Nov 17, 2011- Trading Book Review – Curtis Faith’s Inside the Mind of Turtles

“Inside the Mind of the Turtles” is Curtis Faith’s follow up book to his first “Way of the Turtle” where he talks about exact risk management strategies taught and used by him and the other Turtle Traders under the legendary fund manager/trader Richard Dennis.  Curtis Faith , in his early twenties earned more than $30 million as a member of the Chicago trading group, the Turtles, and recounts in an autobiographical manner his lessons and experiences as trader, and eventually software and high tech startup founder.

Who are the Turtle Traders and What is The Turtle Experiment?

By the early 1980s, Dennis was widely recognized in the trading world as an overwhelming success. He had turned an initial stake of less than $5,000 into more than $100 million. He and his partner, Eckhardt, had frequent discussions about their success. Dennis believed anyone could be taught to trade the futures markets, while Eckhardt countered that Dennis had a special gift that allowed him to profit from trading.

The experiment was set up by Dennis to finally settle this debate. Dennis would find a group of people to teach his rules to, and then have them trade with real money. Dennis believed so strongly in his ideas that he would actually give the traders his own money to trade. The training would last for two weeks and could be repeated over and over. He called his students “turtles” after recalling turtle farms he had visited in Singapore and deciding that he could grow traders as quickly and efficiently as farm-grown turtles.

Read more:

Unlike the first book, which talked more about risk management formulas and strategies, “Inside the Mind of the Turtles” talks more about how Curtis Faith reflected upon the notion of risk, and how he used it in his subsequent decisions in founding a startup etc.

Below are the stuffs that moved me most:

1.)Risk is defined as exposure to the consequences of uncertainty.

The point is that you can’t avoid risk and you cannot accurately predict the outcome of every investment, business, or personal decision.

2.) The trouble with startups – One mistake can kill you.  Delaying or putting off needed action by even a few weeks or months can spell the difference between great success and great failure.  To keep the dangers of risk at bay, you must always act in time.

3.) Unexpected catastrophes.  Curtis recounts one example from his days as a Turtle, in 1987, 4th year of the program, he was trading a $20 Mil account for Rich, and in early October 1987, he was short the Euro dollars and interest rate futures.  He had the maximum number of contracts allowed according to Rich’s rules, and was up 65% for the year.  When Oct 19, 1987, the day of the market crash, it didn’t affect him much, and even had a small profit.  However, the next day when the Federal Reserve reacted to fears of another Great Depression by causing interest rates to drop overnight, Eurodollar went up more than it had dropped in the previous six months and Curtis lost the entire 65% of profits OVERNIGHT.  

4.) Coping with Fear of Uncertainty:  Curtis quotes Brett Steenbarger here on the proper adjustment a trader needs to do with increased pressure and risks of trading a larger account.

You cannot rapidly change a pattern unless you face that pattern in real time.  Talking about it doesn’t resolve it.  People learn from new experiences.  John will feel comfortable getting larger by actually getting larger, not by discussing his insecurities.  Accordingly, I might suggest John on a simulator and have him make some practice trades with larger size.  I would teach him some basic cognitive and behavioral skills for staying calm and focused and encourage him to use those skills while placing his simulated trades.  Only when that’s gone well do we ratchet up the size a small notch, and another, and another.  John will internalize the repeated experience of success, and over time, he’ll think of himself as a larger trader.

5.) Focus on Decisions, Not Outcomes

An essential viewpoint echoed by Bruce Tizes who also is an ER doctor.  Similar to traders’ work, a doctor might perform perfectly but still lose the patient.  There will be times a patient requires a risky surgery to save his life, and the doctor has to weight the risk of the surgery itself against the risk of alternative treatments.  If that surgery will increase the chances of the patient surviving, then the doctor will order the surgery or perform it herself in cases of extreme emergency.  Note that even if the doctor makes the best decision under the circumstances, the patient may still die.  Evaluate trades and decisions based on relative probabilities, not on the outcomes.

Bad things happen, despite what we do.


The 7 rules of Managing Risk:

1.)Overcome fear

2.) Remain flexible – When you don’t know what’s going to happen, the best strategy is to be ready for anything.

3.) Take reasoned risks – reasonable exposure and positive edges only.

A Reasoned risk is more like an educated guess rather than a roll of the dice.  A Reasoned risk limits exposure so that one or a few trades will not affect the trader’s account too adversely should the trades turn out badly.  Great traders aren’t gamblers.

4.) Prepare to be wrong

5.) Actively seek reality

6.) Respond quickly to change – When a trader determined a place to get out of the trade, a competent trader will respond quickly and get out, thereby reducing his exposure to continued uncertainty to zero.

7.) Focus on decisions, not outcomes.


Jerry Parker Quotes, fellow Turtle and CEO of Chesapeake Capital (managed futures asset manager with over $1 Bil under management)

1.) “One of the biggest misconceptions is that open positions with large profits is “risk”. Not true, it’s volatility.  Traders should be more concerned with the risk of losing capital and previously earned/closed profits.  Being too concerned with open trade profits by reducing exposure outside the basic exit rules of the strategy will result in less capital and real losses.”

2.) A common misconception is that previous drawdowns are indicative of future drawdowns.  Not true.  Things can be much worse.


Personal Reflections:

The book is so-so for me.  It talks more about Curtis’ startup life and his lessons in trading that became extensions of how he viewed his startup busineses and consultancy projects, because Curtis Faith is at heart an engineer and tech systems developer.   What is glaring is that Curtis Faith continues to concentrate on decisions and not on outcomes.    He also talks a lot in the book about the mistakes in the government, particularly in education and transportation etc.  This isn’t really a trading book, but more like a narrative.  It’s just quite nice to hear about traders and ER surgeons having a lot of parallels in common, as there were snippets where Curtis Faith’s friends were interviewed too.

Overall- I just realized how sometimes, even the best decisions can result into sordid outcomes (like what happened in Curtis Faith’s profits being swiped in one overnight due to a Federal Reserve decision.).  It only reinforced to me the “reasoned risk” principle.  What astounded me is that Curtis Faith responded quickly and closed his position, just like what a good trader should, and didn’t mind it.

– Faceless Trader


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