In this episode, we are joined by Jerry Parker, founder of Chesapeake Capital, former turtle trader, trend follower extraordinaire, and big outlier hunter.
Jerry shares his views on letting profits run and taking small losses as being both incredibly profitable and psychologically challenging. We cover bagging big outlier trades, Jerry’s unique views on diversification, and we dig into this trend following philosophy.
RECORDED MAY 15, 2023
In this episode, we are joined by Jerry Parker, founder of Chesapeake Capital, former turtle trader, trend follower extraordinaire, and big outlier hunter.
Jerry shares his views on letting profits run and taking small losses as being both incredibly profitable and psychologically challenging. We cover bagging big outlier trades, Jerry’s unique views on diversification, and we dig into this trend following philosophy.
RECORDED MAY 15, 2023
Well hello everyone and welcome to this week's episode of the fat pitch podcast. As always, I'm your host, Paul borowiecki, Chief distribution Officer of Sealy investment securities. And I'm joined by my co host Clint Sorenson of wealth shield. Clint, glad you can make it this week. And we are thrilled to have this week's guest my first time chatting with him Jerry Parker, famed turtle trader and founder of Chesapeake capital to talk about hunting outliers. Jerry, thanks for joining us on the fat pitch.
Jerry Parker:Hey, Paul. Hi, Clint. Thanks for having me.
Paul Barausky:And I know, Clint, that you and Jerry have been friends and chatted for a long time. So why don't you launch us off on this week's pod? Yeah. So
Clint Sorenson:Jerry, I think great place to start. Just because your background is so unique in story, right? Why don't you jump in and tell us how you got involved? With trend following how'd you get in the industry kind of give us the start?
Jerry Parker:Thanks. I was interested in trading. Shortly after college, I majored in accounting and I figured out pretty quickly I wanted to not be in accounting. But I was in there for a while. And I was really interested in trading. And I just started reading books and magazines and newsletters, no internet at the time, unfortunately. But I stumbled on to trend following strategy. I thought that was a pretty good idea. I read Marty's WAGs books, and I bought his newsletter. And he was sort of trend and diversification and money management. So that really suited my personality. Then I answered the turtle, Richard Dennis turtle ad in the Wall Street Journal, and got that interview and went up there and worked for those guys and learn from them. building rich were like genius, traders and math and computers. And it just so happened luckily, for me that they too, were more of a trend following mentality, because there was a test that we had to take before we got an interview. And I just kind of a lot of it had to do with trend, and diversification and things. And I just kind of got lucky. I just remember saying, Well, I hope they're trend followers. So that's how I approach that test. So yeah, I was ready for an amazing opportunity. But no one deserves that opportunity that quite that amazing. Because we had a great training, the program lasted for years, and we had assets. And sometimes if we lost money, they would say you're doing the right trades, you're following the right rules and ideas. So here's more money. And so that doesn't happen in the real world. Clients do not give you more money just by doing the right thing.
Paul Barausky:Yeah, no doubt. And these days, Wall Street training programs last about four weeks, not four years, before they snatched the purse strings away. So when we made the introduction, we talked about outliers, can you expand a little bit on this theme of outliers? Where how you see that and your vision?
Jerry Parker:Sure. I mean, I think the cliche, you know, let your profits run and take small losses. That's a nice cliche, and it just needs to be proven correct. You know, does that philosophy work? Or does what works in the markets? Does it resemble that? And so I think it does. And we take small losses, you know, that is a given on any trade, we try to take an optimal loss, but it'll be a small part of our overall capital. And then we really take seriously letting profits run because when you do a back test, the computer says, if you take it seriously, and really let your profits run, you will make a lot more money. That's sort of what it takes. You need to it seems only fair, that if something as straightforward is letting your profits run and stay with the trend, if at all possible, would come with some pain and suffering and some uncomfortableness, some volatility, which we accept this volatility on the opened profitable trades, right. But on the like I said, the losing trades, no small losses, one of Richard Dennis's main ideas, one, I think one of the fun things for him was was to hear cliches like this, and then go out and prove them wrong. It takes money to make money, you can't go broke taking profits, he really enjoy proving that wrong. But he proved that letting your profits run and taking small losses absolutely works. So that's why we do it. And we try to do it to such a huge degree, that it's both incredibly profitable, and psychologically difficult.
