271: Tom Basso - The Sweet Balance Between Risk and Reward

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To fit your lifestyle, fit your expertise levels, fit your portfolio size, then execute the darn thing flawlessly, and life would be good. You'd be a lot more Mr. Serenities out there floating around the trading world than uh there are these days.

technical indicators, and adjust the weightings as needed to provide enough protection to fill in the potholes of equity drawdowns while retaining the bulk of upside potential. Having a sweet balance between risk and reward, both in the financial markets and in his personal life, has enabled him to maintain a serene disposition. Who's this? His name is Tom Basso, who was on the show back in 2015 on episode 30 with Aaron Fifield.

If you haven't listened to that episode or want to listen to it again, you are more than welcome because we know how beneficial it is to keep these episodes up because of course there's still so much value to be gained from them. Fast forward eight years later, our host Ian Cox has the pleasure of speaking with Tom. There's still so much insight that we were able to extract from this very amazing veteran trader of the markets. Why?

Because even though he's been there and done that and have been a big influence on the trading careers of many, he didn't stop learning, growing, and improving as a trader and investor. He kept going as you'll learn. Tom is a retired money manager and futures currency trader, golfer, winemaker, author of the All Weather Trader, and believer in behavior economics and more.

Ladies and gentlemen, we are so pleased to present and welcome back the calm, cool, and collected N1 of the Market Wizards, Mr. Tom Basso from the cooler part of Arizona.

In Scottsdale, and she said, you know, this beautiful condo we decked out with a private elevator and everything with a gorgeous view, which I love. She said, We'll never get the price out of it as we will right now. And she was right. We ended up with two bids over uh asking, sold it out, and then uh moved to our mountain home.

Which is why I have a fleece on today because my office is downstairs, which works works great in the summertime is it's nice and cool down here, but it's also nice and cool now in November. And so it's it feels a little more comfortable to have a long sleeve fleece on. Um, because it's a little uh less uh warm down here in the basement in the wintertime.

Yeah, it's getting chilly outside. So so we go down and uh the remodel is down in Scottsdale and it's been keeping me uh hopping for about the next two months, I guess, and then we'll move in in January. Uh hopefully life will settle back into a little bit of normalcy.

And uh as a Arizona guy for the last almost thirty years, my blood's pretty thinned out at this point and uh I like the warm.

Because he's an all-weather trader as well. And I like the concept of trying to create an equity curve that's fairly smooth. I think it helps the mental psyche of trading. And that's so important. Uh I think a lot of traders that I see comments. you know, on Twitter or Facebook, they're all over the map emotionally and stressed out and And uh of course, you know, Jack called me Mr. Serenity because I uh am a little bit more even keeled and

Part of why I'm so even keeled is that I've tried to blend in different types of things to my trading so that in any one time I've got green and I've got red. And you just add them up and if it's Totally green, it's a great day. Uh, but mainly you just follow the strategies and let each one strategy that is designed to do certain things.

have its day in the sun or its day in the doghouse. When you add them all together, you're just trying to make the total portfolio go the right way. I I liken it's a pistons and a a gas engine, you ever see the cutaways they have of the uh the uh engine cut in half and you they show the pistons going up and down.

in a gas engine and they're all going up and down at different times, but they're all pulling the car in one direction. That's kind of the way I look at the multi-strategy portfolio. So I've spent a lot of time in the last eight years. thinking through where are my most vulnerable points with say a long-term trend following strategy, which I'm probably best known as a long from long-term trend follower.

And well, they would be coming off of an equity high, uh, markets pulling back to their stops. That'd be the first part of a drawdown. Second part of a drawdown would be a choppy sideways period. So what can I add that would do well in a sideways period or that would help reduce the amount of drawdown I get off of an equity high? And so that's been Probably the biggest focus of the last eight years of what's helped me. And it's really stabilized my returns nicely. And I think I'm off.

something like twenty-nine percent this year or something, according to IB, who I uh trade through. Uh they're saying my time weighted return on my all weather strategy is something up just close to thirty now.

And it's been fairly steady, is the more important part of it. I haven't had a lot of ups and downs and all over the places. So it just allows me to be more even keeled, which just helps your thinking and your emotional state, puts trading in its proper perspective and doesn't get you bent out of shape all over the place, which uh I think a lot of traders tend to fight.

The hedge might be, for simple terms, might be a uh like a short sale and a uh SP futures index, which is what I use. So my portfolio tends to be pretty broad when it is all on, because I'm trading 30 different sector ETFs. That's going to cover most of the market. So it's going to look like the S P 500. Therefore, if I use an S P futures hedge,

So if you look at my hands, here's my here's my stock portfolio. And you make money to the palm of my hands when the market goes up and you lose money when it goes down. If I put in place an S P futures hedge, Then that's notice that my hand's the opposite way. It's going to make money as the market drops.

