Tom Basso is the former president and founder of Trendstat Capital Management.
The retired hedge fund manager, also known affectionately by his nickname "Mr Serenity", boasts over 40 years of trading experience and was elected to the board of the National Futures Association in 1998.
As well as publishing his book Panic-Proof Investing, he now offers trading advice to traders old and new through his website.
In episode 700 of Trend Following Radio, host Michael Covel talks to Tom about his career, how traders can improve, the importance of self-worth, and what factors away from the trading desk - such as exercise and diet - are as important as studying the charts.
Read below for some extracts from the interview, or listen to the full episode here...
The experienced trader…sees the next trade as his next breath, it’s really not anything, it’s what you do every day.Tom Basso
On his personal self-awareness system...
I started in senior high school, I can remember it vividly, I had to do a book report, I was a shy guy, had no confidence to get up in front of a class of just 20 people and give a little book report. I had heard that some people practice speeches in front of a mirror so I closed the door of the bathroom, get in front of the mirror, start making the speech, I start making myself look better, and it worked, it helped me get through that speech.
I started realising right after that, for the next year or so that every time I’d get done with the day, I would lie down to sleep and sort of replay the tape of what my day looked like and how did I react to different situations, to different people, challenges that I faced, did I do a good job or could I have done better? It sort of became a bit of an observer-self but later on when I got out into engineering, I was trying to increase my awareness and I read some stories about observer-selves. One part of your brain is doing whatever it is your doing that day, working on code on your computer, accounting, whatever, that’s one part of your brain. The other part of your brain can be sitting there, watching you do that activity.
When I found that I could do that, I started out doing that by literally putting a little sticky note on my computer. And it would say like a word of mindfulness, every time I saw that sticky note, I would then stop what I was doing, make sure my observer self could play back what I had just gotten through, was I running fast, was I too slow, was I not pushing myself enough, all sorts of different things, and then I would go back to work. And then I’d see the sticky note and go back into my observer self.
Little by little, it’s an exercise, and like exercise and habits, you build the habit of doing it more and more and pretty soon your observer self is there all the time, no more sticky notes. Then I guess that reached a point I guess where I just feel like I’m aware of what I’m doing all the time, 24 hours a day. The only time when I don’t realise what’s going on is when I’m by choice, emotionally involved in a movie or emotionality involved in some activity, where I choose to go away from the rational logical self that I might be more inclined to be when I trade…I think that’s the progression, from mirror work, to sticky notes, to having an observer self all the time and move into mindfulness.
On social media...
I’ve been retired now from the industry for around 15 years and I still get 4-5 emails a day from all around the world. I get messages on Facebook, I’ve got 10k + Twitter followers, I haven’t managed any money in 15 years, except for my own, but I’ve been very helpful to everybody who’s asked questions. I find it interesting in terms of social media, so many people are getting so emotional, especially when they’re not even friends, I mean true friends, however some new follower who just came in yesterday, I have no idea who that person is and yet sometimes I get critical comments on something I say.
They’re expressing their personal opinion, which is fine with me, but what I find more that’s happening in social media is sort of emotional response to the way that that person believes the world works or believes the way the government works or whatever, they’re just 100% committed, they’re very closed minded many times to other possibilities that might be, to that situation.
On giving up coffee...
I remember a very specific example of that. I was leaving from St Louis, where we originally had our business and I was doing a business trip to Phoenix, Arizona, where I now actually live. It was an afternoon flight…went home, and back in those days I drank caffeine, so I’m knocking down a few cups of fresh coffee, finishing up my packing, making sure my briefcase is ready and jumped in the car. I head out on the highway to the city, heading to the airport. I come over the top of a hill, started going down the hill, and I found myself just looking at all the cars around me and I’m looking for any potential speed traps that might be out there, I realise my fingers were practically white, I was gripping the steering wheel so heavily, I realised I was probably going 15-20 mph over the speed limit.
I realised that all that caffeine had me so jacked up… I had put myself in a stressful state for no reason what so ever and I realised that the caffeine was clouding my judgement. That same trip onto Phoenix I actually stopped drinking coffee and been decaffeinated since my 20’s. That was a real critical awareness thing because I realised that I was missing that awareness because I basically have a chemical in my body causing me to speed up and it was a profound day. By the time I got back from that trip, I was living in this peaceful world that wouldn’t go away.
On his routines...
A trader has to deal with himself like an athlete. You can’t just expect to go out drinking with the boys until midnight and get a short nap in and all of a sudden do a full day in a stressful environment, which trading certainly could be if you let it be. Or even running Trendstat, I’ve got 10 employees, everyone’s got questions…my decisions are going to lead to projects being done more timely, more successful, or it could be the opposite if I screw it up. So the pressure to perform is always there, I believe that trying to be as athletically inclined, clear your head out, make sure you keep your body fit, it helps your mind to be sharp as well. So that’s one routine that I’ve continued all my life, I’ve always stayed at hotels on the road which had a fitness facility, it was just routine.
On the statement ‘it’s ok to lose isn’t it?’...
Yes, I think that losing is especially insightful, sometimes winning a golf tournament for instance, you really don’t know how much better you could have played, but losing, you can go back and remember those two putts that you missed, I think losing is very educational. In addition, I’ve always been fond of a statement that one famous trader made, it might have been Ed Seykota, I can’t remember, but “Trading in an effort to win every time, is equivalent to trying to breath by only breathing in”. Breathing out is part of the equation to breathing in, and losing on some trades so you can win on others is also part of the process and I thought that was brilliant.
In a very top-level look of losing in trading, the new trader will tend to blame himself, ‘I did something wrong, I’m not good enough’, winning a trade is pat yourself on the back and losing means kick yourself down…and in reality, I think the experienced trader, certainly I’ve gotten there, sees the next trade as his next breath, it’s really not anything, it’s what you do every day, it’s the next trade of the next 1,000 trades and you’re building this huge database of trades and you know that 35% or something are going to be profitable and 65% are going to be unprofitable, and the average gain is going to this much and the average loser is going to be that much.
And one trade is such an immaterial part of that database that you just don’t think about it anymore than ‘I should breath now’, you just do it. I think that’s the difference between the new trader and the experienced trader, is you start stepping back from the emotional nature of each trade and blame or praising yourself.
On the separation of self-worth from net worth...
Net worth is just a dollar sign behind your name. You know money does buy certain possibilities and alternatives, it allows you to live in Vietnam if you choose to or the United States for the next several months if you feel like doing that. You can’t do that for free, it costs some money, net worth is useful, but your self-worth, who you are as a person, how you’re able to help your family, friends or country, that’s a whole different animal and really have very little to do with each other.
You really have to separate that out and say, net worth is interesting, and I like working on that and sure I’m not complaining about having an above average net worth these days, but I don’t view that as anything to do with my self-worth. I’m more likely to think of my self-worth in terms of helping this golfer I ran into the other day, I gave him some help on his putting and he came back and was just effusive over how much I helped him and how much of a difference it has made in his game. I just felt very satisfied that I was able to reach out an help somebody like that and that’s more in the area of self-worth I believe.