“You’re going to make a lot of money doing this so you should love everything about the system that’s going to produce all those profits. All you have to do is have the confidence and the faith to keep going and do those trades. That’s the only thing that stands between you and your best chance of achieving what you want to achieve.”
Today we will continue our conversation with Jerry Parker the founder of Chesapeake Capital and widely known as the most successful Turtle ever.
After wrapping up his position with Richard J. Dennis as a famous “Turtle,” he went on to start his own asset management firm, Chesapeake Capital Corporation.
In this episode we discuss the evolving CTA industry and the story of Chesapeake. It’s a powerful story from one of the most successful people in the industry. We really hope you enjoy it. Welcome to episode 14 of Top Traders Unplugged.
In This Episode, You’ll Learn:
- How the research and complexity of systems has a backwards effect to making money
- Challenges with entering stock markets with CTA strategies
- Why counting the trades and analyzing sample size is what most investors forget to ask when seeking fund managers
“I think the biggest enough complaint that investors have about CTA firms is that there aren’t enough stocks”
- Where the CTA managers have failed investors
- How Jerry Parker handles emotions during drawdowns
- Why markets have changed so that longer term focus has proven more successful
- Learn about the philosophy of “The Markets are the Heroes”
“You sort of have to look at yourself as a martyr, being willing to suffer pain and do what most people find hard to do; stick to a game plan, even when it’s not going well”
- Important lessons from a long, successful career in the CTA industry
- What is it that keeps investors from Turtle CTAs and choose larger financial organizations
- Why we see a skewed distribution towards profitability of long side trades and short side trades
- The key legacy traits left behind by the Turtles and if the experiment could be replicated now
- Why Jerry Parker’s contribution to the CTA space will be that he sticks with the plan and be the last one going down with the trend following ship
“That is really the essence of what we do. No one can predict what will happen. The trend following rules will put us in a good situation usually if something happens that’s never happened before.”
- Lessons for upcoming CTA managers from Jerry Parker
- Debunking trading cliches like, “you never go broke taking a profit” and “exits are more important than entries”
- Personal habits that have contributed to Jerry Parker’s success
- How Jerry Parker would start if he were to start all over again
Resources & Links Mentioned in this Episode:
Sponsored by Swiss Financial Services and Saxo Bank:
Connect with Chesapeake Capital:
Visit the Website: www.chesapeakecapital.com
Call Chesapeake Capital: +1 804 836 1617
E-Mail Chesapeake Capital: email@example.com
“To be successful, I believe you should commit yourself to a systematic approach”
Niels: You are listening to Top Traders Unplugged, Episode number 014, where I continue my conversation with Jerry Parker, founder and President of Chesapeake Capital. This episode is sponsored by Swiss Financial Services.
Introduction: Welcome back to Top Traders Unplugged. Where the best traders in the world come to share their experiences, their successes and their failures. Let's rejoin the conversation with your host, veteran hedge fund manager, Niels Kaastrup-Larsen.
Niels: That's a really good point, because actually, without naming names, we've actually seen an example of that, of a multi-billion dollar CTA being named the best in the world and the subsequent 12 months was actually not so great, so it really does occur, so I think that's a very important point. In terms of investors in general, I mean most people now-a-days, and certainly in 2014, they don't really appreciate or like the systematic trend following strategies. What is it in your view that they don't understand, that they don't get, or can't get their head around about what these strategies do?
Jerry: I think the biggest complaint that people have now is not enough stocks. And I think that CTAs made a mistake by not having a stock only fund, or having their diversified portfolio having 25% or 30% equity component to it. But I guess there is some, also, I think I have come across people who don't like systematic trading, but I do think another thing too is that people desire complexity from their managers, and certainly from our point of view, being sort of a trend following plus nothing shop - trend follow by itself, and try to emphasize to people that you don't want to make it overly optimized, and sometimes research can make the systems weaker, then I think they do not like that idea. The gadgets in our pockets are always getting better, more complex, they can do more things, and that's how I want my managers to be too. They always need to be doing lots of research. I think they don't really understand is that adding too many ways to prevent drawdowns also has negative implications on making money. You have to ask other people. I really don't want to sound paranoid, but I think, right now, stocks are way...that's the reason that CTAs are underperforming in the stock market index and so it's just amazing that no one really understands the value that the hedge fund, or a CTA is the trailing stock. Now I have an exit, once we sell off here, or once the markets look weak, we're going to have a plan in place to preserve capital, and that's not needed right now, so why should I even bother. It's kind of silly.
Niels: Sure, sure. Now, of course, the other thing is, I mean with investors they certainly tend to go on about certain themes, and I guess the concept of risk parity has been brought up by some famous hedge fund managers who have had a lot of success, and I think actually Ray Dalio at Bridgewater is one of the people who brought it up and people seem to love that, but isn't risk parity just another fancy name for what trend following is all about and what you've been doing in all these years, when it comes to position sizing, and also position sizing is probably what people underestimate the value of when they look at a systematic manager, and maybe they focus too much on the entries and the exits.
