Curtis Faith: Turtle Tales

Nearly 20 years after the famous trading experiment ended, a graduate of the original “Turtle” class of 1983 is talking about his experiences.

©2007, Reprinted with permission of Active Trader magazine (www.activetradermag.com)

BY ACTIVE TRADER STAFF 

Trading has always been something of an insular business. Inside there are plenty of rumors, myths, and “celebrities,” but most of them don’t travel far in the wider world. For every person who’s heard of Paul Tudor Jones or Richard Dennis, for example, there are thousands who have heard of Warren Buffet.

But several years ago Curtis Faith got a little taste, in an indirect way, of what passes for fame in the trading industry. “I was on a flight and sitting next to a businessman who asked me what I did,” he says. “I gave him my little story and told him how I used to be part of this trading group in Chicago, and he looked at me and said, ‘You’re not one of the Turtles, are you?’”

Faith laughs. “That was a big shock — that I could randomly run into someone who would have heard of us.”

The Turtles, as most traders know, were the eclectic group — a Ph.D. in linguistics, a professional gambler, and an accountant, among others — assembled in the mid-80s by two heavy-hitting Chicago futures traders. Curtis Faith — a nascent trading system designer and tester — was just 19 when was plucked from obscurity to be part of the group in late 1983.

Richard Dennis and William Eckhardt (both of whom were profiled in Jack Schwager’s Market Wizards books) had already made millions in the markets when they got the idea for the Turtle experiment. The two disagreed about whether great traders were the product of nature or nurture, with Eckhardt believing successful traders had inherent skills and Dennis arguing that anyone could be taught to outperform in the markets.

The pair decided to launch a trading program to settle the debate. They would teach a group of neophytes their trading system and then give those who successfully completed the program substantial trading accounts. As legend has it, the group’s moniker stemmed from Dennis’ visit to a turtle farm outside Singapore; he claimed he and Eckhardt would be able to “grow” traders like turtles.

Faith’s path to Turtledom began when he, like hundreds of others, responded to a newspaper ad Dennis and Eckhardt had placed in the New York Times, Wall Street Journal, and Barron’s. He had dropped out of college just before the Turtle program began, but not because of a lack of direction or ambition.

“I’d already decided I wanted to trade, and I was going to start with some money from my father when the Turtle program came along, which changed my plans,” he says.

After surviving the interview process, he ended up in Chicago with 13 other students and spent the next four years trading the Turtle way.

In his new book, The Way of the Turtle (2007, McGraw-Hill), Faith recounts his experiences in the Turtle program, how they traded, and what he learned about himself and traders in general. The book also functions as a primer on risk management, trading concepts (with the emphasis on trend following), and behavioral finance, as well as what Faith considers the more valuable lessons and rewards of embracing risk.

Faith, now 43, was by far the youngest participant in the Turtle experiment — and also one of the most successful during the program’s four-year run, reportedly racking up profits in excess of $30 million. Over the four years until the program was terminated in 1988, the Turtles posted an average annual return of 80 percent. (Faith, however, points out that some underperforming Turtle students were dropped from the program early on, so this figure has an element of “survivorship bias.”)

However, unlike several of his cohorts, including Jerry Parker of Chesapeake Capital, who went on to found successful trading operations of their own, Faith walked away from trading in 1988 when the Turtles were disbanded.

“When the program ended, I was faced with the decision of starting a new business,” he says. “I would either start a business in the same area I’d been in for the last four and a half years, or start something new. I’ve always been in favor of learning something new, and I was bored.”

He laughs. “As it turns out, I’m sure I would have made a hundred times as much money over the past 20 years, but it doesn’t matter.”

Faith, 43, currently heads research and development for a company called TradingBlox (www.tradingblox.com), which provides simulation software for back-testing automated trading systems. The software, Faith says, was actually an outgrowth of an internal research tool he built for a hedge fund he was working with (Galt Capital) in 2000-2001.

From Buenos Aires, Faith first commented on his decision to write a book about his life as a Turtle after all these years.

AT: Why did you write the book, and why now — more than 20 years after the experience?

CF: The time was right. I couldn’t have written a good book at the time, or shortly after the Turtle experience, mainly because I don’t think I had a very mature understanding of the reasons for my success. I wasn’t old enough to really appreciate how I was different from other people. I think that, as a young trader in my early 20s, I didn’t really understand that the way my brain works and the way I thought about things were different from most people.

Over the years, I’ve come to appreciate that the things that are easy for me aren’t easy for a lot of people. And through teaching people, I’ve seen what consistently stands in the way of success. Invariably, it comes down to just a few things — essentially, psychological barriers people put in place. They basically don’t have the ability to put enough confidence in their own thinking — especially when it comes to simple ideas.