Paul Barausky:No doubt, what does a huge degree mean? Like if you could quantify just maybe in a real life example, even letting a profit run versus covering a loss right away? Because human nature is to do the exact opposite, right?
Jerry Parker:That's right. Human nature is to be very helpful when you have a loss, that it's going to come back and be a profit, when you should be very fearful that it's going to get to be a bigger loss. And of course, people get very fearful with their open trades when they should be very hopeful that it's going to get bigger. And I think in a nutshell, unfortunately, it's a very straightforward answer. And that is you just got to have your trailing stop further away from the market than you would hope to be. So you can look at the 100 day low or the 150 day low in a breakout system and not get out until it hits that 150 day, low 100, day low, something like that, that sort of timeframe. And of course, that could potentially get back lots of open profit that you've been sitting with for months and months. And that's really not fun. But if you really want to bag those big outlier trades, the biggest 5% of all of your trades, then you've got to give them that kind of room to give back the profit, not saying they will or they won't. But even if they don't, you know, people will just get very nervous and very afraid, especially when volatility kicks up. I remember my Tesla trade, it was a pretty big trade right off the bat. And then it went all the way back to zero. You know, if you go back and look at that chart, and then of course, after that, it just skyrocketed, you know. And it turned into one of the biggest trades of all time. But if you're not willing to give back big profits and let profits turn into losses, you shouldn't expect to have the big outlier trades which pay for all of your little losers. I remember, when I was 25 years old reading about trend following I was like, Oh, very simple. Do the big winners pay for the losers? And now, it can't be that simple. If you allow it to be well, no, this is 2023. We have fast computers and fancy software and PhDs. And it's really not going to be allowed to be that simple, because we want the good of the trend following. But we also really like to smooth it out and not have those big profits turned into small profits.
Clint Sorenson:Yeah, interesting. That's the
Paul Barausky:behavioral got a question for us here? Um,
Clint Sorenson:yeah. Yeah, that's the challenge, though. It's the behavioral challenge, right? You start to think about that loss aversion. This is like the perfect elixir, you just have to be so disciplined to do it. And I think that's why the concepts, like you said, the cliches of cutting profits quick, let your winners run that cliche is simple. But it's not easy to do in real time when you're trading these markets, and you see a big gain. And I think that's the hardest part right? To see a big game turn into a loss, right? Just because you allow that room to profit. So you know, keeping that kind of at the front of our mind, what do you think is the most underrated concept or one of the most underrated concepts when it comes to trend following you know, a lot of people focus on entries, exits, you know, those type of things. What do you think is the most underrated topic that now a lot of people focus their efforts on that could make a meaningful difference?
Jerry Parker:Well, definitely, I think a lot of time needs to be spent on entries and exits, right, I have a lot of free time. So I can not shortcut anything like that. But obviously, diversification, I'm really big on diversification, trading as many markets as possible, we opened up the portfolio to equities years ago. So we can get a lot of diversification in the single stocks. And they have a tendency to provide more of this outlier trade this really big winning trade than an average and index, which would kind of mathematically kind of mix the trades less than an outlier, usually. So I'm really big on diversification. But once again, I talked to so many traders and investors over the years that I think the one thing that plagues all of us, and the stories that all of us have, is pretty much the same. And that is all the times we got out of a trade too quickly. And we How much money do we leave on the table? I don't care if you just trade stocks long only, or you're the most sophisticated hedge fund in the world. This is that human bias we just need to overcome. It's just so painful to hang on to that trade. And I think from a systematic trend, following point of view, we've done the back testing, we know what works, we know what works the best, and we kind of don't like it. Like I don't really like that. But we're only asked to do what the computer says is the best. I mean, can you imagine having to do it, and it really wasn't that great. The computer, the computer says this is the best. And so I think we should could be compelled to do the best. And it's one thing if you don't know what the best is, but we kind of do. And then we still are trying to find all kinds of ways to have our cake and eat it too. We want the profit, the consistency, the robustness, yet we don't enjoy, you know, kind of the pain and suffering of the daily city with these daily trades. And the fear really is not even how often you give back a lot of profit. It's the fear of giving it back as much as anything. So that's
Paul Barausky:interesting. So these are the things that people might not know what do you think are some things that are overrated about trend following that people think, Oh, if I just do this, it's going to work out all the time. So what are misconceptions any mistakes or things that people are overvalue? Maybe they shouldn't? Because let's face it, nothing's perfect. Well,
Jerry Parker:that's a tough question. I was gonna go in another direction, probably
Paul Barausky:direction. Politicians too, right? We don't like the question we changed.