Jerry: True, true, true. I think that people don't even fully appreciate how wonderful the CTA money management and position sizing, how important that is, that's the other piece of the puzzle. It's just amazing how wonderful that is, and it fits in with every type of portfolio, whether it be stocks, stocks and bonds, or more fully diversified portfolio, like we trade, with longs and shorts. I'm sure that our way, you way of trade sizing is far superior to what the typical manager does in the stock world, and the problem with, in particular, people advocating recently...last year, the idea of, what did you call it, risk parity, is that they advocate it at the top of the bond market. So you need risk parity, when you first put the trade on (laugh). Don't tell me to go risk parity after you've been in a bull market for 2 or 3 years, and I'm underweighted in the thing that's moved a lot. So, that's, once again, if there was CTAs out there with stock only funds, we'd be killing, with CTAs out there who started a stock and bond fund 10 years ago, we would be killing it, and all of these objections to trend following and managed futures would have gone away because we'd be making money. So it's just a shame that none of us have a product, or don't have a long track record utilizing our techniques on markets, our systems that are money management principles utilizing the markets that people care most about now, which is stocks and bonds.
Niels: Sure, sure. Now, Jerry, during the more than 25 years you've been running Chesapeake, you have been in hundreds of meetings and due diligence meetings with investors, I wonder whether there's things that you find that investors should be asking you but they never do?
Jerry: That's a good question. I usually hear some good questions on strategy and how we trade. I would say that some of the most important things that everyone should ask of their advisors...the manager should be able to explain exactly how the systems work, and the theory behind the systems, and so the client has no problem knowing what to expect, and what the trading is going to look like. So, more specifically, I would say the most important question to ask any systematic trader is going to be along the lines of what is your sample size of trades, how do you count your sample size. This was the first thing I learned in 1983 about system development and construction, is count the trades. You have a 20 or 30 year back test, the systematic approach that I was taught lends itself to an entry, an exit, and a stop loss, and so you total up all those trades and you have thousands of trades to look at across all the different markets and these different environments, and then you can go forward with that systematic approach. The problem with doing research and proving the systems and trend following plus PHDs is that any sort of additional variables and niceties that you add to your systems to try to prevent losses or prevent drawdowns, and only take the best trades, has a tendency to lessen the sample size and weaken the systems, so part of that's the limit of trend following is you really don't want to eliminate the drawdowns. You don't really want to impact them too much, you really don't want to have a winning percentage higher than the low 40s because this is going to make the systems less robust. But I seldom get those types of questions. And I don't believe that it's beyond the capability of those in charge of asking those questions.
Niels: Sure, sure, very, very good points and obviously it is about trying to help investors get more comfortable with trend following, because it is something I find that they struggle with, and I've heard you say, which I think is a very interesting point of view, because we know how much people are general investors like, you know, mutual funds and stocks and bonds in general, and I heard you say, at some point, in a different interview where you said, "if you think about it, almost doing nothing, going with the trend, taking small losses and trading long term is not that far from indexing, which the world seemed to love, yet trend following traders are often looked upon with great skepticism", and that hits the nail on the head, that we're not that different, yet people see it as being very different and much more risky.
Jerry: I mean I blame that on the CTAs. We have a wonderful product and lots of diversification where we could apply our trend following to the stock markets and the bond markets, which would maybe make people feel a little more comfortable, but basically our algorithms are a little more complex than doing nothing, which is pretty much what doing indexing is - do nothing. So I think that the industry in general has shot themselves in the foot by using too much leverage, fees being too high, expenses being too high, not having a meaningful equity component in the trading, I think the marketing idea of showing investors, if you add managed futures to your traditional investments, how it improves the risk and doesn't harm the returns, that's a failed marketing strategy. These strategies need to stand alone and be worth investing in alone, and yes, of course they will fit in nice with a traditional portfolio or any portfolio, but you can't just continue to sell these managed futures or trend following and diversified products in diversified markets without taking into consideration the underperformance and possibilities, and when you underperform for a certain number of years, or a certain amount, you're just increasing the odds that clients are not going to be able to stay invested.
Niels: Sure. And speaking of underperformance, I wanted to ask you how do you handle emotions during drawdowns? I know you've obviously learned that, and so, maybe you could share some of the advice, and what helped you really maybe look at drawdowns in a completely different way than most investors look at it, which were they, when they see it, or when they're in it, they probably feel at the time that this is just going to continue and it's never going to change. How do you go through these experiences?
Jerry: I don't think that's very easy. One thing that I did about 10 years ago, is I stopped watching the market prices on a daily basis. I think you just have to also have to make a commitment to the process, and doing the right thing on every trade, and following your systematic approach. It doesn't mean you can't tinker with it, and improve it slightly, but that's really...you get paid for creating the good systems and approaches, but the other 50%...at least 50% is in doing those things. You sort of have to look at yourself as sort of a martyr, being willing to suffer pain, and do what most people find hard to do, which is stick to a game plan, even when it's not going well. So, that is just something that...and I think having everything computerized and computer generated, all the trades, and then having one group devise the systems, in terms of create the trades each day, and another group actually be in charge of carrying out those trades, that sort of division of duties is a great internal control process to ensure a more disciplined approach. Definitely a process oriented...you know when I first started trading, Richard Dennis said, you need to do the right thing, follow the systems, and that's how you'll be graded. If you lose money doing what you should do, then we won't complain, but if you actually make money when you break our rules, then that will not be good for you.