People seem to have this need to create complexity and believe trading must be more complicated than it really is. When you try to show them something that’s relatively simple and explain, “Yes, you can make a lot of money with that,” they don’t believe it.

AT: Do you think your youth was one of the things that made you different among the Turtles, in that you had fewer biases or preconceptions?

CF: I’ve been asked that question before, and my reply was yes, I thought it was because of my age. But looking back, I actually think it wasn’t the major factor. It was really a combination of two things. First, I was the only person who came into the program with a background in the computerized testing of trading systems.

Second, I have tremendous confidence in my own thinking — even when it conflicts with other people — which lets me take risks other people would never take when I feel the corresponding rewards are large enough.

AT: How did you get started testing systems?

CF: It’s funny. My sister was doing accounting for a guy named George Arndt, who had made a significant amount of money in the run-up in gold in the late 70s. He was smart enough to realize he needed to develop a plan. He had a technology background, so he hired some people and started writing software to do research.

I hadn’t actually programmed computers before, but he had been hiring some high school students I knew, and my sister mentioned I knew a lot about computers.

At that point, my knowledge of computers consisted of having purchased Radio Shack’s TRS-80 computer manual. But I went over one day and talked to him and he said, “Come in next week. If you can do the job, you can stay. If you can’t, you leave.”

I was doing it 25 to 30 hours a week, while I was in school. I was actually in high school for part of that time.

AT: How long did you do that before you came across the Turtle ad?

CF: Just about two years.

AT:: Let’s talk about the Turtle experience. There are lots of rumors about it in the trading world. First, was it really competitive or was there a sense of camaraderie?

CF: I would say there was more camaraderie than competition, although I think I was probably the most competitive of the bunch. But I would characterize us as friends rather than competitors. It was, overall, a very nice group of people. We hung out and had lots of discussions. We played ping pong all the time in the office.

But what I think would surprise most people was how little we actually did. Most of our time was spent waiting for something to happen. I’d usually be reading a book or something like that. In the first year I probably went through eight Steven King novels and 20 or 30 other books.

AT: In your book you write the initial training period was only two weeks, and then you were given a small account to trade during a kind of probationary period. What was the trading process itself like?

CF: The way our trading methodology worked was to put on our positions in chunks called units. Normally, the size of the unit would depend on the volatility of the market, so in a market with low volatility we might have a lot of contracts on, while in a high-volatility market we’d have fewer contracts on.

For the probationary period our unit size was three contracts — for every market — just to make things simple. By comparison, later on we’d have unit sizes of 20, 30, or 50 contracts, in some cases.

AT: And what were the systems you were given to trade? Were they just straight breakout systems?

CF: We had two systems, which were very similar in a lot of ways. One was slightly shorter-term than the other — 20 days vs. 50 to 60 days.

They weren’t stop-and-reverse systems. Both systems would take you out of the market for significant periods of time — they would exit the market on a shorter breakout than the entry breakout. For example, if the market went lower for two weeks, we’d get out (after entering on a 20-day upside breakout). In most markets we didn’t have positions on most of the time.

AT: You’d already been researching and testing systems before this, so how much of what you learned — in terms of actual trade signals — in the Turtle training did you already know?

CF: The system’s entry and exit rules were things I’d seen before. The Donchian breakout was one of the first things I actually programmed.

The normalization of volatility across markets and the idea of adjusting the quantity you traded based on the volatility of particular markets was a new concept at that time. In fact, I don’t think it was until 1998 when Van Tharp came out with his book Trade Your Way to Financial Freedom that the concept started to be something most people looked at.

AT: You’re talking about adjusting the number of contracts so the dollar value of the positions is kept constant in different markets, right?

CF: Right. So, assuming everything else was equal, our positions tended to go up and down about the same [dollar] amount every day. That was an innovative concept.

In fact, because of the way the data existed at that point, I had only been running single-market tests (before becoming a Turtle). I’d run many, many tests, but it was always a matter of considering the profits in, say, corn, soybeans, gold, and silver separately, whereas Rich really looked at things from the perspective of the total portfolio.

You get completely different answers if you look at trading from a portfolio perspective; you come to different conclusions about whether you should be trading a particular market.

AT: What kind of freedom were you given? You wrote something to the effect that you could do whatever you wanted but you had to justify your trades in a journal of some kind.

CF: We could do whatever we wanted within the framework of what we’d been taught. With respect to markets, we were essentially told, “Pick your markets and be consistent with them — don’t pick and choose trades.”