Jerry Parker:I liked the question is my answer that I may not like?
Paul Barausky:Well, let's put it this way, you're obviously very good at it for a long time. So if it was easy, everyone would do it. Right.
Jerry Parker:I think people underestimate diversification. They underestimate the benefits of following rules. Because it's kind of like these rules really pin us down. They're a negative. I know what I should do. Everyone else is thinking the same thing. This is the one time I should not follow the rule. But I think it's in fact, quite the other case, no, these rules are much better than people give them even average or bad rules will be better than using discretion. I think.
Paul Barausky:It wasn't my imagination that I heard about.
Jerry Parker:She's very rude today.
Paul Barausky:I don't mean that. But I was wondering if it was me.
Jerry Parker:Yeah, she's very jealous. She likes to get on the camera.
Paul Barausky:I used to my job, but I couldn't let that go on. I
Jerry Parker:used to get very nervous about having two birds in a row. But then people would ask about them, like, I'm really upset where the birds I don't hear them. She's making people feel better. People definitely overrate smoothness, and consistency, you know, trend followers make money on 40% of the trades. And almost anyone would know, at least initially, that you've got to make money on at least 51% of your trades. The win rate is highly overrated. I think people underestimate the possibility of things happening that have never happened before. That's the benefit of trend following as you're just getting in gear with the trend, whether it's a breakout or a moving average, and COVID happens never happened before. There's no machine learning or AI to learn from. And initially, we had a, you know, a losing period that we get the right trades on and the right direction. And the trend following is magic, it gets you in the right trades, mostly short, you know, during that period. So, yeah, I think the whole idea of being able to predict that's another thing that trend followers are really bad at we don't have a great story. People like a narrative. Why is this happening? I want to feel like my manager is super smart, and is explaining the world to me. And Jerry gets up there and talks about uptrends and downtrends. That doesn't sound like much of an explanation. He's like, as out of it as I am mean, he doesn't know what's going to happen either. And I think recognizing that you don't really know, what's going to happen is, you're so far ahead of the game. Yeah, that's
Paul Barausky:not easy for a lot of money managers to do they want to tell you why they have convictions in certain directions. Not say I'm gonna move with the trends, because none of us necessarily know for certain. That's very interesting. Clint, what's next, but I'll stay out for Jerry. Yeah,
Clint Sorenson:I want to dig into Jerry, you said underrated was diversification, I think you've got such a unique view on diversification. And in terms of how many markets you trade. So if you don't mind, you know, digging a little bit into what makes Chesapeake what makes Jerry's approach different in this regard as it relates to trading markets. And, you know, talk about kind of the evolution of how you've gotten to the point because you're trading up to is that around 300 markets now is what you're trading, including individual stocks, but you dig into that, but just kind of, yeah, kind of pour into that a little bit. Because I see such a value to that. Currently,
Jerry Parker:they trade a lot of markets, we take small positions, and each individual position is sort of easy to take easy to follow the rules, because they're so small, but of course, the accumulation of all of those small trades is what you know, is going to be our performance. They're important. But psychologically, you're trading a lot of markets makes it easier to stomach, the ups and downs and to actually do the trades. So that's what I learned from Richard Dennis, in 1983. Was the importance of diversification. Yeah, I just didn't think if you wanted to maximize your diversification, and have some sort of smoothness in the returns in a robust way, you just had to add more markets and you had to add stocks, there was just no way around it. I don't like the marketing strategy of managed futures CPAs in the sense that, you know, we're put on this planet to have a five or 10% allocation to your traditional stock and bond portfolio. And so you can add some crisis alpha or be a perfect hedge. I do think that you can add crisis out For buy invested in CTAs, and it can't be a hedge, but I'd rather concentrate on building a more perfect portfolio, which includes all the world's markets, as many as I can get my hands on. And trend following is on top, not crisis alpha or managed futures. And so I want to maximize what's possible with trend following. And that's just going to it has to be with, you know, a great group of very diverse stocks and all the commodities, you know, over 5060, commodities 75 currencies all around the world. And then interest rates, 4050, interest rate markets, you know, and so and hopefully, you know, some of those, I'll be long some, in short, some and based upon the trends and able to offer client a hell of an opportunity to profit from these trends, but at the same time, have, you know, very concerned about protecting your capital, not your open trade equity, but, you know, taking those small losses and letting those profits run.