Niels: Sure, sure. And speaking or Richard Dennis once again bringing him into the conversation, how would you say you do trend following today? Have you evolved? I think I know the answer to the question, but I'm going to ask it anyway, and that is whether you've evolved away from what Richard Dennis taught you through your own research, or in fact, whether you have maybe been a little bit away from it during the last 25 years, but maybe you've come back closer to the original way of you were taught.
Jerry: Well I definitely feel that we're very close to the way that we were taught, because we were not taught necessarily specifics, or told that certain parameters would work forever, so we concentrated on the philosophical approach, and I think, one minor thing we did is that we were just able to systematize and create algorithms for all of the different concepts we were taught about what works and in markets, and how you should approach the markets. But I really am open to changing, but I haven't really found anything too much better than what we had learned as far as the general approach and the importance of diversification, and trend following, and the big concepts. But I would say that it's pretty identical to what we used to do, except we're just longer term. Shorter term and trend following that we practice, our analysis really stopped working in the late '90s, so now we can still make money trend following, we just have to trade longer term and be more tolerant of drawdowns, and have exits that are further away. So maybe in the '90s we were exiting at the 50 day moving average. If we went below the 50 day moving average we would get out, now I think you have to look at the 150 day moving average, or the 200 day moving average and, just in general, a longer term approach that keeps you in the markets even though they are choppy and not as smooth trending as they used to be, trend following works, but maybe in some ways it's a worse investment than it was in the '80s and '90s, which is no big deal. It's still better than almost anything else.
Niels: Sure. I'm a little bit curious about the long term because clearly the results that we've seen in the last year or two certainly confirms what you have said, that the longer term managers have done well, have done really well, and certainly your performance last year demonstrates that, why do you think that markets have changed so that you have to become longer term? What is it in the markets that you see has changed and kind of led you to become longer term?
Jerry: Well, I think there are two different answers. One is that, just looking at the charts, you can have a very long term move, multi-year moves in gold and silver, let's say, but it's going to be more choppy. You are going to hit the 50 day low more often than you used to, or the 75 day low more often than you used to, only to see the markets go back to new highs and keep going. So, now the down side is when the market does hit a peak, in hindsight, you see that was the peak, then you won't be able to get out...you won't be able to preserve as much of that max profit as you may have in the past, but at least you will have stayed in the trend, for the most part, for that 2 or 3 year period.
Then, of course, it's mandatory to have multiple exits not just one exit, so in case you do get bounced out, you didn't get bounced out of your whole position, or in case things do crash you don't have your whole position still on when it goes through the 300 day moving average or something. So, you need to use some smarts and have multiple entries, multiple exits, but they all sort of need to be without concern to being longer term in nature. And the reason I think this choppiness happens is just too many people trend following. There are more computers. Everyone can kind of see the data. I think it's a big opening for Chesapeake or longer term managers that the only reason that people...traders try to come up with different ideas and more strategies that weaken the sample size and that try to do different things to preserve those profits, it helps us, probably, to not do those things and we stay in those trades and our systems tend to be more robust and more reliable.
But despite the amount of trend following, the amount of computers, trend following in the markets are not going to be easy. They're going to get progressively harder, and having the where-with-all and stomach to sit through drawdowns bigger than the ones we had in the '80s and the '90s it's going to yield profits for those who are able to do that and not listen to clients who want you to cut your profits short, or reduce your volatility versus hanging in there with a hard trade when it gets really scary and making a lot of money.
Niels: Sure, and becoming longer term and with the increased risks that you just mentioned, does that put more emphasis on market, diversification? Because I know you talk about, or in the past have mentioned that the markets really are the heroes in what trend following is all about, so does that require you to become even more diversified to compensate, maybe for the additional risk of going longer term?
Jerry: I think being more diversified is something that you should do regardless. It's just going to...even if the markets reverted to being much better for trend followers, than they have been; you'd still want to be as diversified as possible. There's no down side to being diversified. All the trades that our trend follower or systematic manager puts on are created equal when they meet the entry criteria, but the fact that you're trading all the markets the same way, and with the same systems, and same approach on the longs and the shorts, this is the only thing that allows you to accumulate the necessary sample size that I talked about earlier. So, by definition all the trades are the same, they are all equal, they all have the same expectations, so there's no reason to fear diversification, and certainly we trade 200 markets now, 100 single stock futures, and 100 other markets: currencies, commodities, indices and interest rates. Hopefully in the future it will be 300 markets or 400 markets.
I guess to some degree the diversification can help in that regard, but a lot of the times the markets are very highly correlated across all these sectors and you have one big trade on and everything is crashing, or going against you in the same day, or in the same month, or in the same quarter, so it's sort of hard to hide from the drawdowns. But they would be a lot worse if you didn't have the diversification. If you only traded stocks, you can just see in the data that those, drawdowns would be much greater than the target rate of return can be the exact same in a stock portfolio or a diversified portfolio, the only difference is going to be the drawdowns and bouts, everything is going to be a lot higher. And then you brought up another interesting point, and that is, from a traditional trend following point of view, from my point of view, obviously, I don't look at this volatility in this drawdown on profitable trades as anything other than volatility, and I don't like it, because I don't like giving back profit, of course, but I have to give back some profit to actually make a lot of profit.