It's going to tend to lose it when it goes up. If I put these two things and balance them halfway decently, you're not going to make or lose anything. So it's just like you sort of sold out your entire stock portfolio, which You know, in some people's cases, especially if you're in illiquid instruments, it's really, you know, a lot of work. It's a taxable consequence. There's lots of negatives to selling out an entire portfolio.

uh from the standpoint of work and taxes, if you put a hedge in place that is just an index of some sort, then you're not really selling those instruments that you have in the long side of your portfolio, but you're basically taking away a lot of the potential for a catastrophic loss due to a say fifty percent down bear market, which Lord only knows we could be on the verge of any moment uh with with the market doing so well and so overbought.

If the thing went the other way and panic set in or war broke out or any number of different things, you could be off to the races to the downside and it w it could happen very quickly because down markets happen quicker than upmarkets. And by being able to put one instrument on and knock down the market risk so dramatically, to me as a retired guy, it just gives me the peace of mind knowing that I've got a protection mechanism ready to go.

And I don't have to worry about all those longs. They'll eventually sell themselves off, but it might take a week or two. And meanwhile, I'm exposed to a lot of market risk. But with the hedge on, I'm not exposed to almost any market risk.

And when you get those types of dramatic moves, it starts affecting capitalization of businesses and everything. You got boom and bust, uh uh uh surges in the economy and recessions coming through in the uh seventies, about every four years it seems. And uh until Reaganomics came around and and launched uh almost a multi decade surge in the US economy.

You ended up with these boom and busts that chemical engineers would be hired like crazy when the boom was going on, and then we'd be laid off. And I was thinking to myself, I need to protect myself against. these down markets. But I also knew that just from looking at charts and all that, that if I went long stock And I had one of these recessions come along and and the stock market got cut in half.

I'll my savings, which I would have to live off if I've got laid off from my chemical engineering job, would be decimated. So I had to figure out a way to mitigate risk. And some of the stocks I owned were fairly illiquid, small. low price, less liquid types of positions that I uh would build up for a fairly long run, uh, hoping to get to a long term gain eventually. And You know, by having the hedgling, it just seemed like that would uh mitigate a lot of that risk.

You have the logistics of making sure you have enough cash to handle the SP wide short sale or the futures trade, which sometimes in some stockbrokers case can't be done at the stockbroker, you gotta go find a futures broker. And then you're moving cash, wiring cash back and forth to cover your margins and it gets awkward. Uh a lot easier these days where I do it all at one place.

But back then uh the S P 500 uh ETF was what I used and I'd short sell it. And until one day uh I was at a brokerage firm that I thought looked attractive and I went to borrow the SPY shares to short them. And they said you can't borrow them. We don't have any to borrow. I thought, wow, that's the most liquid traded vehicle in the in the new on the New York Stock Exchange, it seems. What the heck? You can't borrow it? You got to be kidding me.

So uh needless to say, I wasn't at that brokerage firm very long after that. Moved to a place where I uh wanted to see the depth of the SPYs so I could use them for hedging, and eventually moved on to futures and got it. even more streamlined so make it easier for myself.

overnight and the uh stock portfolios we were running for clients were down about twenty three. So we picked up like a percent on the portfolios and uh Boy, I was I was patting myself on the back for protecting the client assets in that case, and I thought

I was going to be a hero, but very famously we had one uh pension plant out in California that had a bunch of PhD physicists on the pension panel, and they wanted me to Shut down the stock portfolio because we lost thir twenty-three percent and just trade futures because we made twenty-four. And I told him, No, you can't do that. The reason this works is they're both together and we protected the assets and that's what we're supposed to be doing here.

We couldn't see eye to eye and I ended up firing them. It was a multimillion dollar account, which hurt me a great deal business wise. at the time, but it was the right thing to do. I couldn't see just trading futures for them in their pension plan. It's a good example to me in an early age at that point of How completely brilliant people sometimes are so common sense stupid when it comes to investing, and how Uh being a money manager

Doesn't just mean being a good trader. There are two different things. Money managers have to understand the psychology of not only themselves, because there's Lord knows. you know, huge amounts of pressures from the markets and everything that's going on, the news coming in every day. But you also have that aid at uh added pressure from your clients.

uh expecting you to to work miracles sometimes and and very unreal realistic about what it is that you do and what you have to go through. If they knew what you knew. Uh, they would be trading themselves probably. So they hire you to do it, but they they still have that ultimate power to pull the cash. And that pressure is always there as a money manager and um

