Buy and hold is dead! The extreme market volatility over the last decade should make this abundantly clear to even casual market watchers, but it is something that good traders have known all along: You trade securities, you don't marry them. Buying a stock is not a commitment "until death do you part." A friend once told me the story of a man he knew who worked at Worldcom during the go-go 90's and had his entire 401(k) invested in the company stock. He was waiting for his account to hit $2 million, and then he was going to cash out. It was almost there - $1.8m, $1.9m - something like that when the stock began its terminal decline. Instead of selling, he held on until the bitter end, until all was lost. Moral of the story: The market is the utlimate authority. It does not listen to you, nor care about your dreams & desires, so you had best learn to listen to it.

Stories like the above are not uncommon - just ask the employees of Bear Stearns. These days buy and hold may as well be called buy and hope, which is definitely not a sound strategy. And while there are a near infinite variety of potentially successful trading strategies (as the book Market Wizards shows), some of the most successful strategies have been mechanical trend following systems. You've no doubt heard a bit about Richard Dennis, the trend trading pioneer who discussed his mid-1980's Turtles experiment in Market Wizards. Now, thanks to Michael Covel, we are lucky enough to have access to the whole story.

Covel's latest book, The Complete TurtleTrader, is a wonderful chronicle of the entire Turtle story, starting with Richard Dennis's humble beginnings as a 19-year old kid in the early 1970's trading on the MidAmerican Exchange, a now defunct regional commodity exchange that traded mini-sized agricultural contracts. Dennis was a trading genius and a quick study. Most traders try to apply the old adage, "buy low and sell high," which is why most traders fail. How low is low? How high is high? There are no definitive answers to these questions. But Dennis intuitively grasped the concept of doing the opposite: buying strength and selling weakness. "Buy high and sell higher," and "sell low and buy lower," are the fundamental, but counterintuitive concepts of trend trading. Dennis got rich - as in running an intial stake of a few hundred dollars into tens of millions! - trading in the pits this way. By 1983, he had moved off the floor to trade multiple markets for his own account from an office. This is where we get to the heart of the Turtles story. To settle a bet with his business partner about whether traders could be taught or were simply "born," the an experiment was conceived.

Imagine this: You see an ad in the Wall Street Journal: "[Super famous trader] Richard Dennis seeks commodity futures traders. No experience necessary, will train." This is the ad that actually ran:

Even though you don't know a stock from a bond from a futures contract, you apply and get the job! You move to Chicago, get two weeks of training and then you're set loose with hundreds of thousands of dollars to trade for Dennis's account. There are twenty more like you, just starting out in commodities, all sitting around trading these huge sums of money. In addition to your salary, you get a cut of the action! The only condition is that you have to follow the trading rules exactly as they were taught in the first two-week training session. The rules are not difficult to grasp - in fact, in the program's second year, the training for the new recruits was cut down to just one week! Can you imagine it? What would it be like to experience something like that?

Michael Covel's writing allows you to live it. Anyone interested in the Turtles story, in the psychology of trading, or just a great American story period should read this book. If you're looking for the Turtle's trading rules, of course those are there too in Chapter 4: The Philosopy, and Chapter 5: The Rules. Everything the Turtles learned is there. If you are only interested in making a ton of money trading, you might think that all you need to do is read these two chapters, that the secret to successful trading can be found in those few pages. But if you believed that, you would be mistaken.

In his Market Wizards interview, Dennis famously declared, "I always say that you could publish trading rules in the newspaper and no one would follow them." For the Turtles as a group, it was easy to follow the rules, because it was a matter of social pressure as well as keeping their jobs! In a bizarre twist to the story, in spite of how rigid the trading rules were, Dennis's allocation of capital to the Turtles themselves was not uniform. In some respects, it appeared almost random. He played favorites, giving some millions while others only thousands. This created tension, rivalries and confusion among the group, a fascinating story in and of itself. There was also competition among the Turtles in terms of performance. Even though they followed the same rules, there was a wide variation of in each individual's performance.

The turtles were wildly successful, grossing over $150 million in four years. By 1988 in addition to the Turtles, Dennis himself was managing two big funds at Drexel Burnham Lambert for outside clients. At the time he believed that collecting fee income was an "easy" way to supplement his profitability while lowering his risk, but his performance suffered. As with anyone who has to deal with clients, Dennis later changed his mind saying, "I found out that it was more trouble than it was worth. The costs were not financial; they were psychological." His trading had grown erratic:

...the Turtles couldn't figure out why Dennis was overtrading when he had stressed time and again that overtrading would kill you: "We calculated one day that his risk was probably one hundred times greater than the risk we were taking."

That Dennis was possibly taking risks over and above his Turtles by a factor of 100 simply made no sense. He knew enough to make his students do the right thing, but had a difficult time disciplining himself."

He was also trading against the Turtles at times, something that made absolutely no sense from the standpoint of the rules. Ironically, as he was losing in his own account, the Turtles were keeping him afloat. But when his hedge funds at Drexel went under in April 1988, Dennis suddenly pulled the plug on the Turtles as well, in dramatic fashion:

Jim Dimaria (one of the Turtle traders) was bewildered at the Turtle program's abrupt ending: "All of a sudden, its over. That's how fast it was. They came in Monday morning and said, 'Friday we're done.' I was like, 'Oh, better get a job.'"

This was probably the worst trade of Dennis's entire career. The Turtles were profitable, having grossed $150 million for him in four years! They were still floating his boat as he was going to pieces. The program was a cash cow, and in spite of the rivalries, overall they were happy with their jobs, and they did it well. More importantly, they were under contract - they couldn't just up and go work for a competitor. Dennis could have retired himself and let the Turtles keep raking in the dough. But instead he cut them all loose, just as the interview in Market Wizards (1989) was giving them ultra high profiles and putting them into tremendous demand on Wall Street for their knowledge. Dennis's secret was out and multiplying, but Dennis himself had nothing to show for it.

No one ever said trading was easy. Most trading books and software programs try to make it look so simple. "Just do A-B-C; buy on the green arrow, sell at the red triangle; 90% winning trades!" they claim. Covel has done an excellent job of revealing the complexities, not only in the trading itself, but the complexities inherent in human nature that form the context in which the trading takes place. Richard Dennis had the secret, but ended up taking a nearly a round trip. He made a few attempts at trading comebacks, but nothing that approached his former trading glory days. Even more telling is what happened to the Turtles after being let loose in the world. Covel follows this thread as well:

The Turtle story breaks down into two parts. Part one takes place during the experiment, when the Turtles are on the relatively level playing field designed by Richard Dennis. His experiment proves nurture trumps nature. Part two take place after the experiment, when the Turtles have to face the real world as individuals and human nature reenters the picture.

Some of the Turtles did great, continuing on in the tradition of successful trend traders, others gave trading a shot but failed to repeat their prior performance, and still others became near total losers. What was the difference? The ongoing experiment shows that there is more to it than just following mechanical trading rules. The true secret is more fundamental and like human nature itself is neither simple nor easy to define. The answer takes wisdom and solemn reflection but clues are sprinkled copiously throughout the book.

This is a fascinating book. Not only is it well written and easy and exiting to read, but I learned a tremendous amount. For those who like inspiring books about successful trading, this one is as good as they come. But beyond the cheer leading, it examines the darker and more complex side of what winning means and how to keep what you've made for the long run. For these reasons this book is an easy pick for my list of top ten trading books of all time.

Excellent work. Thank you, Michael Covel.

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