But I look at the risk as something different. The risk is that I'm willing to risk on a certain trade. So let's say that I have...say for every trade I do, I'll risk 50 basis point of my capital, and I'll be very concerned with that. I want to have great systems, that has a reasonable win percentage, they have a tendency not to string a lot of losses together, and I'm going to be very concerned and conservative about losing 50 basis points of my clients capital on these trades that I'm doing. But, if I have a big open trade profit, like the gold or the silver, of the past few years than, I'll be much more liberal with that profit and, my systems are going to not get me out of there and make a big distinction between losing capital and losing back open profit.
So, that's the problem with trying to tighten up your stops, coming up with different ways to preserve profits, apart from the system exit, which is going to be the 200 day or 300 day moving average, is you cut your profits short, and you don't make as much money. But trying to convince clients that they should allow for this volatility during good periods is almost impossible. That's very frustrating. It's only when we are relatively better than others that people would tend to be OK with that. I'm sure if we were trading equities and there was a big sell off, and we had a typical drawdown with our systems, if the markets kept going lower than the buy and hold, and the index has lost even more money, I'm sure they'd be fine with that too, because we weren't losing as much. But CTA diversified trend following is held to a higher standard because of all the goofy markets that we trade, and the systematic approach that we use that is not that well known about or accepted.
Niels: Sure. I think also part of the problem is, of course, when you hear people talk about equities they always refer to the performance year to date. They never talk about performance month by month, while the CTAs and other alternative investment strategies you're always measured on your last month's performance and that in itself creates volatility in the returns because they look worse than they are, so it's definitely a problem. If I was going to ask you, what is, maybe not the most important, but what are some of the most important things that you have learned during your long and successful career? What stands out to you when you think back over all this time?
Jerry: Well, I think I'm more committed to our approach. I'm more convinced every day that what we do works, and it's the best and safest way to manage money. Definitely I have learned, through bad experiences that you should maintain 100% consistency and discipline in your systems, and that is more important than about anything, and more important than creating better systems. Even if you have a substandard system, you would be better off just following it and not trying to guess. I'm shocked that people don't believe in price, and following price and they can't predict markets, and I'm even shocked at CTAs that will venture off into other types of trading, that seem to contradict their trend following world view, and I think that, from a business point of view, the managed futures industry that I grew up in with high leverage, high fees, high commissions, managed accounts, that was all very unfortunate and it's just amazing that all of the great CTAs out there with really good systems have such little money in their management, and it's pretty much our fault of trying to only trade diversified portfolio, not trading equities, and then not offering clients better products and better cost structures. I'm sure I'll think of some other things as we keep talking, maybe..
Niels: Sure, No that's fine. You actually mentioned something that I wanted to ask you about and that is if we can stay a few more minutes with the Turtle story, specifically, and today there are still a handful of original Turtles who still run investment management businesses, but in fairness they're not the largest firms in the industry despite having probably the longest, and, for the most part, the best track records. I don't know if you sort of alluded to that a little bit before in your response, but why do you think that is? What are investors seeking that they're not getting, do you think, from the classical trend following approach?
Jerry: I think that some of the larger CTAs have, probably, a pretty geared classical trend following approach that, maybe the difference between their approach and a more classical approach is not that material. I kind of agree, I often wondered why the Turtles businesses are underperformed others, but, I think what happened was the other firms with as good approach as ours, just did a better job at probably realizing that larger organizations were going to be what was needed in order to continue to manage money. Maybe, there's just an irreversible move now towards larger asset managers that makes institutions more comfortable, and so the smaller CTAs are going to have a much harder time, and it's not so much about the systems being a little bit better or worse, it's more about institutional quality and lots of staff, and making the CTA trend following and CTA approach look more institutional versus the smaller organizations that we grew up in and started, and didn't evolve into something any bigger.
Niels: Sure, yeah, I think that's definitely the case, and the other thing that I have noticed, which I think is quite an interested point of view, and that is, of course, that the CTA industry specifically, was a very US dominated industry for many, many years, and also when I started, but then suddenly, maybe for the last 10 years or so, it's really been the European managers that have just grown enormously, and we've seen this shift from US based managers towards the European power houses. Yeah, there's been certainly a couple of interesting changes going on.
I wanted to ask you just one or two final questions on this before we move to the last section, and that is, when you do trend following, and when you do back testing, and you look at all these things, typically what we find is that 80%...85%...maybe even more than 90% of all the profits in the long term are made from the long side trades and not the short side trades. Now there are probably some explanations in certain markets, but have you ever spent time thinking about why there is this sort of skewed distribution towards long side trades versus short side trades, because I don't think a lot of people really realize how different it is between the two?
Jerry: That's definitely the data and everybody sees it. Maybe a simple...the long trades can go a lot further than the short trades. The CTAs in general are sizing their trades based upon the recent volatility, when a lot of times you can kind of just know that if the market goes to zero, I'm not going to have an outlier trade. And so it just has a tendency not to go to zero, and then the longs can start with a very low volatility, they can throw in a big huge position, and then as it rallies over the next year or two, the volatility can get a lot larger, and these profits can get really outsized. I think as a good trend follower, you don't want to rely too much on the past as it relates to what to expect for the future. All we're trying to do is use the past in the most conservative way possible, which is, here's a good place to buy, here's a pretty good place to sell, other than that I really have no opinion. Things can look vastly different, the shorts can all of a sudden become incredibly great. 2008 was pretty good.
