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In this exclusive podcast interview, we sit down with legendary trader Tom Basso, known as "Mr. Serenity" for his unique approach to risk management. Discover how Tom started in investing, his journey from chemical engineer to hedge fund manager, and the importance of understanding risk, diversification, and customizing trading strategies to achieve success in the markets.
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⏱️ Video Chapters
0:00 Introduction
1:10 How Tom got started
3:16 Broaden your definition of risk
8:28 How are the markets changing?
15:00 Thoughts on discretionary vs. systematic trading
21:00 Evolution to an all-weather trader
30:11 Getting started in futures trading
35:20 Tom’s trading timeframes
41:12 Free yourself from degrees of restriction
45:23 Tom on his latest book: The All-Weather Trader
Show More Show Less View Video Transcript
0:00
in this episode I interview Tom basso he's a world-renowned hedge fund manager he's founded trendstat Capital
0:06
Management he's the current chairman of standpoint funds and everyone knows him by the name of Mr Serenity for his
0:13
unique way he attacks risk head-on now there's something in this episode for everyone because he trades multiple
0:18
strategies across multiple time frames across pretty much every single asset again this is a unique way he attacks
0:24
risk so I know you enjoy everyone Tom basso hey Tom pleasure to have you uh
0:30
join me today um yeah yeah it's been a little bit since we've talked but uh you know I'm excited
0:38
to get back with you I just finished reading your book here excellent read yeah it's an excellent read I recommend
0:45
anyone who's uh even non-systematic I think you get a few good ideas out of this and I'm sure we'll cover a lot of
0:52
the sections here but for those of you or the few that probably don't know who you are which is not going to be that
0:58
many can you just give me a brief uh of who you are how you got into the markets and I'd love to hear about even the
1:04
early days with your dad and the savings alone and and kind of how it molded you as an investor well you know I got in uh
1:12
started investing when I was a paper boy and I bought a Fidelity mutual fund actually way back when it was a fully
1:18
front and loaded mutual fund I had no idea what I was doing and my dad was
1:24
afraid of uh stock market risk you know because the prices go up and down he didn't want that so he decided to invest
1:30
in savings and loan CDs and this was back when Savings and Loans were you
1:36
know everywhere on every corner and uh offering what and they were after World
1:41
War II kind of the primary source of home mortgages and a lot of people used them well it turns out that you know we
1:49
had stagflation back in the 70s there's a lot of scary similarities to right now actually
1:54
um as we're doing this recording and what he ended up doing was
2:00
in the savings loans ended up doing was to borrow money or get money from guys like my dad
2:06
and pay him a certain rate on their CD but then they would try it's a loan and
2:11
this would be maybe a year CD two-year CD stuff like that then they'd make 30-year mortgages
2:18
well when you have that kind of uh a differential in your maturities between
2:23
what you are sending out there and what you're bringing in and having to pay for that cost of capital what ends up
2:29
happening is if the yield curve inverts which it did during the early Reagan years 1980
2:35
Savings and Loans to still went bankrupt and it was back in those days the dollar actually was worth a whole lot more than
2:42
it's worth at the time of year right so uh 280 billion dollars we had to go in
2:50
and bail out the Savings and Loan industry and make my father and so many other small investors whole and it
2:57
taught me a lot about that risk isn't just the risk of the market movement it's the risk of loss of capital there's
3:04
institutional risk there's risk to your stop-loss point if you're a Trader there's risk of margin calls and and
3:12
interrupting your um sequences that way so what ends up happening is you now
3:18
start broadening your definition of risk and when you do that you end up
3:24
I guess being able to attack risk and that's kind of got my start I I started
3:29
thinking about risk in terms of there's lots of different forms of it I can't hide from it because it'll find me just
3:36
like it found my dad but wouldn't it make more sense to attack the risk figure out and identify various ways
3:43
that risk will visit you potentially and have a plan in place to try to deal with
3:50
each one of them is as best you can because sometimes you can't totally get rid of risk but you can at least
3:56
mitigate it or control it a little bit and that's a big step in the right direction because a lot of Traders view
4:02
trading as sort of this Buy sell engine I'm going to buy here and sell there and that's all they worry about they don't
4:08
even think about position sizing Which is far more important mathematically to your
4:13
results than than as uh your Buy sell engine so
4:19
I think that's what started up me out at the progression I ended up a chemical
4:24
engineer I ended up while I was a chemical engineer managing
4:29
other people's monies on the side just friends and relatives and things one thing led to another I finally
4:35
registered because I got too many people that I was managing money for to exceed and start exceeding the limits that you
4:42
can do privately so once I did that I thought well okay this thing keeps getting bigger and eventually I teamed
4:50
up with two other guys we formed a investment advisory firm in St Louis which I think still exists today but I a
4:57
couple years later sold out my share in the firm and started Trend stack Capital
5:02
which then I could control and the rest is history I ended up you know being
5:07
retired at 51 as a money manager instead of a chemical engineer so yeah that's
5:13
kind of a brief summary of what I went through Paperboy to retired Trader
5:20
yeah no that that's fantastic and I think one of obviously for those of you don't know uh you know your your moniker
5:27
is about Mr Serenity right and uh I think that you could probably only be Mr
5:32
Serenity if you do have a uh you know good foundation understanding of risk because I know you know in the early
5:39
days of start of trading for me uh you're absolutely right all I cared about was you know return you don't even
5:44
think about uh you know risk or or are those you know how that impacts you and probably most importantly
5:50
psychologically right in in your book you you show how um you know the Buy and
5:56
Hold strategy for for most is you know you know I guess mathematically if compound returns or what you want but
6:02
really who can hold that I I know for sure uh I I couldn't right it starts to
6:07