You know, when I retired about twenty years ago, I put a smile on my face. It's been there ever since. I I don't have any clients anymore. I don't have any registrations. I don't have the SEC coming in and auditing my books and all that stuff that you have to do as a money manager. Then life's good.

that we were doing for clients back in those days where they used to allow mutual fund timing. We would we went to cash. So we were in total cash in those programs as the crash happened and those folks were quite happy. So we batten down the hatches. We had no clue that it was gonna be the crash of eighty seven. It just

Continued to follow through, panic set in. At one point, the Quotron machines in our office were running two hours late on updating the prices. That's how we talked to the floor. They told us where the market was. We looked at the screen. He said, Oh, that that was two hours ago. They were so backlogged on getting the throughput uh through the uh wires. and out uh that we were running two hours late on the screens. It was insane and uh an interesting time to live through.

uh, especially since we were protected. But you never know. Uh to me, the market at any point in time, particularly in a time like we are in right now, where you have Everybody getting kind of excited about how far the markets moved up. And the more things move up and the more people get excited, the more nervous I get, just as an experienced trader and thinking when I'm making new equity highs.

And I've had a good streak, I'm sitting there remembering those times when I'm at new equity lows to balance myself out and keep myself very even keeled. And likewise, when I'm in the middle of a drawdown, I'm thinking about those times when I was making new equity highs.

And you just never know when something triggers it. And then it's like a match to f gasoline that's spilled all over the floor. You just have this complete fire uh going in every direction and then the news is all turns into negative and people panic and the selling just gets uh out of hand and with computers You know, back in eighty seven a lot of stuff was done by hand, you remember. I mean, PCs, personal computers only came in. I got my first PC in nineteen eighty.

So in 87, you know, computers were coming into the industry, uh, money management industry and the trading industry, but it wasn't as pervasive as it is today. And it certainly wasn't the speed and the the huge disk drives and the The capability to mass handle just huge amounts of information. my artificial intelligence was maybe a dream of somebody. It it it just wasn't there. So you look at how things have changed and you think about s you know, panic setting in.

And everybody has the ability to move a lot more money a lot quicker than they used to when they had to call up a broker and it had to get wired down to the floor and a runner had to take it out on the floor and you know, things were slow, so that in itself slowed down the panic. But now you can just hit a button and sell. And uh I really worry that, you know, circuit breakers.

you know, notwithstanding, I mean I still think things could get really ugly really quickly. And people always have to keep that in the back of their mind and have a plan. Um it's not that you have to run scared. Uh I'm a fan of trying to say that you have to Look at the risks out there and attack them. You you can't try to hide from them. You have to realize they're there and ask yourself, what are you going to do about it when it hits? And be prepared. Have a plan.

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Um, I own some gold bullion, the typical stuff that you might do to try to hedge. Based on what happened during COVID, I have plenty of toilet paper that seemed to be in in zero supply around the world here, in the United States at least.

Those types of things, uh, I would say would be what I try to do. I also try to stay in good physical shape. I'm 71 years old, but I still work out and try to keep my weight down, try to, you know, watch what I'm doing so I have the physical capability to to get out there and do stuff if I have to on my own.

uh there may not be people to hire to do things. So you have to be able to be a jack of all trades a little bit. So in my personal life there's a little bit of that, but I don't obsess over it. I try to I try to operate in both worlds. And not really dwell on either one. I I'm not Pollyanish to think that the world is always going to be wonderful and I'm also not obsessed with that it's um gonna all fall apart either.

index has gone down 80% and you can go short those indexes, you can make a lot of money. And some of the currencies, some of the bond uh type movements uh lend themselves to big profits. Uh the two thousand eight was definitely God, you can make a lot of money on the debt instruments there because you had um interest rates making some move. You had the stock market falling like crazy, about fifty percent. So the the short sales and the indexes there were wonderful.

And uh so we buffered there really well. At that point I'd been uh started retired. And I was now trading ETFs instead of mutual funds, because mutual funds tend to be end of day pricing. And I found it more convenient to use an ETF and then I can put stops in. And if a panic sell-off occurred, I could sell my ETFs off during the day as opposed to waiting to the end of the day.

So that seemed to me to be a good way to go. It fit my lifestyle and retirement better and uh nailed that one. It was great. I guess the the most recent year, uh last year, there was a little bit of uh downside in the barrier uh about thirty something percent down. Uh I got that one with the hedges as well. Uh I put my hedge strategy, exactly what I do, right on my website so people can go back and look at, you know, the charts and where my most recent three or four signals have been and see.

