EP 030: The logic of trend following, and how to improve your trader psychology with Market Wizard, Tom Basso

Aaron Fifield Podcast Leave a Comment

This week we’re taking it up a level…

I had the honor of interviewing the legendary Market Wizard, Tom Basso, president of former money management firm, TrendStat.

Tom started his working life as a chemical engineer, often discussing stocks and investing with colleagues. As he started to experiment with trading from a $2000 account, there was no beginners luck in sight. Tom consecutively lost money for the first few years before things started to turnaround.

With a series of events that followed, Tom went from trading his own money, to forming TrendStat and managing other peoples money. At the peak of his career, TrendStat managed $600million dollars of capital.

And while Tom’s now retired, he still actively studies the market and continues to trade.

This interview covers many topics that range from trend following and systematic trading, to psychology and why you must never forget to ‘enjoy the ride’.

“A lot of people look at me as a trader, yet I felt like the president of a data processing company.”

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“A really good day at the end of the ’74 bull market was 10M shares on the entire NYSE.”

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Lessons learnt in this interview:

  • Some may find it comforting to know that Tom felt like a ‘fish out of water’ during his very first trade, and he consecutively lost money for 4 or 5 years when starting out. Tom speaks about how he funded this, why he kept pushing on, and how he could have shortened this learning curve.
  • The ‘ah-ha’ moment that came out of a trade which made 5X his account, and how this forever changed the way he viewed markets.
  • Tom discusses volatility controls and risk controls, how they increased his performance, and the formula you can use to calculate both of these.
  • The story of how TrendStat went from a few guys running an investment club to $600M under management at the peak.
  • What attracted Tom to a systematic approach, and why he jokingly puts it down to ‘laziness’. And how he reduced the human interaction at TrendStat to almost nonexistent, during a typical trading day.
  • The reasons why Tom meshed with a trend following strategy, and how the longer term focus worked with his busy lifestyle. Plus, how the structure of trends has changed with markets becoming more and more electronic, now that everything is sped up.
  • Tom reminds us to avoid predicting and be in the now. As well as sharing some wisdom from Paul Tudor Jones, about the way he analyses his open positions every morning.
  • Why Tom believes psychology is the most important aspect of trading, even for traders following an automated strategy.
  • Tom shares a brilliant quote from Dr Van Tharp, “Good trading is following your strategy that day, it’s not whether you made or lost money that day.”
  • How Tom got the title of ‘Mr Serenity’ in Jack Schwager’s ‘The New Market Wizards’. And an explanation of his ‘view your life like a movie’ outlook.
  • Why you’re doing yourself a huge favor to design a strategy that fits your lifestyle, capital, resources, and expertise levels. Instead of approaching it from the opposite angle.
  • The importance of accepting full responsibility for all aspects of your life, and why it’s empowering when you no longer blame anyone for things that don’t work out.
  • Never forget to ‘enjoy the ride’ – the significance of these three simple, yet powerful words Tom uses to sign off.
  • And much, much more…

Links and resources mentioned:

  • Interactive Brokers – A broker Tom suggests for new traders who want to get in some practice with a demo account, before risking any real money.
  • Panic-Proof Investing Lessons in Profitable Investing from a Market Wizard. The book Tom wrote, with the intention to better educate clients of his money management firm, as well as other investors who aim to make better choices.
  • The New Market WizardsConversations with America’s Top Traders. Tom is one of the legendary traders featured in Jack Schwager’s renown Market Wizards series.
  • Facebook – Tom mentioned that you can find him on Facebook.
  • @Basso_Tom – You can also catch him on Twitter, and email (address shared at the end of this interview).

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