weigh on you yeah I couldn't either that's why I ended up being more much more of a
6:13
Trader and probably shorter term than than some people in the Buy and Hold categories I thought I always say that
6:19
the Buy and Hold investors they call themselves are still Traders they still end up buying and selling they just do
6:24
it over lots of years and the same principles in trading apply whether you're doing something day
6:30
trading or you're doing it over a couple of years are you doing it over six weeks or a month or three months it's all the
6:37
time you still have to buy still have to sell you have to manage your risk you have to size your position you have to
6:44
look at how this position relates to everything else in your portfolio somehow you maybe don't want to trade
6:51
just tech stocks and only five of them and they all move up and down exactly
6:56
the same each day that's kind of a bit pointless it's not really a portfolio it's just a a sort of one investment and
7:04
you're you're sort of rolling the dice on just this one thing that at least
7:10
even though you got five of them they're all related so you don't really have any diversification and risk is going to
7:15
visit you along the way and you'll probably not be able to deal with it and I think that that's
7:21
if you start thinking of your even as an investor uh think of yourself as a
7:26
Trader instead of an investor it's a it's a better word because it it gives you the connotation of buying selling
7:33
position sizing doing screens and rankings and dealing with all the things
7:38
that Traders typically might deal with but I think investors should be dealing with it too okay no I think that's a great point
7:46
because you know you're not um you don't have a you know you're not psychologically ready for a drawdown
7:51
until you have one and then you don't you know who knows what you're going to do there and if you think about a lot of
7:56
the various economies and even in the US I mean there's a long time where you're going to be in a drawdown and can you
8:02
actually with withstain that right um so I think those bring up some excellent points yeah so I guess you
8:09
know you've been trading for for longer than most of us so you got a lot more experience than most of us um
8:16
it's a lot grayer than most of you yeah that's that's it comes from experience
8:22
um but uh but with that being said you know obviously you've witnessed a lot in the markets uh how do you feel like how
8:28
have they changed since uh the the early days and if so you know and in what ways well to me I think the market still goes
8:37
through psychological Cycles from Euphoria to depression sort of you know
8:42
in sort of impossible mental uh attitudes that investors have at the end of 1973-74 I was coming out of school as
8:49
a chemical engineer we just finished up a 50 down on the S P 500 in a bear
8:54
Market 10 million shares on the New York Stock Exchange traded in one day was
9:00
break open the champagne that was huge volume spy is several hundred million by
9:06
themselves in a day that's that's some of the differences right there but what
9:11
I've seen happen over say from 1974 you had really the wide adaption of PCS
9:18
around 1980 or so I bought my first PC in 1980 and started doing very minimal I
9:25
mean you're talking uh modem baud rates of 2000 uh baud not 2
9:34
000 megabod or megabits 2 000 bits per second and and it was slower than
9:39
molasses and you couldn't do anything with it hardly you could add subtract multiply divide and maybe do an
9:45
exponential it was it had really it was a fancy calculator almost but it was the start
9:51
of being able to automate some things in trading what I've seen happen since 1980 is the Advent of the at and the advance
10:00
of uh the uh you know now we get quad processors and we've got all this you
10:05
know multi-threaded everything and now you've got a lot of stuff in the cloud now so you got servers doing high-speed
10:14
transactions and you could be working off your phone so what's happened is the amount of
10:21
transactions that can go through any one Exchange can be a lot larger due to the pipelines
10:30
and the processing speed being larger and faster
10:35
what that does is it takes the markets from Euphoria to depression
10:41
which they're still doing and people still get overconfident and over over uh
10:46
you know terrified of the market they just do it over shorter time frame they
10:52
just because if you think of it if you back in 73 74
10:57
where you're having to call your broker and send in a piece of paper to go out to the exchange floor and then do a
11:04
transaction and then you take the piece of paper and run it back to a teletype operator and then your broker calls me
11:10
back on the phone you know half an hour goes by nowadays you go on your screen and you hit transmit and over here on
11:16
the right side of your screen is the confirm coming back like a half a second later so everything can happen in a much
11:23
faster pace so you can adjust your risk and deal with it a lot quicker and so
11:28
the market has responded with that by moving a little faster and a little I've
11:35
seen screws in the last three years since covered that just astonished me on on uh gosh how fast things move and how
11:42
much how much return uh happens within a single day in a single Market this
11:48
morning at the time we're doing this thing oil is up like five percent in one day at face value crazy right right
11:55
right yeah they mentioned he used to take a war breaking out in the Middle
12:00
East to make that kind of move uh now it's just another day honey farm
12:06
now I I saw in your book too that you had um this was an interesting point that markets moved sideways 60 of the
12:13
time and then you know 15 up and then the rapid moves downward is that um I
12:19
don't know if you have if you looked at that in slices in history I didn't know if that's changed and you know just getting faster and faster or it was
12:25
always bad let's see uh we're getting a little less sideways and a little more
12:33
up and down uh okay not so much down until just recently but I would say the
12:40
statistics have leaned towards the upside being slightly more in the sideways being slightly less but you're
12:46
still in the same ballpark of roughly I like to think of it as two-thirds sideways one-third trending and of the
12:54
one-third trending I like to think of it as somewhere in the neighborhood of you know two to one or one point seven
13:01
to one or something right bending to the upside versus trending to the downside downside in history at least has always
13:08
gone faster because I think a terrifying down moves motivate people more than uh
13:15
just making profits study going up it's not that exciting for a lot of people so
13:20
there's not that uh but uh compelling
13:27
action that I've got to take to jump on this up move the fear of missing out uh
13:32