And then I need to do the shorts because they increase my sample size, they're not a losing trade, necessarily, and they help my diversification. The longs are sort of correlated, the shorts are correlated, and so most of the time we have on equal amounts, and so it just makes the portfolio more stable and less volatile, but I've listened to some very smart people say the shorts have underperformed, but don't count the shorts out, because that may not be the case for the future.
And that is really the essence of what we do. No one can predict, and the trend following rules will put us in a good situation, usually, if something happens that's never happened before. Updating the systems, because the markets have "changed"...there's two different ways to interpret that. Absolutely - I'm banking on the markets changing, because all I'm doing is buying a high price and selling a lower price and that's the only thing that I'm looking at, so no matter what happens with the Fed, or the world, or the wars, or the weather, the fundamentals will always be changing and they can't be predicted, I will be the best person to handle that because I'm not even acknowledging, I'm not even paying attention to the past about how those fundamentals work, I'm just going with the trend, with the crowd sourcing of all the information. I am the first person who says, "You cannot beat the market". The market is telling me what to do and that's what I'm going to do. The second way of interpreting that is, well the markets have changed so that your trend following systems no longer work. Well, I agree that's possible. And the way that we have seen that happen, recently, is the choppiness in the markets i.e. like I said you have to be longer term. And, of course, you can have these violent sell offs, like we had in the Swiss franc, and silver, and some of the other markets that make highs and then half the profits, or most of the profit is gone within days or a week. And, it's up to the CTAs and systematic traders to change their systems, to take those things into consideration. Which we can and will do. But the fact of the matter is the markets are always changing, no one can predict how they're going to change, and just following the price, taking small losses, being diversified, buying highs, reducing positions when the trend goes against you, there's nothing better, nothing safer than doing that. Certainly safer than not having an exit at all, or a random exit where you rebalance or some of the things that people talk about that are just, sort of, random trading, I prefer to stick to a systematic approach that's proved itself in the past.
Niels: Yeah, I know. I think that's actually a great segue to my last two questions on the Turtles side, and that really is, if you were going to sum up this experience, and what impact you believe it's had on the industry as a whole, what would you say the key things are that the legacy leaves behind, what would they be? And, also, do you think that the same experiment could be done now, 30 years later?
Jerry: Yeah, I think the same experiment can be done, but it would be done much differently, now, because back when we did the experiment, we were given the research and we were to just follow the research, but hopefully, possibly, through our experience of watching the markets offer our thoughts on ways to improve the systems. Now I think the best way to duplicate this experiment would be to just hire the programmers, and a person who could program a little bit and do some back testing, but could also have some gamesmanship type talent to where they could come up with new and different ideas, and maybe develop their own systems. So I think that it would be much more computer and math oriented Turtles in the future, than the way that we did it.
I'm not so sure what our legacy is going to be. Hopefully it hasn't been written yet, and hopefully over the next 20 years our performance and our businesses will be better. But I'm not exactly sure...hopefully we're done yet. I think it's incomplete, and I think my contribution, if there is going to be a contribution, I can definitely tell you what that contribution is going to be, and that is I'm never going to do anything other than stick with what I was taught, with minor adjustments, and if that gives some encouragement to others, then great, and if it doesn't work, than that's OK to. But I will be the last one going down with the trend following ship, because I don't think there's any other alternative...there's no good alternatives, and certainly layering on other things to trend following, other components - counter trend, or non-trend ideas, ideas that take small profits, these are not replacements at all, so I'm happy to be the one of the few who sees the value of what we do and is willing to stick to it and not give in or give up. So, I feel that given such a huge gift in 1983, by being able to be in the Turtle Program, minimally I owe that, because we really did learn from the smartest people, some of the best people, and it was just an amazing situation. I think back to, what you were talking about earlier, I just wanted to comment that you can sort of see that we have great training, and great mentoring, it's not sufficient, it's totally sufficient for managing money, or doing the trading, but possibly the big European CTAs came out of that age: MAN AHL, they had different training than we did. They had training on the system development side, the money agent side, but on the business side this is what is helping to set them apart, is this sort of not just coming out of a trading mentality, but also a money management large organization that helps build a business. I think that's where the problems with me, and a lot of the CTAs is, we put too much emphasis on systems, and tweaking our systems and the systems would always bail us out in the end, and not enough emphasis on what do clients want, how do we create solutions for clients, and build a lasting, large organization? I went to one of the best undergraduate business schools in the country; it just doesn't look like it. So I give my trading and my knowledge on the markets that I got from Richard Dennis and Bill Eckhardt, an A+, and hopefully I'll do better in the future on the business side.
Niels: Absolutely. That's a very, very good answer Jerry. Now I want to shift gears on you, to the last section that I wanted to talk to you about. I call it general and fun. So those are the questions that you may not get asked on a regular basis. But I think the first one, at least, is a question that a lot of people listening to this will be very interested in learning from your experience, and it really goes to ask you about what you think it takes to become a great trader, a great CTA, maybe, what are the traits that the person needs to have in order to have a long and successful career?