Clint Sorenson:So Jerry, on position sizing, do you adjust? So you take a lot of small positions, do you adjust that position size? Once you're in the trade do you add or take away from that position, I actually was talking to our mutual acquaintance, Val Ceanothus, the other day about this via text. So I'd love to hear your thoughts there,
Jerry Parker:ya know, I, hopefully, you know, we're gonna put these trades on, based upon their volatility, the risk in the market when we put at the entry price, and then we're gonna let them run. And hopefully, we're able to put on a fairly large position on some of these trades, because the volatility in that particular market has been so low. And then what can happen is, you know, especially in a big uptrend will be just an explosion and trend and volatility in the market is really making lots of money. And we have some of those now, and OJ and sugar and coffee, cocoa. And they just keep going. And it just gets bigger and bigger, and it becomes more of a bigger part of the portfolio than it certainly was when it was initially put on. And maybe it's getting a little scary as well. But that's, you know, you gotta have the guts to hang on to those things. And but managed futures unfortunately, sort of evolved away from that letting profits run into more of a correlation management. So we'll scale back if the correlation gets too high, or will scale back, certainly, if that position starts to get more volatile, and deviate from how small it was when we first put it on. So we're more of a classic trend follower, Mike and me. And once again, you know, it's just this whole philosophy of, we wouldn't do it, if the computer didn't tell us that it was the right thing to do. And we would make more money. The only way to justify something like that is you got to convince yourself that the volatility in a profitable trade is increased risk. And so since we can refuse to do that, we think risk is taken a loss in those losing trades, which we're very concerned about. And we're very do all we can with our approach to minimize those losing trades. In order to produce the most amount of profit, we need to let those trades run. And it's going to be, you know, class are not necessarily going to like it, but I feel like they put me in charge. I don't expect them to like it, nor be able to do it nor be able to do it correctly. And the last thing I'm going to do is ask their advice. I mean, it's almost laughable. I remember when we left the turtle program, there was 20 people. And one of the things that they had taught us in the class was no clients are a problem. They're going to tempt you to do bad things, take small profits, get out of profits, don't do certain traits, all these things. And I think some people left there with a real chip on their shoulder, really not interested in getting into a business of trading, especially in this cocoon atmosphere we had were the test at graduation in a Christmas party in 1983. was, you know, are you going to be able to do the right thing and do the hard thing and follow these rules? Regardless if Rich's short soybeans, but your rules say you should be long soybeans, what are you going to do that sort of follow the rules, and that's the bottom line, and we're going to give you more money and more praise. If you follow the rules, even if you lose money. That's the sort of training and how we were raised. You know, no, one of my bad analogies would be like if someone handed you a manual and said, Here's the manual on becoming a Marine. Then you can learn everything you need to know about being a Marine. I think boot camp might add a different dimension to it. And so we had a great manual, but we had trend following boot camp, and not just you know, here's what works today. But here's how to look at the markets in life. So you can trade for the rest of your life. That makes
Paul Barausky:a lot of sense. We have enough listeners, we're starting to amass thanks for guests like you that some are not in the financial services industry or wealth management industry. And so I always like to kind of frame things. You know, Jerry, I come out of the boring world of the warehouse, industrial space, rectangular buildings with flat roofs and not a lot of deviation just be a good operator. But I know exactly where we stand with what we're trying to earn versus the markets and the amount of risk we want to take. What do you benchmark yourself to? What are your goals for a portfolio over a year, three years, five years? What are you trying to accomplish for your investors?
Jerry Parker:Well, we're heavy on the back testing and the analysis and seeing what has happened in the past. So we don't try to put too much an overemphasis on that, but we kind of know at a certain level of leverage and risk that, you know, we're going to target a 1215 20% return, you know, an average something around that level. And so we know, as long as the markets are somewhat normal, we should what to expect we've had periods where we dramatically underperformed, we had periods where we so many good trends out there that we performed really well. I have a tendency to look at grade myself and look at my performance on an almost a trade by trade basis, you know, was there a big trend? And did my approach capture a reasonable amount of that. And I think that's kind of what we need to always be concerned with. Because we can adjust and change. And
Paul Barausky:I would imagine, we call this the fat pitch podcast, I would imagine you also grade yourselves on letting balls go by that are outside of the strike zone, just as important as the ones you don't swing at that others may have jumped on.