right sometimes but there's just not as much of that as oh my God I gotta get
13:38
out of this because I'm losing my shirt that motivates people to pick up the phone and do something or pick up the
13:45
the mouse and do a transmit uh and sell out of a position or whatever and uh
13:51
yeah those down markets definitely the magnitudes are faster accelerations and
13:56
velocity of the down moves always faster so I like to think of it in those terms
14:02
when I'm designing strategies and trying to put together a multi-strategy approach which I cover in the book as
14:08
well you're really trying to realize that you know you're going to have a lot of up
14:14
stock markets you're going to have some down along the way let's not ignore them for all you long only Traders out there
14:20
you might want to give that some thought and then there's going to be more than half of the time you're going to sit
14:25
there and do next to nothing and uh how do you deal with boredom how do you
14:31
deal with the lack of action if you're an action junkie uh you know it's all psychological you have to be patient and
14:38
you know go play a round of golf take the day off yeah yeah perfect and I guess um you
14:44
know there's so this so my audience is I would say split discretionary and systematic but obviously there's a lot
14:51
smaller portion of of uh systematic um I guess from from the discretionary
14:57
perspective why would uh what do you feel like the advantages and the disadvantages are between discretionary
15:02
and systematic Traders for me I started out more discussion and
15:07
I realized really quickly because I was you know trying to be a chemical engineer trying to manage money on the
15:12
side I was designing a custom home in the woods Southwest of St Louis I was
15:17
taking courses in architecture interior design landscape architect and pruning
15:23
techniques and all sorts of other stuff I was getting an MBA I felt like I was
15:28
you know doing five jobs at the same time in my 20s and I had the energy back
15:34
then to do it I would never take that on in today's world at 70 years old
15:39
um so what what I had wait a second you're 70
15:45
yeah last time that's a happy belated birthday but fantastic so that's that's
15:52
the Mr Serenity there I would I would guess you're 20 years younger but sorry about that thanks for that but you know
15:59
we're getting up here the um what ended up happening is I just
16:05
ran out of time and you know when you if you think about a discretionary traitor a lot of times they're sitting there all
16:11
day long looking at you know candles charts bars whatever they're looking at
16:17
lines and you know things are happening and beeps are going off and you know
16:22
giving them lots of stimulation and actions to try to act or not act
16:28
and it takes up it sucks a lot of time and so what I ended up starting to
16:33
realize is that human endeavor is sort of broken into two thoughts or
16:39
two different types of activities is better way to say it there's the activity of
16:45
the alarm goes off in the morning at X and I hit this button and turn it
16:51
off okay that's a repetitive action that you take every day let's say
16:58
that does not require creative human endeavor
17:04
an area is I'm going to spend the next two hours creating a program code that does moving
17:12
average crossovers so that I have it alert me when I get a moving average crossover
17:18
and I can take action all right so those are two things one is creative you're creating a program or you're creating a
17:25
piece of art or you're creating a new composition of music those are creative things that human
17:32
mind only can do a I cannot do it it can simulate and fake out a lot of people
17:38
that it can do it but it really is just running a set of code that people who
17:43
were creative created to make an AI robot look a bot look like a human being
17:51
in the way it interacts the way it talks perfect English Etc it's still running code it still
17:59
dumb as a rock just acting off of all the the data that's floating out of the
18:04
data is wrong the bot is just going to spit back garbage it's not going to be able to figure that
18:10
out so what I did was I tried to look at what I was doing back in my 20s and
18:15
saying what are the repetitive types of things that I do every day in my trading
18:21
that don't require discretion don't require creativity that and so it's like
18:27
transmitting an order what's transmitting it are you're hitting a button and your computer does it
18:32
um even if you're not automated it's still completely automatable but then there
18:38
would be stuff like bringing in the data you got to get the data are you going to sit there and look at the data Raw on
18:45
the screen try to make sense out of it or could you just bring it in automated and then process it automated and
18:52
generate a set of suggested trades that you could do so what I found myself doing is kind of putting myself out of a
18:58
job as a Trader this piece could be automated then I could do that and I could do this and I could do that and
19:04
little by little trendset Capital had a one million dollar roughly costed uh
19:10
trading platform that did simulations for me and did order generation took me
19:15
a decade or more to build it and the roughly the salaries I figured out one
19:22
day would benefit packages and all the computers I had to buy software I had to buy it roughed out to somewhere in the
19:28
neighborhood of a million dollars and uh nowadays we're trying to create other platforms that will be a lot less
19:35
expensive and also a lot more affordable for people uh normal traders to use but
19:41
I think basically you're just taking discretion if even a discretionary Trader makes the same decisions
19:47
two times or three times or four times in a row then you got to wonder why are you using your creative brain to do
19:55
something that could be automated and then you wouldn't have to hassle with it go be creative some other way it's just
20:02
more efficient yeah no excellent yeah I uh I ended up
20:07
having challenges you're sitting at a screen all day long that's why you know did the same thing and I feel like in
20:13
some instances uh in most instances I think it's it's a good thing because then I'm not you know pulled in various
20:20
directions with the market when you're sitting there you feel like you have to do something right but sometimes I have concerns that
20:27
I'm not close enough to the private section and maybe I don't have as much intuition as some of these other uh you
20:33
know discretionary Traders but uh I feel the opposite sometimes I feel I'm
20:39
too close to the prices I'd rather go play golf or go work on the healthy
20:44
model or do something and get away from it uh I don't enjoy sitting in front of a computer all day even though I have to
20:51
do it um just by a lot in life and you know interacting with Traders around the