Jerry: I think to be successful, I believe you should commit yourself to a systematic approach, and a research approach in the commitment to use object information that something like trend following offers, and equally important is to be committed to do those trades and not be swayed by others, or clients or your own bad thoughts to guess and to trade by the seat of the pants. But commit to the type of approach that will keep you out of trouble and will help you preserve your capital and still participate in the big moves and give you the best chance of making money.
I think another thing that happens with traders is they try to make the systems too good, and improve them too much and this gets you in to lots of trouble with your sample size and your optimization. So good enough should be good enough. Don't try to make it too much better. It's good enough. There's no such thing as making it perfect. We actually would have people in the Turtle room, in 1984, who tried to convince themselves and others that, because we were losing money sometimes, or having drawdowns, that Rich hadn't told us all of the secrets. Which is silliness. Some of the greatest minds ever in the trading world, and the first thing to acknowledge is that some things you don't want to try to eliminate, and losing trades, drawdowns, are two of those things. It's part of a winning system. A winning system has to be hard, it has to be difficult. Do not seek out ease, comfort and pleasure. If it feels good, it's probably wrong. I think it's just very difficult. You must not be jealous of other people, of what other people do, poor ideas, ideas that don't fit with the proper philosophy can have good performance for a longer period of time than you would think, so your whole ability to sort of stick with what you know to be right, and hard, and reasonable, in the face of losing clients and losing money is just indispensable. Play for the long term. I think give your clients and yourself a good product and a good trading system and reasonable leverage, and expenses and leverage need to be reasonable, and grow slowly. Don't try to take over the world too quickly. Trade small, learn from your mistakes. I'm just shocked at how many people can make money, even with inferior ideas, maybe my ideas are inferior, I have no problem with that, but I can just say, and I've sort of acknowledged that to myself that our systems now are so much better than they have ever been, and I would think, how did I ever make money in the past? I was thinking so incorrectly and not nearly as good as we do now. This is the power of the trends, hence going with the trend, taking smaller losses, diversifying and protecting your capital. It's so powerful that it can even overcome some of the problems with our methodologies that we have.
Niels: Sure. So it's back to early on in what you said in our conversation, which Richard Dennis, I think, told you, and that is learn to love your system.
Jerry: Yes, learn to love your systems and love your losses and your drawdowns, because that is part of the system. The computer, when you do the back tests, will tell you, as you know, look how much money you are going to make. You are going to make a lot of money doing this, so you should love everything about this system that's going to produce all of those profits. All you have to do is have the confidence and the faith, and keep going and do those trades. That's the only thing that stands between you and your best chance of achieving what you want to achieve. If people only knew how much money I haven't made for myself because I'm not perfect at being disciplined.
Niels: Is that, would you say, going down a little bit on that, is that where you say, if I look back, and I look at my biggest failures, have they come from lack of discipline do you think?
Jerry: Yeah, I think they have. When we got there, to the Turtle Program, I think Rich sort of described one of his driving motivations for research, was just trying to prove, right or wrong, mostly wrong of course, all of the trading clichés: 'you never go broke taking a profit', and of course that's totally wrong. That's the one way you will go broke is taking small profits.
Oh, the one today that I hear all the time, and I think it's so unnecessary to even make this statement is, that 'exits are more important than entries'. Ah well, I can see where people are coming from on that, I don't really think it's necessary to talk about in that regard, because your exits, you should have multiple exits. It's random where which exit is going to work, so have lots of exits. All trend following, all medium to long return exits, have lots of exits, and in the same way have lots of entries. But certainly there's nothing more important than an entry because, in the grand sense, that's been the biggest failing of all traders, and certainly mine, is not entering into a trade, and you lose in a certain market three of four times in a row, and then you want to try and convince yourself that you shouldn't take the next trade, or you come up with a filter that looks good in the back test, but prevents you from getting into a big trend, and so, to me that's where it all is, just not doing the trades that you should do on the entry side. That's where it all starts as the biggest failing of an approach is to not be willing to take a smaller lose.
Niels: Actually, this is interesting Jerry, because I seem to have read somewhere, in some of the books that have been written about the Turtle Program that you were taught, in the beginning, that there were certain circumstances that you shouldn't take an entry. I can't remember what the writing was, something like if you have a winner, you shouldn't take the next trade, I can't remember exactly what it was, is there any truth to that? Or were you just taught to take all trades?
