Jerry Parker is one of the original Turtle traders and is a legend in the world of trend following. I had bookmarked an old interview of his, and I finally got around to listening to it, and I loved it. Jerry’s decades of experience shows and there were a ton of insights throughout the episode, and I wanted to share a few things that stood out to me.
On diversification
Oh, wow. There’s been a lot of change, you know, slow change, and then you look back at all the slow, but it’s really materially been a lot of different changes. Obviously, we traded, when we were taught that diversification was a most important thing for trend followers, trade as many markets as possible, but we were only trading 25. And now we trade over 300. So, that’s been a big improvement to add those markets. We, unlike most CTAs, we trade single stocks instead of indexes. So, we have, you know, we can really make that number go high if we trade a lot of single stocks.
You know, I was there for the early managed futures years where the big wirehouses would have these public funds with really high fees. And thankfully, that gave way to mutual funds and now a few ETFs. So, that’s a big improvement. But I guess from a trading point of view, back in the 80s, we traded pretty short-term. And for those four years with Richard Dennis, we were making about 200% a year with huge, huge drawdowns. So, when I started Chesapeake in 1988, I kind of knew that I probably should not try to make 200% in order to start thinking about having a stable business that was going to last and have client investments. So, that was a no brainer. But, yeah, to sort of slow it down and try to add more markets.
But in the late 90s, another change happened for us. And I think a lot of CTAs picked up on this, which was the shorter term stuff was not that great. It was not working very well. The markets were experiencing trends, but they were very choppy. Short-term stop losses, you would get whipsawed. Short-term trailing stops, you would get out, the market would go back to the highs, come back down, you’d get out, it’d go back to the highs. So, you really got to make sure that you’re participating in these trends and not getting out too quickly because these long-term trends can last a long time.
With trend following, it’s the opposite - every market makes money. It’s like Lazarus from the dead. Trend following rehabilitates every market. And so these people who kind of sit around and they say, “Well, I’m going to include stocks and bonds - buy and hold. You can include gold - gold is positive buy and hold,” I think recently at some point Bitcoin became able to be in the portfolio because buy and hold, it was great.
And we come along and say, “What? These commodities and currencies don’t do buy and hold? We don’t care. Trend following makes them all profitable.” So you have this diversification feature. Wonderful shorts - oh, sometimes it’s the only thing that’s going to do well is the shorts. And the trend following makes them all positive contributors. I mean, 90-some percent of them. And the few percent that aren’t having contributed positively in the future - in the past they may do pretty well in the future. You know, we just don’t know.
So… yeah, I got off subject there, but that’s how we handled the sample size. And so it’s really important in order to maximize that sample size to have systems with not too many parameters, not too many moving parts. I’m famous for coining this term “one entry, one exit, and a stop loss.” And the reason - and we trade multiple systems like that - they all have one entry, one exit, stop loss because that’s the way to maximize the sample size.
On living to fight another day
Jerry Parker: Then you have these periods like 2020 COVID, where everything was correlated. We were long, I was pretty much long everything; currencies, commodities, stocks, and bonds, and they all went down And so people bring that up as well, like, what about during COVID when stocks crashed? I’m like, well, so did currencies and so did commodities. And so I got really crushed during that period. So, you put it together, you do the back test, you know you’re going to see things maybe you’ve never seen before, you think you got the correlations pretty good and then all hell breaks loose and then you have to scramble to get your risk more under control. And that’s what we have to do every two or three years. We will get through a rough patch where we’re not seeing any diversification and we’ll have to make a kind of position cut back. That’s how we handle it.