20:56
world I I get dragged into being at my computer writing this book was a long
21:02
time of being on the computer and so while I'm writing the book I've got my day's trading screen up there and I'm
21:08
picking up a few thousand dollars here and there on day trades and it's sort of paying for me I like to think of it of
21:15
going through the pain of sitting at my desk all day instead of going out and working out or doing something else I'd
21:21
rather be doing in retirement sure no no that's great and then in regards to your you know Evolution as an
21:28
all-weather Trader can you kind of uh you know explain on how you attack risk and maybe if uh you know there's newer
21:35
true uh Traders today that are systematic that are you know are trading how would you suggest they kind of build
21:41
out their own set of strategies and and become all-weather like yourself so there's a couple different things the
21:47
first thing what I would say is don't think of yourself as trying to create a single
21:54
all-weather strategy that covers every possible Market type and objective that
22:00
you would ever have and try to make this monstrosity work that's going to be so
22:06
it's going to be a Megatron collection of all sorts of nonsense and
22:11
in the end it'll be so complicated you won't be able to tell whether it's doing its job or not so try to keep every
22:17
strategy simple but try to think of each strategy you do as having a purpose in
22:23
life an objective a purpose a risk level that you're tolerating and so on in the
22:29
simplest example I can make is the Buy and Hold Trader so you're going
22:35
to buy and hold you got your screening technique you got your ranking technique you're going to buy XYZ and add it to
22:42
the other nine guys in your portfolio now you got 10 10 stocks you're going to hold it's going to be long only
22:48
okay that could be one strategy right so you got that figured out and you've got some of it automated like the screening
22:55
and the ranking and and maybe you gotta buy the position manually once in a blue moon so it's not
23:02
a big strain now you look and say okay well that's going to do well in exploiting the
23:08
upmarkets it's probably going to do better than almost any other type of strategy because it's going to be long only so the day the market starts up
23:16
you're going to be in on it and you're going to enjoy that ride now we also should be smart enough as a
23:23
Trader to see that there's bear markets out there and in the book I outline what five major calamities that we've had
23:30
since about 1973-74. and they go by names they there's the
23:36
7374 bear Market there's the 87 Black Monday crash there's the 2000 Tech
23:43
bubble crash there's the 2008 real estate crash there's the covid crash
23:49
every each one of them is so impactful to the pain that it provided traders
23:55
that they get names and people know them by their name and almost kind of know when they happen
24:03
it's these are major historical events in trading well what
24:09
are you going to do with your long strategy then it there's a lot of risk so what if you put
24:15
in place a simple hedging strategy so for example what I do and I don't recommend necessarily
24:22
everybody copied this because this is designed for my portfolio not for yours
24:27
but in my case my uh sector ETFs that give me my long exposure are
24:33
covering a wide cross-section of the US Stock Market so I use the S P Futures
24:38
myself that fits and correlates well and then I only do a downside trade
24:45
when I get a trend downward so if you think of the math of a trend
24:50
following downward only trade it's sort of the opposite of the Buy and Hold or
24:56
the long exposure side and they are going to counteract each other so what have I done I've attacked down Market
25:03
Risk by using a hedging strategy that only gets employed when it needs to get
25:08
employed to protect my retirement accounts from catastrophe
25:14
what does that allow me to do sleep well at night be Mr Serenity I'm
25:19
not too worried about the stock market going up or down because the hedging strategy kicks in when it needs to kick
25:25
in right now time of this interview it's kicked off I think it was last Thursday or something so you know if the market
25:32
wants to continue to run up like it's been lately you know enjoy the ride that way if the market uh turns around and
25:39
take puts my hedges back on I'm hatched I don't really care I'm basically neutral so I watched the market Fall
25:47
I I hear I look at all the headlines of the Twitter uh traders that are upside only Traders and they're all bemoaning
25:54
the losses they're taking and they can't find setups and they God you just read some of these things and they just go on
26:00
and on and I'm just sitting there patched neutral I don't really care I'm just in you know
26:05
waiting for the next upswing and take the Hedge off and do it again so training becomes somewhat boring to me
26:12
it's not something I want to sit here and try to do all day because I'd rather be working if I'm going to be
26:18
sitting here I'd rather be working on automating a tent strategy that would do
26:23
something very specific and help me out in that way so I think that's my advice to Traders when they're trying to attack
26:29
risk identify the risk and create a model of some sort to at least minimize
26:35
or or degrade that risk somehow yeah that's an excellent point and then
26:42
I think if I recall correctly you have that your hedging strategy on your website is that is that correct yeah for
26:49
those of you enjoy the ride that world just like the initials on my shirt it's kind of nice to have a business I can
26:55
buy my own uh clothing line yeah that's great
27:02
yeah no I you know I appreciate that uh you know you're saying that because it's it's one of those things where
27:09
um I see the same thing everyone's complaining of setups and you know stressed out with the the bear market
27:14
and obviously you already have a strategy in place because you're obviously attacking that risk one thing
27:21
that um that I found that maybe I should be thinking a little bit more and maybe you
27:26
can speak on some of this is it I'm predominantly a stock market Trader right so that's just the market that
27:32
that I'm in but when you know thinking about strategy diversification and this is something so you're a market wizard I
27:39
interviewed Marston Parker who's also a market Wizard and both of you came up with the same sort of overall theme is
27:45
that um you know you tackle multiple strategies and have multiple return streams you know his was more strategy
27:53
components but you have all of these different assets and different you know different strategies across all of these
27:59
markets so can you speak on a little bit about how your current setup is today sure
28:05