We could decide, say, we weren’t comfortable trading one of the thinner markets, such as coffee. In my case, I didn’t like the S&P 500 because I didn’t think it trended well for the type of short-term systems we were trading. So I never traded it.

But we weren’t supposed to pick and choose trades, and that’s where people got into trouble. They would decide a particular trade in a particular market was too risky — and that would be the one that would end up making 50 percent on the year.

AT: Other than market selection, were you completely mechanical yourself in terms of executing the signals?

CF: I was probably the most mechanical of everyone. I was very consistent. If the market broke out, I put on my positions as fast as I could, and I did it every time the same way. The people who tended to be more discretionary lost money.

AT: Was everyone aware how everyone else was doing?

CF: Just in general terms. We didn’t share P&L, but it was pretty obvious who was up and who wasn’t. And it was also obvious who had done well the previous year because we were all phoning in our orders. If someone was phoning in a 50- lot and you were phoning in a 300-lot, you knew you were trading a larger account.

AT: That brings up an interesting point, because you were initially given the biggest trading account of the Turtles, right?

CF: Yes.

AT: How much did you make over the course of those four years?

CF: Around $31.5 million.

AT: When and why did the Turtle program end?

CF: April 1988 — a little more than four years after it had started. Rich had some drawdowns in some funds he was running and was advised to discontinue trading, so the program ended.

I think most investors weren’t able to stomach the kind of drawdowns that trend-following gives you — at least at the kind of aggressive levels we were trading.

AT: Do you think you would have been able to stomach the kind of drawdowns you experienced — I think you wrote your maximum was around 70 percent — if it had been your money?

CF: I suppose I can’t really answer that question because I can’t go back and change [the way things were], but I don’t think it would have been different.

Every year we were given a fixed percentage of the profits, and that was all we made — so that 70-percent drawdown I went through directly translated to 70 percent less money I was going to make at the end of the year.

It’s certainly possible that I would have traded differently had it been entirely my money, but I really didn’t think of it that way. I viewed it more as points in a game rather than money, anyway.

AT: Did you enjoy it from day to day?

CF: In the beginning, yes. Toward the end it was incredibly boring to have to sit around and watch a screen when most of the time almost nothing was happening.

I think it’s a bit like flying an airplane: Most of the time it’s not very interesting, but every once in a while it’s horrifying.

AT: What did you do after 1988?

CF: I started several companies. I started a computer hardware repair company with my father that did pretty well for a while — we were in the Inc. 500 one year — but that market pretty much imploded when computer parts became so cheap that everyone ended up buying new computers every year instead of repairing old ones.

I’ve probably been involved in five or six small software companies over the years. I’ve built software for corporate sales, sales automation — what came to be known as CRM software.

In 2000 I got back into trading and hooked up with a group of traders — a group where Ed Seykota was trading for a while — called Galt Capital. That’s when I started doing research again and looking at trading stocks and trading systems other than trend-following systems.

AT: You make it pretty clear in the book that the two major trading principles for you are “manage risk” and “be consistent.” Is that really all there is to it, in your opinion? It sounds pretty simple.

CF: Yes, and I think those ideas are the ones people have the hardest time with. You’ll find a lot of really good traders who blow themselves up because they’re trading too hot (large), and then you’ll find a lot of people who never become good traders because they’re too inconsistent. I think it’s relatively easy to get an edge, which I would say is the other important factor.

The overarching concern is not to make it too complicated. People want it to be complicated, and the complexity they put into it — what they perceive as the requirements for successful trading — gets in the way.

AT: What are the complexities you’re talking about?

CF: Well, people are always looking for something different — a new type of indicator, or they’re always trying to add something to an existing trading strategy. And instead of improving the strategy, they end up conforming it more and more to a specific past, which makes it less likely to perform well in the future.

For successful traders, discretionary trading tends to be fairly consistent. But for new traders and [unsuccessful] traders, it tends to be all over the place. They have complicated rules that will give them lots of different reasons to make or not make a trade, which makes it difficult to be consistent.

And again, part of the reason is they’ve made it so complicated that they always have a reason to do what their emotions are telling them to do, anyway.

AT: You never found yourself caught up in the emotions of those huge trades — even the heating oil trade you write about in the book that went to the moon after only a few days (see Figure 1)?

CF: I wouldn’t say that I never got caught up in it, but I was probably less affected by it than anyone else, and it didn’t affect my trading much, if at all.