Jerry: Well, there was something similar to what you described, as far as a filter. Even though I do remember in the training, someone saying that filter is a bad word, because filter has a connotation that can mean, in some people's minds of missing a big trend. So even if you have a filter that's based upon whether the last trade was a winner or a loser, or if you have a certain setup that you know is to be optimal, so you have a trend plus something else that has been tested and is not discretionary, but is in your algorithm and it's in your systems, and you always have a failsafe, which is this plus this and then I'll buy. Well if you don't get this plus this, then you get in a little higher. So it is true, you may try to grade the entry and you know that some trend plus something else is better than just the trend, but let's say, OK now we're at the all-time high, the 52 week high, you buy, regardless whether the filter was satisfied or not, so that's another part of the back test, is that you have your sample size, but you should be very worried if you don't have a mechanism that finally gets you into a trade. I remember my first trade, in that regards, it was a Swiss franc trade in 1984, and it had nothing going for the trade except the trend, so we delayed, we delayed, we delayed, and finally we just said, OK we have to buy. And then, of course, it turned into a loss (laugh). I remember Rich coming in and saying, yeah, and that happens, and you've got to buy, you cannot let it go and you cannot rely upon the filter, because these filters work until there's the greatest trade of all time that comes along, that doesn't meet your little nice filters. Look at the data and torture the data and you've come up with this filter, oh, darn, something happens that never happened before and that filter is not satisfied and I'm going to miss the biggest trade of all time? No, of course not. So you have this switch that you put it on regardless if it's not setting up the way you think most great trades should set up.
Niels: Sure, and I think now that you actually talk about it, I think that was exactly the point that was made about the original Turtle rules in that it was that I think you were given two time frames to trade, and in the first one, which is the shorter version of it, then there were these filters, but actually the longer term time horizon would take all trades, and I think that's exactly what you say, you have a failsafe to get into the trade, so that you don't miss it, but maybe you don't get the full position, you certainly get into it.
Niels: Now here's a little bit of a personal question, I'm just curious, because I ask this of everyone, that is whether you have any kind of personal habits that you think has helped you and contributed to your success over the years, is there anything that you do on a regular basis that you think has helped you?
Jerry: Well, I think I have a certain personality that craves rules and trying to get to the bottom of what works in the parts of life that I'm very interested in. So whether it's my political philosophy, my religious philosophy, my trading philosophy, I am always trying to look at those topics in those terms of an overriding world view on these issues. And I want to have my 10 commandments of trading, and of life, and of politics, and economics, and diet, and fitness, and everything that I'm interested in I really want to get to the bottom and understand the basics. And so when things are pitched to me, or things come into my head about the specifics, I can evaluate them through the lens of does this make sense to the 10 things that I know are right about trading or trend following? Now I'm not saying that I haven't had to have some changes in those things that I once thought were 100% perfectly right, but, you know, I just desire to sort of be a person who wants to follow a philosophy, and a world view on things. That's why it's easy for me to be trend following plus nothing, because I don't want to add anything that's not the best to my management. (I'm going to do something like that) just to avoid a drawdown or have a little bit more volatility? No, forget that, that's crazy, I'm going to stick with what I know to be right, maybe try to change the specifics of it, but on the big issues I sort of desire not being a moderate and not seeing things in multiple ways, in most respects I have no problem being committed. I've definitely been wrong, and as I get older I become more open minded and moderate in recognizing my mistakes, but my personality lends itself to building a systematic model in my own mind of what works and actually carrying it out, and not desiring the approval of others. Sometimes I do desire the approval of others, but, then I wake myself up, sick with being weak, and choose to be strong, and don't be afraid to change but, at the end of the day, it's my responsibility, and I have to be true to myself.
Niels: Absolutely. Now we're getting closer to my final questions, and I wanted to ask you, if you were going to start all over, today, is there anything that you would do differently?
Jerry: Yes, I would hate to think about starting over today because I think it's very difficult today. It was much easier, when I first started, to manage futures. There were so many opportunities and institutions raising money for CTAs. But I think even back then, I've touched on some of these, I believe that I think it's just better to try to grow slow and create your own fund with low fees and reasonable leverage and try to raise money slowly and concentrate totally on the experience of the few clients that you may have. It's better to resist taking managed accounts with lots of emotional equity and high fees and commissions, and then I think, most importantly, every CTA today should have a stock trend following fund where they only trade stocks - simple stocks, maybe some indices, and try to beat the S&P by a little bit with your trend following systems, long and short, and then also have a diversified program. The industry has gotten into major trouble by defining CTA trend following as managed futures, which is sort of defined as currencies, commodities, stocks and bonds - the perfect portfolio. Yes I agree, it's a perfect portfolio, but the CTAs and few others are about the only people who agree with that. So today, if we have a 20 year track record with diversified portfolio and a 20 year track record with stocks, the ideogram of the CTA industry would be a lot higher. So I think that that is the most important, when you trade stocks, trend following does not equal managed futures. Trend following is going with the trend, paying attention to price, taking small losses letting your profits run, on any market, on every market: stocks, stocks and bonds, commodities only, diversified, and that's been lost. The billions of dollars under management with momentum trading, and the positive press, let's say that the momentum trading gets, there's huge missed opportunity from the trend followers. My opinion, the trend following is far superior than momentum trading. Some similarities, but not the same.
A long term trend following approach, I think will do better than momentum. Trend following is not even a part of the stock world, it's not even talked about. It's synonymous with managed futures, with managers who trade lots of commodities that have been flat lined in the past 4 or 5 years, when performance is down and that's what we are. And it's just a total shame that all the academic research and now places some value on trend and momentum, that the CTAs are just on the sidelines and not even a part of obviously something that should work very well if not better than almost anything else. Now, once again, this is the big question...this is the big question, because this is what should separate the two camps from fundamental versus technical, fundamental versus trend following, is it possible for people to predict the future, to predict the markets, can you predict where they're going? So, I think most people would say, absolutely not. It looks like people can for a short period of time only to turn out to be human in the next go around, so, this is a huge missed opportunity for the trend followers in the stock world.