um I trade nine strategies and one of them is day trading so while I'm for instance
28:11
talking to you I'm not doing day trading so that strategy comes and goes when I
28:17
have the time to sit here and I'm forced to sit in front of the computer and I do it other than that the other uh one of
28:24
the one of the strategies is a sideway strategy of selling spread option premium on index uh stock
28:33
index uh like sbys or something so I'm selling spy index options I guess you
28:39
could say but I'm doing spreads so that I have a limited risk it caps it and I'm picking up premium
28:46
well that works great in sideways markets it's a money machine and it
28:52
doesn't offset all my losses in sideways markets but it dents them it softens them and I talk about in the book
28:58
filling the pothole uh you know when you have a track record going up you'd love as a Trader to have that straight line
29:05
going up the page but in reality there's these potholes along the way called drawdowns and if you can figure out why
29:13
that drawdown occurs mathematically and I try to attack that drawdown that specific type of Market
29:19
you have a cause well a lot of times those drawdowns are nothing more than the Market's doing at 60 percent
29:25
sideways period and it's an extended sideways and you're getting little whip
29:30
saws so you're buying and selling and buying and selling and you're not getting anything on the profitable side
29:35
to offset it so your Equity is drawing down if you're going to have another strategy that in that type of Market is
29:42
just coining money you're offsetting what you're losing on your longer term strategies so I guess that's kind of
29:49
what I'm trying to when we're trying to explain
29:55
how to think of multi-strategy uh one of the things I realized early on is okay
30:02
yeah I started out as a stock market guy I got into mutual fund timing still stocks now it's a little bit more risk
30:09
protected but with a real profound thing came when I started in Futures and now you have
30:16
no I probably trade I guess it's close to 30 different Futures markets and you have thanks to the CMAs Innovation and a
30:24
few other exchanges all these micro contracts now so you can get there's no excuse uh we I don't even trade the full
30:31
crude oil contract I find it more convenient to trade the micro uh crude oil contract and in crude oil is up five
30:37
percent today so I'm making a ton of money on my crude oil position and I'm
30:43
not going to be able to make that as easily yeah I could own a oil stock I suppose and that's probably having a
30:49
good day today but you're one step removed from the actual price movement affecting the
30:55
value of your portfolio where if I'm long orange juice you know how are you going to play orange juice in the stock
31:01
market I guess you could try to buy whatever minute made or whatever uh but uh in reality you've got a lot of
31:08
different markets cotton you got uh you know all these rare I mean
31:14
there's even stuff like cold rolled hot rolled steel or something like that cold roll stick there's I don't even know
31:22
what that is but there's a Futures Contract on it and when you start getting a really striving for what could
31:29
I trade that doesn't equal stock market going up or down because what's happened with all the computers around the world
31:35
is the Tokyo exchange and the Singapore exchange and the London exchange and the
31:40
Paris exchange and the New York Exchange they're all kind of doing the same thing now because
31:46
all around the world you get such fast information you get such uh impactful
31:51
moves that it just you know us goes up one percent today and then you know
31:57
something like Tokyo and Singapore open and they're up 0.9 and then you've got uh you know India and you've got
32:04
Paris Germany dafs and all that and each one of them goes around the globe and
32:10
they go the up 0.9 the mic up 1.3 up 1.5 up 1.1
32:16
they're all going up so where's there's no diversification there and you can break it down inside the stock market
32:22
when you have an up say two or three percent Market Day in the stock market or a down two or three percent by the by
32:30
the other side of the coin you look at how many stocks are down that day they're all down so if you've
32:36
got a portfolio nothing but stocks you really can't hide from the risk but if you're trading orange juice or something
32:44
do you think really orange juice cares about what the stock market's doing do you think lean Hogs care what the stock
32:51
market's doing um you can trade them in up directions and down directions with equal ease
32:58
you have hedgers that are trying to hedge their hog crop or their cotton crop or their whatever and you can take
33:05
the other side of that trade and be paid for it and so to me it's just a no-brainer it's a
33:11
diversify into that and then you have this interesting thing going on where you can do Futures overlay and I
33:17
explained that in the book where you can take your equity and maybe take all of your Equity up to maybe 85 percent ish
33:25
of your 100 of your equity and take the other 15 and cover an equal amount of
33:30
Futures because it only requires maybe 50 or 15 percent margin to cover enough
33:37
Futures to offset that entire stock portfolio so you get some interesting math coming in where you have a very
33:43
non-correlated set of things from what you're trading already that
33:49
ends up having its own very own return streams so it's making money and losing money at very different times some of
33:56
which will be when that first strategy is losing money and that's the important thing if you look at you know I became
34:03
chairman of help raise the capital to get started and became chairman of the standpoint
34:08
multi-asset fund and if you look at their track record on the ticker symbol
34:13
blndx you'll see that right through the covid crash and the subsequent rally
34:21
the because it's a 50 long equity and a 50 futures
34:27
you're getting that Futures portfolio fighting against the losses that were
34:32
definitely taken in the stock side when the stock market hit the skids with the covet crash and you can see that little
34:38
aspect of it you can see last year was 20 uh it would be 2022 performance it
34:44
was sort of a bear Market in stocks in the U.S and uh you know kind of Waltz
34:50
right through it that's the Futures profits uh helping to offset stock losses and
34:56
can it do that guaranteed no because each one's independent they
35:01
could theoretically all lose money at the same time but the more different return streams you've got going on the
35:08
more it just sort of stabilizes the aggregate of the of everything and you just kind of pushing that line up the
35:15
page to a little bit more of a straight line uh that's fantastic
35:20
and then in regards to your strategies are you so obviously you have all these diverse assets you're trading do you uh