Adam Butler: Can you go into that in more detail? So, you can use COVID as an example if it’s fresh or another one if it’s a better case study. But how do you think about this idea of cutting back risk? Or — I get the sense that you’re not sort of on a day to day basis using, for example, covariances or correlations to help with risk budgeting or sizing or what have you. But you’re observing that on occasion, obviously, that you’re in a crash scenario, right? And you do have this correlations crushed to one type of scenario. And it sounds like there’s some kind of, you know, discretion or intuition or experience that you bring to bear in order to manage those events. I’d love it if you could kind of go through the thinking there or the mechanics or —
Jerry Parker: Yeah. I mean, this is a Turtle Rule. That when you have a drawdown, you reduce your positions twice as fast as the drawdown. So, if you’re down 10% you should reduce your positions by 20% and so on. And that’s a different day when we were trading really large, very few markets, very short-term. But I think it still kind of applies that you want to have that one rule that always works. It’s always going to work. It’s going to keep you from losing too much. And that is just reduce your positions and live to play another day. And it also is very important in that one of the most important things is to always do the system trades. So, you don’t want to guess which trades to cut back. You know, you want to feel good. So, now, you know, it’s — you’ve gone through this really tough period. It’s a bit traumatic and you don’t want to get into a situation where you’re afraid to do — to follow the system and do the trades. And this cutback rule kind of helps you do that.
One of the secrets of the cutback rule is don’t have to implement it very often. So, I’ve seen people do research and they showed me their research and they said, and the research was, what happens if the turtles would have traded smaller? Would they have made more money by avoiding so many of these cutbacks? And the answer was, of course, yes. The cutback is a non-system rule. By definition if it’s non-system, it’s going to make less money. But you need to sacrifice and make less money sometimes in order to preserve capital. So, that’s the key. Trade small, don’t put yourself in a situation where you have to make these radical cutbacks, but don’t be afraid to do it because it is the perfect money management rule that tries its best to allow you to continue to trade the system and not do a lot of overrides.
But like you said earlier, it is somewhat discretionary because anything that doesn’t have a large sample size might — it’s going to be — even if it’s a rule, it’s kind of like not a rule based in good math or sample size. It’s just this rule you have. So, it’s okay to have a rule or to use some sort of feel or discretion. The whole key is you may not — you may use it once every five years or two years, but it’s not based on sample size because, thank God, you know, you don’t want to have to do this very often. It’s one of those rules where I’m happy that it doesn’t have a sample size. It means I’m not — my system is good and robust and doesn’t have these problems. So, yeah, it’s — I love whatever it takes, whatever the trader needs to encourage them to continue to do the trades the way that your model indicates you should do the trades is a really good thing.
On cutting losers and riding the winners
Mike Philbrick: Well, I think that kind of complements that sell the losers quick and beat the hell out of the winners. I mean, that’s just typically the exact opposite of human behavior. Let me take that small gain and I’ll wait till I get back to breakeven on whatever it is that I hold.
Jerry Parker: Oh, Rich used to — Rich used to say humans just get a charge out of a profit. It’s just a reaffirmation. It doesn’t matter how small it is. You hear people saying, don’t let it turn into a loss. Leave your stop up to where at least it doesn’t turn into a loss. And of course, if you do the backtest, letting it turn into a loss is absolutely the best thing to do. We don’t like it, so more than likely it’s going to be correct. I used to say, when you have a loss, you’re thinking, I’m hopeful that it’s going to come back and turn into a winner, but that’s when you should be fearful that the loss is going to get bigger. And then the biggest mistake is when we have big profits, we’re very fearful. We’re fearful it’s going to turn into a smaller profit, but that’s when we should be very hopeful that it’s going to be a big, huge winner.
So, I think that, you know, we’re always going against the way we’re wired. And I think that is going to help with the longevity of trend following. And I try to maximize that and be an extremist in those areas. Smoothness, no, I want the bumpiest, most volatile, yeah. I want the hardest to implement strategy possible. I think it might have some benefits of working longer.
Adam Butler: I mean, you should look a lot more beat up and older, Jerry, given how much contrarian grief you’ve inflicted on yourself over the years.
Jerry Parker: I know. I know. But most of that has come from, honestly, from over-trading and not following my systems to a T, as a 100%, as much as I could have. Yeah. So, most of that was all self-induced anxiety. The markets I can kind of get over, I can turn it into a game, I love the game. I love playing and I love competing. But, yeah, that’s the two most important things. And I got that from Rich. I asked him, like, one day, what’s the two biggest mistakes we make? Or what are the biggest mistakes we’re going to make? And he’s like, oh, over trading and not following your system. And that kind of connected to some — in some ways as well.
Watch the full interview, I highly recommend it