Jerry Parker:That's right. I mean, we're not interested in taking a lot of trades. We only want to be in the markets when there's some sort of indication that something big might be happening, but with 60% losing trades, and even limiting our trades, to infrequent times, you know, we still are wrong. And we're, you know, we participate in you know, 10 out of the last five trends, we're all always thinking here comes a big one and usually doesn't materialize. That makes
Paul Barausky:a lot of sense to me.
Clint Sorenson:Yeah, I got five more minutes. So what I want to do Jerry is really dig into how do people learn more about trend following how do they learn more about you point them too? How can they you know, you've got a podcast out that's awesome with with Mike, he talked about on our show, you've got spaces that you do frequently. I mean, you are such an evangelist for the trend following community. And being part of that community. I thank you for that. I hope that our listeners can find some valuable information in what you constantly share. So point our audience and how to get in contact with you how to find more out about trend following about finding outliers and about your approach.
Jerry Parker:Well, I think that Twitter is the best place. I have a lot of loyal followers on Twitter, and then we get together every Friday morning 8am Eastern time. And we talk about following. And we can have some disagreements. But there's a lot of smart people on that podcast as well. I love podcasts. I'm on some podcasts every now and then. But the center of my evangelism has to be Twitter and Twitter spaces. I can really get going on Twitter. I was talking to Mike this morning. And I was saying to him like, oh, yeah, people should like read these tweets of mine. And if if something seems a little bit off, you know, like a little aggressive, a little nasty. They should absolutely assume I'm drinking wine or something. Because I really intensely involved in debating and discussions and I tell myself to stop. But I can't really do it. I don't know why. But I just really love a good debate and a good argument. And Twitter spaces and Twitter. Perfect for me. I really love it.
Paul Barausky:That's awesome. Great. So what's the handle? Can we just search under your name?
Jerry Parker:RJ Parker, Jr. 09.
Paul Barausky:We're going to add that to my followers. Plus ever since they changed the algorithms. I can't tell if I'm following or not. I really have to double check since Elon took over. Yeah. Although he did just bring in a new CEO. So we'll see if some of the advertisers come running back as well. You had a second part of that question. Besides your tweet? Is there somebody else that you follow? That's an evangelist besides Mike or someone who wants to learn more because Glen's got me really geeked up now to learn more about trend following
Jerry Parker:Well, you know, it's kind of funny because Richard Dennis was my I mentor and is responsible for any success I've had. And the second Richard I met on Twitter, Richard Brennan, incredibly smart guy, I mean, out of out of sight, you know, math and science and computers and just as much of a sort of dedicated classic Trump followers me. So I have really learned a lot from him in the sense that trend following like almost a lot of other subjects can be very deep, you can understand it on a surface level. And to some degree, it may make it easier. If that's all you understand, to implement, you know, I don't really know too much. I know breakouts. I know what I've learned about diversification and money management, taking small losses and letting profits run, I'm really not going to ask too many questions. I mean, to some degree, that person might be more effective than someone who's maybe a little too smart and has desires on overfitting and writing more code on how to, you know, get away from the tried and true elements of trend following but Richard took it to a deeper level philosophically helping me and everybody on Twitter understand what's happening in these markets. Why are we doing what we do? Why is it working the way that it works? Super smart guy, Richard Brennan. And he's almost always on the Twitter spaces. And you can search my followers. And he'll come up but he's, he's taking my second Rich is taking me to a deeper understanding of trend trading. Well, I
Paul Barausky:appreciate it. I find it fascinating. This is a whole new world for me. Bricks and sticks are where I felt comfortable historically, once I got out of the equity world. So with that, Clint, you want to wrap us up today?
Clint Sorenson:Yeah, thanks, Jerry for the time today. Thanks for joining us on the fat pitch podcast. And Paul, as I've said before, I think trend following especially systematic, diversified trend following is a fat pitch. And it was an honor Jerry to have you on the call and share your knowledge and hope that all of our listeners will, will follow you on Twitter and pick up what you're putting down out there because I think it's phenomenal. And Paul, thank you again for being a great host. And we'll sign off. Thank you