35:27
tend to use the same strategy like a breakout strategy or long strategy would be the same on each one of those various
35:33
assets or do you vary it up um I would say that
35:40
I I tend to have very short term on the order of one to three days
35:46
nine days being sort of for me I um more of a
35:54
I guess a little longer term or maybe borderline intermediate maybe and then I
36:01
start looking at a month or more when I start getting long term so 21 days 50 days
36:07
those tend to be the time periods I tend to hone in on and I just I don't
36:12
optimize more parameter I don't sit there and run you know a thousand cases from 15 days 16 days 17 days 18 days 19
36:20
to settle in on 21. 21 is about a month of trading days that's how I picked it
36:26
no more math than that common sense and what I each one is designed to do is to
36:32
pick up different types of movements in the markets so I would say this that I I custom
36:38
designed everything I do for a specific purpose you start from the purpose and
36:43
you build the math and the logic that would be required to try to extract out
36:50
of those price movements what you want and uh that's kind of a better way to
36:55
look at development rather than saying oh there's a Keltner that looks interesting let's run a thousand cases
37:01
using every possible parameter set and we'll just pick the best one you could do that but it's probably not very
37:07
robust and um you know what you find works the best in
37:13
history will not quite work like that in the future so you haven't really learned
37:18
much you haven't really fought the next battle you fought the last battle and that battle's already
37:24
over so I don't know how much good it's doing you um so what I'd there's tons of be themes
37:31
that probably is about four or five different indicators in various ways in similar ways in different types of time
37:39
periods uh that just because I like the way the indicator does certain things
37:45
and then I pick the time parameters to try to match what I'm trying to go after there's no point in me you know if
37:52
I'm running a 21 day indicator on stocks there's no reason for me to necessarily
37:59
use a completely different time period for a hedge for those stocks why not
38:04
match those up so I have a similar set of parameters for my hedges on my long
38:10
positions as I do for my long positions it matches up better but if I want to
38:16
just trade NASDAQ indexes I might do that on a nine day indicator set that's the same as what I
38:24
use for the hedging at 21 and 50 days so I try to design it and to to suit my
38:32
portfolio what I call uh everyone's Financial puzzle you have a financial puzzle I have a financial puzzle I've
38:39
got to solve mine that's what I'm worried about I'm not trying to solve yours I don't even know what your financial puzzle is how can I solve it
38:46
and and when people try to copy me directly I think they're making a big mistake because their Situation's not
38:52
mine their skill level is not me they don't have my uh knowledge of automation
38:57
or knowledge of apis and various things so when I Custom Design things to suit
39:03
me it's to fix and and to deal with my financial puzzle I like to try to use my
39:09
own situation as inspiration for other people to solve their own Financial puzzle in a way that makes sense to them
39:16
that's seems to me to make the most sense out there I don't know the people
39:22
that go and do seminars and say this is the way you should trade it's insane and
39:27
yeah it doesn't make in other words so solve for your own own potholes not
39:32
Tom's potholes right exactly exactly yeah yeah I mean just starting from the
39:39
different size in the portfolio I've got you know X millions that I'm trading for
39:44
myself somebody else is starting out with ten thousand how in the world do you think that
39:50
portfolios can do the same thing it's just impossible so right you have to
39:55
design what you can do within all of your you know limitations and parameters
40:00
and skill sets and everything else time commitment I'm retired other people have jobs all day how are you going to do
40:07
what I do when you don't have the time to do it you're not going to get your trades in that's just going to fall
40:14
apart no matter how brilliant your trading strategy is if you can't get it done every day it's useless so design
40:21
something that you can get done every day or once a week do a weekly program
40:26
and do all your work on Saturday morning when you're free you got to design what you're doing around you and uh and if
40:33
people would do that they'd be a lot more successful and a lot more consented with their trading right right yeah I think you're
40:40
absolutely right I know whenever I got into investing I started heavily on the valuation side learned all the discount
40:47
cash flow models and everything and then you did the same thing and then after a
40:52
while you realize you know what I'm great at valuation but this isn't my personality and it's just not going to
40:57
work for me um you know even though I did okay with it actually did pretty well um better than when I first started
41:03
trading because you know uh I don't know anyone who goes into trading and immediately like makes money but uh yeah
41:10
you have to match your personality yourself but one thing I did want to mention and it's a common theme among
41:15
great Traders and investors it feels like good Trader like when you first start trading you're trying to add
41:20
things um when you're become a great Trader at least from from my perspective it seems
41:25
like you're trying to subtract things minus the strategies but make them more and more simple
41:31
yep then the reason is I would draw upon Jack Swagger's uh uh great statement
41:39
that he made to me once he said Tom the more parameters and the more uh optimizations you make on a strategy and
41:46
are an indicator the more you're creating degrees of restriction and that was a perfect term
41:52
it stuck with me and I I credit Jack with that all the way he uh
41:58
the degrees of restriction combat I immediately saw how if you put a 21 day
42:03
parameter on something that becomes one restriction because it's taken the data and filtering everything over a 21 day
42:09
period if you then run it from 15 to 35
42:14
and end up with 21. you have now optimized history to 21 but next year
42:21
the optimum could be 25 or it could be 15. and so you've just locked in on
42:27
something that's made the rest of the time a little bit more strange and you may have in the process made it harder
42:34
for you to execute that because it's trading too frequently or whatever trading not enough
42:40
um so you haven't really thought through what you were trying to do with the indicator then you start adding filters you say
42:46
well I'm only going to do the 21 Day indicator when it's over sold
