of, client
money. Is it a lot easier now with computers as compared
to like 1980s where you had to execute everything by hand and pick the phone up and make a phone
call down to the pits? Now you have these algorithms and you don’t
necessarily have to make the decisions right there, because they will do it for you in
a sense. You program them, but in a sense you don’t
have to actually go in and physically do it. Does that take a little bit of pressure off
of you? I think it makes us more disciplined. And probably the traditional CTA firm would
have a research department that creates the models, a committee that approves the models,
and then you run those models each day on the new data, and then you have a separate
department that executes the trades. So the guys that are executing, their only
job is to get a good fill. And everyone else’s hands are tied. They can’t walk in there and say, hey, do
a Jerry trade, or do a Joe trade. I’m getting freaked out. So I think this division of duties gives people
more consistency and discipline. There are still ways to what I call a systematized
discretion. It’s really easy sitting in front of the computer
and say, I’m really nervous about this coffee trade. The coffee skyrocketed in 1988 as well, or
in ’89. And I remember sitting there going, I really
want to get out of this coffee. It’s just going up too much. So now I think more than– a lot of people
just program that in. It’s a rule. So rules are not a panacea either. If you have a bad rule, I think there’s a
lot of temptations to have bad rules. I’ve done it before. And just think that you can get away with
it because it’s computer code. You can’t. How about on the other side? What was your biggest winner? We definitely had some trades that lasted
a year or two, or three. Short yen, I think in the ’90s, or 2000s. Crude trade in ’14 came at a really good time–
90 down to 20 something. There hasn’t been a lot of great trades. The heating oil trade I mentioned earlier. Both of those were legendary trades. Natural gas has been– some major moves in
natural gas– ’87– or ’88 drought. Oh, the base metals in ’04, ’05, ’06. Gigantic trades that lasted a year or two. When you put up a weekly chart– I’m not saying
you need to trade weekly– I’m just saying, put up a weekly chart and scroll through the
charts. Massive trends just pop out. And you look at the little jig in the middle
where it goes down a little bit and comes right back. You’re like, oh, it’s a piece of cake. You blow it up into a daily, it’s like, oh
my God. But you live through it. Living through things– I think Bill Eckhart
has a good quote, I can’t remember what it was, but something like today is really a
bad day and it’s really important, but you won’t even remember it in a month or two. Right. I can see that. Ah, got me. Well, thanks for coming in, Jerry. It’s been fun. Joe, so much fun. Thanks for having me. I’m glad we got to talk about your background
a little bit, your investment strategy, and where we are in the markets today. [MUSIC PLAYING]

5 thoughts on “Top Turtle’s Trading Tips (w/ Jerry Parker) | Skin In the Game

  1. All the dialogue was interrupting the connect four game sheesh! Jk I appreciate this video cause I've heard of turtle traders but I've never seen an interview of anybody directly involved. Hindsight is key lol

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