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.
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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
now-a-days, and certainly in: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 what 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
the first thing I learned in: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 of 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
dden become incredibly great.: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.
hat given such a huge gift in: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.
people in the Turtle room, in: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
it was a Swiss franc trade in: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.
Jerry
Exactly.
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
in a movie with Jim Carrey in: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
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