42:53
according to the RSI stochastic and it's got to be less than uh 20 with a number
43:00
before I'm going to even consider it oh and by the way the s p has to have the 10-day moving average of the SP
43:08
SB 500 has got to be in excess of what the 50 day is and you just guess you add
43:14
and you add and everybody keeps thinking that by adding you're making your one
43:20
strategy Flawless it's just going to make money every single time it does a trade not going to be many trades but
43:27
when it does it's guaranteed 90 percent reliable and what you'll find happening is you'll
43:33
never do any trades and it won't be 90 reliable you've created so many degrees
43:38
of restriction it can't even deal with the reality that you face at any point in time in the future
43:44
right so yeah I definitely would say that as I've gotten uh more gray hairs
43:50
uh approaching 50 years now of trading uh yeah I would say I'm getting rid of
43:55
stuff rather than adding stuff making it simple yeah no that's great that's funny you
44:00
mentioned that because I did the you know my very first algorithm I made it it was a Herculean efforts bajillion
44:07
lines of code had all this you know you know academic stuff and then eventually it like it just I was like you know what
44:13
I don't even understand at this point what it's doing you know it's so sad so
44:19
complicated you have no idea whether it's going to be long or short or flat
44:24
or what and yeah you just can't even it's beyond your mental processes to
44:29
figure it out yeah but I I feel like everyone every algo Trader is going to go down that
44:34
road at least at least once unless they're listening to you know people smarter you know and uh actually can
44:40
bypass that but I I couldn't but anyways um so is there anything in the book that
44:45
you would like to specifically call out or I you know I I read this and I thought it was fantastic
44:51
um and one of the reasons why I thought it was fantastic because I've read pretty much every algorithmic training
44:56
book out there um it really highlights the fact that what every good algorithmic Trader is
45:02
saying now is that you got to be you know Diversified you can't always know what's going to happen
45:08
um and I liked how you put it I've never heard to attack risk but you know attack risk you know fill your own potholes and
45:15
how and what was even cooler like you showed an example in the book of how to attack every single you know risk in
45:21
Market regime um you know can you talk about uh some of the other strategies that you're doing today any highlights that you want
45:27
from the the book well I think the the most important highlight in the book book would be the chapter on the mental
45:32
side of trading I tried to break down into a fairly lengthy chapter but I kept
45:39
it as one chapter intentionally but a lot of sub chapter sort of discussion on
45:46
things like awareness things like self-confidence
45:51
self-esteem things like how those combined together
45:56
can lead to discipline but you need to have discipline with Trading
46:02
uh dealing with various mental States I think a lot of people are not aware that
46:07
they go through days or at least they're not aware live they they might be aware at the end of
46:13
the day looking back and saying gosh I was frazzled today yeah that was a rough day I'm exhausted and blah blah blah but
46:21
to be able to realize at a moment's notice that you're stressed right now
46:26
I used to find what I uh back in the day and I think I told the story in the book where I put these little Post-it notes
46:33
and I would say be aware and I just stick them up on my monitor and had an
46:38
alarm on my computer every half hour or so it would go off and say be aware and
46:44
so then I'd see that note the alarm went off I see the note and then I would say was I aware
46:50
of anything that was going on or was I so deep in you know typing that note to
46:56
the client or that uh studying this new strategy that the research department
47:02
just came up with that I'm supposed to look at the results and try to figure out whether I think it'll work or not
47:08
and find the flaws in it and uh and have a meeting in a few hours on it
47:14
or was I aware of the fact that I was getting sort of nervous and my fingers
47:21
we're getting more and more tight on the keyboard and I could feel the muscles of the inside of my fingers and that's an
47:28
indication that I maybe I should just kind of like pause and go like this and smooth things out and go back to being
47:35
aware again and little by little of doing that you get in the rehearsal of constantly trying to look at yourself
47:41
and be aware of what's your posture are you sitting up or are you slouching or what are you doing uh
47:48
everything are you are you is are your cheeks up and you're smiling are you frowning
47:54
you know you can feel that but if you're not aware of it you would never know what your face looks like
48:00
now in zoom and with all the things out there I can look at my own picture and I can see what I look like because it's a
48:06
little easier to be aware of what your facial muscles are doing let's say but I
48:11
point out all of this because you're trying to get to a point as a Trader even as an automated Trader
48:18
you'd never lose the the control over your money you can always shut that
48:24
computer down and not do the trades you can always override the trades you can screw it up so many different ways as a
48:31
human being if you don't know and are aren't aware of how you're uh
48:37
changing what you're doing all the time and being emotional and all that well I talk about mental States and how you
48:44
could if you're aware say to yourself you know I really feel
48:49
I don't know down today I can't get out of this funk that I'm in well can you
48:55
being aware of that allows you the ability to say well what if I were to be able to do something about that and put
49:02
myself in a very positive State just intentionally say you know I'm going to be positive for the rest of the day I've
49:09
got all the rest of the trading session to go I've just done two lousy trades but my next good trades right around the
49:15
corner I'm going to go on to the positive mindset and get back on track and if you aren't
49:22
aware that you're doing it you can't change anything you just you know life is just putting it to you but having
49:29
some control over your own mental processes and being able to be sensible about uh your discipline and and let's say you
49:37
that you know exercising and diet and all the things that everybody would
49:43
quite agree with that you should be doing uh if you want to live a long
49:49
productive life and and make it to 70 and Beyond you know you got to work at
49:54
it a little bit if you're if you're absolutely throwing your life down the toilet you know health and health-wise