Click here to view Figure 1 - Upside Breakout in Heating Oil

AT: You make it clear the trading rules themselves were nothing special, and much of the approach was well-known at the time. And you’ve also mentioned how hard it is for people to handle the kinds of drawdowns that went with the type of trading you were doing.

In retrospect, did the market conditions at the time have a lot to do with the success many of the Turtles experienced? There were huge trends in a lot of commodities, and these kinds of moves haven’t been as frequent or clean in recent history. How much of the approach do you think is still valid and useful?

CF: The specific rules are still profitable, but they’re much more erratic. There are much better ways to trade today.

There are certainly some things that have changed over the past 20 years. The breakout itself is not as strong as it once was. As increasing numbers of people recognized it as a concept, there started to be more and more noise associated with it. So the presence of a single breakout wouldn’t necessarily mean the same thing today as it did 20 years ago.

At the same time, what I consider the overarching principles are still very much as valid as they once were. Trend-following certainly still works. It’s a bumpy ride — it’s not what your typical investor would like to experience, but it still works.

AT: Isn’t it predicated to a certain extent on having to trade a relatively diverse portfolio of markets, which would also imply the need for a substantial bankroll?

CF: Yes, and many people get in trouble with that style of trading when they try to trade a $20,000 account the same way we used to trade a $1 million account. I think that’s one of the significant disservices made by some of the people who try to sell books and such today.

If you want to follow trends and get relatively smooth returns using normalsized contracts, you need to do it across a significant number of markets to get diversity. And that requires a lot of money — I would say, somewhere in the $200,000 to $500,000 range — if you’re going to take reasonably small levels of risk, which is prudent.

Some of the newer mini contracts make it a little easier to trade smaller, but you don’t have mini contracts in all the markets, so you end up getting less diversification if you’re using them.

AT: How many markets does it take to diversify?

CF: There’s no specific threshold — 25 or 30 markets is pretty good. Certainly no fewer than 15. It also depends on how you pick the markets. Fifteen currencies wouldn’t be very diversified, for example.

AT: You mentioned there are probably better ways to trade. What are they?

CF: I think most people would be better off swing trading — essentially, taking a lot of the same principles and applying them to shorter time frames — for a couple of reasons. First, because of the reduced size of the moves, entries and exits are much closer, and therefore the risk levels are lower on a per dollar basis. That means you can trade a more diversified portfolio with a smaller account.

You’ll also tend to have much lower drawdowns when measured over time. If you have a trend that lasts a year and a half — let’s say gold goes up to $700 and then it drops back down to $500 before you get out — that’s a significant period of time you’re sitting there watching losses accumulate, and it’s also a significant amount of money.

But if the same thing happens over a four-day period, it’s much easier for most people to handle emotionally, because they might be sitting in a loss for only a couple of days. I think people view losses in an open position differently when they’ve held it a few days vs. six months. For example, if you buy gold at $700, it goes up to $715, and you get out at $710 two or three days later, that drop from $715 to $710 isn’t too painful. But it’s essentially the same sort of percentage you might see in a long-term trend-following system. I just think it’s a lot easier on people’s psyches to trade shorter term.

But day trading is probably not the best thing for people to start with because it’s too easy to get caught up in the frenzy of the market. I’ve seen more people make a successful transition from swing trading to day trading than starting from scratch with day trading. [If they started with swing trading], they’ve already learned the kinds of concepts they need to trade well.

AT: One of the themes in the book is the value of having a particular mindset or attitude toward risk — a trader’s perspective, in a way.

CF: Yes, I think there are two principles. The first is that the truth is what it is — you cannot hide from it. But we spend an awful lot of our time and energy pretending or hoping things are different than they really are. That’s always a mistake. Because eventually — since reality is what it is — we have to face it.

The most common example is in relationships. It seems like practically everyone I know is in a relationship they know is not going to work out, but they can’t bring themselves to face that reality. A trader would say to himself, “look ‘the market’ didn’t do what I thought it was going to do — get out of the trade.” I definitely believe successful traders have that perspective, and that it works very well in real life.

The one thing I would tell people is that taking risk is not such a bad thing. If you can learn to try something new…well, whether you fail or succeed, I think it’s better than never trying, or never attempting something risky.

If you can learn to make risk your friend, you’ll be happier and more fulfilled in life. For me, the Turtle experience was just one example of that. I’ve had many subsequent experiences that didn’t turn out well, but I still think they were good experiences because I learned a lot along the way.

Additional Reading: Way of the Turtle by Curtis M. Faith (McGraw-Hill, 2007).

www.wayoftheturtle.com: Faith’s Web site for his book, which includes his blog.