Niels: Yeah, yeah, no, very interesting. And the almost last question is a little different. Now imagine that you could ask a question to one of your peers coming on Top Traders Unplugged, what would you ask them?
Jerry: Oh gosh, I would just be such a...I can't get off on Johnny one note. I have no imagination, I would just have to ask them, in my opinion, sort of the most important...I think two questions...one would be, I hear this from some managers, I was going to trade equities, going to trade stocks, we were going to have a stock program, but we're not going to use trend following. Or, we're going to use trend following plus a lot of other fundamental stuff, and I would just say, how could you believe in trend following and that you can't predict markets, and that following the price and taking small losses is the safest thing to do, and yet you want to use other information. I wouldn't understand that.
And then I would just sort of probe and ask certain questions about the cost of smoothing out your equity curve. I think that resizing position is based upon volatility, reducing the portfolio based upon the volatility, having profit objectives, a lot of counter trend, non-trend following type of trading has a big cost associated with that, and I would just explore those explanations as far as the sample size. The more you cut your profits short, regardless of how you do it, regardless of how it reduces your volatility; it just usually is going to cause you to take bigger losses. So, I think the CTA industry has a major problem in that area, that somehow massive amounts of portfolio adjustment trading that overwhelms the core systems, actually can come with no cost involved. Which is totally false. That reduction of risk - seeming risk, but it's really just volatility, you know it's wack-a-mole - it's going to come up someplace else, it's going to have a negative impact somewhere else, and just causes people to trade larger the more you limit your potential profits.
Niels: Yes, absolutely, and we've certainly seen an example of that in the past, and no doubt we'll see the same in the future. Now my last question to you, Jerry, could you tell a fun fact about yourself that people don't know about you, or not so many people know about you?
Jerry: Oh wow. That's the same story I bring up all the time when I meet people and greet people, that my children just really cringe when I start talking about it, but a fun fact is I was in a movie with Jim Carrey in 1999, called Me, Myself, and Irene, which was a lot of fun. It was a prize from the Robin Hood Foundation auction dinner. So I paid to be in a movie, essentially, and it went to a good cause, and I was actually on set with Jim Carrey, and had a speaking part, and Jim Carrey and I had some dialogue together and that's really my biggest claim to fame, was I have a IMDB page and I think that I could do a much better job in the future if allowed to get back to that acting gig again. I've learned from my mistakes, but that was a lot of fun, and it's something that I like to bring out at parties, and people are always wanting to watch that movie, which I don't think is a very good movie, but it is one of my bigger exciting times as my children...I always advise my children, become an actor or become a hedge fund manager, it's like the two best things going.
Niels: And you've been able to do both, (laugh) so there we are. Now, Jerry, listen, we could continue all day talking about trend following and maybe we need to continue in another episode, to continue to talk about this, but is there anything before we finish that you want to bring up, anything that I've missed, something that you want to share, or do you think we've done justice to the Turtle story?
Jerry: Oh, I think we've done a lot of justice, and you've been very kind to have me on, and I think that people can pick up on a lot of the things that I've said about how wonderful that experience was, and there's lots of examples of the great life altering lessons that I learned from Richard Dennis and Bill Eckhardt, and it's irreplaceable. Their generosity and kindness, and just general, probably were as people, their friendliness exceeds all of their other accomplishments, so it is a great time and a great period, and I'd still be working for them. If the Turtle Program kept going I'd probably still be there it was the greatest experience ever and something totally I didn't deserve, but I'm really thankful I was there. Thanks for having me, and it's been great and I hope to see you soon Niels.
Niels: Sure. Absolutely. And before we finish, Jerry, is there any place that, if listeners want to reach out and learn more about you and Chesapeake Capital, so what would be the best place for them to reach out?
Jerry: We have a website ChesapeakeCapital.com, so that's the place to go.
Niels: Great stuff. And for those who are listening today, I would say also feel free to go out and find a way to say thank you to Jerry for all his time, all his generosity, and I'll certainly be the first one to say, thank you every so much, Jerry, it's been a great conversation. Your story is truly inspirational and I really appreciate your willingness to share it, and the unique journey, and allowing me to dig into that experience, and of course, our listeners can find a lot of details about our discussion today in the show notes for the episode, on TOP TRADERS UNPLUGGED.COM, and I really do hope that we can connect at a later date and see what your trend following journey, where that will take you next. So thank you so much Jerry.
Jerry: Take care Niels. Thank you.
Ending: Thanks for listening to Top Traders Unplugged. If you feel that you learned something of value from today's episode, the best way to stay updated is to go on over to iTunes and subscribe to the show, so that you'll be sure to get all the new episodes as they are released. We have some amazing guests lined up for you, and to ensure our show continues to grow, please leave us an honest rating and review on iTunes. It only takes a minute, and it's the best way to show us that you love the pod cast. We'll see you next time on Top Traders Unplugged.
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Date posted: 17 Jul 2014no comments