50:00
and everything else it's going to be hard to make it very long before your body says I can't egg anymore you know
50:06
and so I think that that whole chapter is probably one of the most important
50:12
chapters in the book and it may get glossed over by a lot of people because a lot of people are into the next Buy
50:17
sell engine ID and oh maybe I should be trading Futures and it's all this physical stuff but they lose sight of
50:25
the fact that if they can't get themselves put together right all of that other stuff will
50:31
yeah it'll fill their day but it it may not be as easy on them in trading
50:37
they'll still be stressed out and still get a little bit overrod over uh
50:42
potential losses because you know even I have I'm on a drawdown right now you know it comes I very rarely are you
50:49
out of making new Equity highs you you spend a lot more time in drawdowns usually as a Trader than you spend in
50:56
surges and new Equity highs so uh you know you kind of get used to that after
51:02
going through so many events in my lifetime it's just that's what I do but
51:08
I think that that's the the real important chapter we concentrate on that one there's a lot of lessons in there to
51:14
learn and I think that plus the concept of thinking about
51:20
getting away from just the one strategy mentality there's so much capability that to systematize multiple strategies
51:28
that would make sense and stabilize your performance probably those two things probably are the biggest uh takeaways
51:35
that try to get people in the book okay no I appreciate that and you know obviously life uh life aside I mean from
51:43
Trading I mean you're not just fighting the market you're also fighting yourself right so obviously if you're not aware
51:49
of yourself um you know I don't you know how many times I mean I've done it you know you're a systematic Trader but you're
51:55
you're not there mentally and you and you pull the plug or you do the wrong thing you know I've over time I've done
52:01
that less but I mean you know we're every bit of a Trader even if we have systems in place that's supposed to
52:06
mitigate that you're on an orange juice trade it's taking off like uh like I said on Twitter the an F-22 going after
52:13
a Chinese spy balloon straight up the page and people look at that and you
52:18
know it's all systematized and they say wow I got four positions on maybe I'll sell
52:24
all but one or maybe I'll just lock in my profits this can't keep up well I'm Still A long orange juice now
52:31
I've been blowing another six weeks beyond the previous Equity height pulled back a great deal I went short briefly
52:38
and then I went along again and I'm just running my numbers and doing my thing and
52:44
if it wants to keep going up great if it wants to turn around and go the other way I'll go short I don't really care
52:49
and uh one day after another I don't jump in there and say think about that
52:55
money and say wow I could lock in that profit because I know that it's paying for this guy over here in my portfolio
53:02
that's read that today and it's been read the last three four days and I'm losing money over there and when you add
53:07
them all up if you can make the total slightly green every day you're getting closer to that you know straight line
53:13
that we all would love to have I know that that's fantastic yeah so
53:18
perfect okay we're about ready to uh to close up is there you know any uh resources
53:25
um that you'd like to point anyone to uh both to learn and to to get a hold of you you know my website has got a lot of
53:31
free stuff on it all the interviews including this one eventually are on there you can listen to probably
53:37
countless dozens of interviews that I've done over the years not just recently but you know being back in history I
53:45
tried to collect them as best I could and put them all in the interviews page my recommended reading page answers the
53:51
age-old question that I get a lot from a new traders of what do you recommend me reading uh when I start out how do I get
53:58
started and what would be your recommended books well I put them all on the page
54:04
uh the book I just put out would probably be a really good one because I cover so much of trading
54:10
give you some broad background in trading um then uh
54:15
there's you know I've got some videos that might be interesting to some people if they want to buy them it helps pay
54:21
for the website I don't get rich off any of the stuff on the website the hedging
54:27
technique is completely spelled out there as an example of what one guy came up with to solve a problem and to attack
54:33
a certain form of risk so you know read that see if it stimulates your brain
54:39
that might be useful uh beyond that if you want to try to get into Futures I
54:44
know the CME has some tutorials that you can get into for free on what is a
54:50
Futures Contract and simple stuff like that so you can come up the learning curve if you wish
54:55
there's uh lots of other I I think uh if you do searches on
55:03
correlation coefficients uh things like other types of markets what's happening
55:09
around the world there's lots and lots of studies out there that you can get just free off the web that you know
55:15
doctorate students in college do I take someone with a grain of salt and some of them are difficult to read because
55:21
they don't write like like my book uh which is like eighth grade grammar checker probably and you could anybody
55:29
could understand what I'm talking about in my book some of those research papers take a lot of you want to be well rested
55:37
let's say or you'll find yourself napping while you're reading it but uh and they use some big words that you
55:42
might have to look up and actually understand what they're talking about but I I think that that's a good start
55:49
for most people I think beyond that it starts getting more specific each
55:54
individual have their own challenges and have to deal with those more specifically and then you have to go out
55:59
and try to find answers to those more specific problems the the general how do
56:05
I get started problem I think you I think we've covered here Perfect all right Tom well hey I
56:12
appreciate your time today I felt like it went that was 55 minutes and went really fast so if I said you know I
56:18
thoroughly enjoyed it I'll put a link to all of the different uh resources covered in the show notes so everyone
56:23
can have access to that and once again I'd like to thank you for your time and and your wisdom and uh enjoy the ride
56:29
all right thanks Leo and that's a wrap for Alpha cast episode 3 with Tom basso I'd like to thank you
56:37
for tuning in and listening to our amazing guest and for the show notes and some of my key takeaways you can check
56:43
out analyzingalpha.com podcast
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