Uh the most recent one was whipsaw, for instance. So I I actually came up behind on that particular hedge trade, but The current uh up move is looking like I've already locked in a break even almost. So uh that looks like a good trade, taking the hedge off and letting my twenty-four out of thirty now uh sector ETFs go long and They're clicking along nicely. I would have not predicted this. I think the economy is uh a little bit shaky in the US, but hey, the stock market's moving up. I'm long.

I don't question it. I don't use my own judgment even in my trading. I just look at the indicators and go with it.

Uh I I view that as probably the Fed and Treasury and government uh in the US leaning towards slight inflation. So there's an upside bias. to equity prices because if you have if you think of it A dollar of earnings and a stock sells for a PE of 10, then it would be at$10. But if the value of the dollar is diminished, And now the company makes$2 of earnings, but the$2 is equal in purchasing price to the$1 that it used to make.

Then nothing's really changed from a real earnings standpoint, but at the same PE, the stock would sell for twenty. So the the downward bias in the purchasing power of the dollar seems to me to always put an upward bias.

to the price of stocks. And so I lean my indicators that way to suit my bias that way. And this is what I talk about a lot with traders. You have to design What you do to suit your own financial puzzle and your own biases, as the great late uh Dr. Tharp used to say, you trade your beliefs, not the market. And my belief is that there's this upward bias to equity. So therefore I upward bias my indicators in a fashion that that you pointed out.

uh volatile inflation, I I would think the indicators would automatically separate the the noise bands out and probably give me enough room. So I I have a tendency to say I Probably shouldn't have to change anything there. The indicators should adjust themselves. But, you know, hey, it's my portfolios and my indicators. I can do what I want as a human being any day I want here. And so yeah, everything I do is subject to change if I think of a better way to do it. Sure.

how I took over the years uh a large equity exposure and I moved into extreme diversification into things like futures markets because If you think just as a human being, that you know, you got the stock market and you got corn. Does corn care what the stock market did today? Does the stock market care what corn did today?

Those two investments, if you're trading both of those, are going, they both could go up in a certain day. They both could go down, or they could one could go up, the other one could go down. They have nothing to do with each other. And likewise, if you took, say, corn and you you uh put it against uh, I don't know, euro currency or Japanese yen. Why would they have anything to do with each other? So just common sense starts telling you that there's certain markets that could be.

Very non-correlated. And it turns out if you run a lot of correlation coefficients, you'll see that your common sense is probably not too often. the mark there. So what I try to do is look at markets and say to myself, is this likely to trade exactly like that? And I try to cobble together a list of tickers.

that has a lot of diversity to it. And then I try to time all of those. And when you do that, you're gonna always, if I look at a screen any one day, I've got You know, fifty positions, sixty positions, depending on the time you're talking. And I'm looking at it and half of'em are, you know, up and the other half might be losing. And hopefully the ones that are losing are losing a little bit and the ones that are up are making more.

And uh the the important number of course is the total at the top of the screen. You hope that's green. Uh it isn't always. I run about 50% days up and 50% days down. But my reliability and my strategies is down in the thirty. So when you add them all together, it it gives you that smooth smoother track record. I'd love to to make the number uh instead of fifty percent of the days, I'd like to make it a hundred percent of the days and that's the The financial puzzle I continued to try to solve.

If you can realistically find something between say minus point two to plus point two, you don't have a whole lot of correlation there. That's probably a real safe spot to try to to search for if you're looking for correlation coefficients and using your spreadsheets and putting the prices of one thing against the prices of another and using the uh uh C-O-R-R-E-L uh function in Excel or something uh to run a coefficient. Uh

It's easy to do. It's it comes with Excel. You could easily set that up and get the data and run it. Uh, just to verify your own common sense that Corn has nothing to do with the SP 500, let's say.

And uh that's kind of the way I handle that long exposure. When I'm not in those ETFs, I go to money market fund and make interest, which is not bad these days either, uh, with interest rates being up. I then asked myself, well, where's the vulnerability or risk there, and how can I attack it?

So the thinking would be the vulnerability uh vulnerability of an ETF timing is gonna end up happening in two pieces. It's gonna be the Stocks make new highs, the ETF timing makes new highs, it starts settling down and the bear market starts. And I'm getting back to my stop losses to time out into cash. So that little bit of downswing is going to start my drawdown. So there is where I like to have a hedge capability to come in a little quicker.

hedge some of that long exposure out and protect some of that that downswing due to just coming off equity high. The next part of the drawdown that I'm going to experience in those types of strategies is going to be a market like we've had kind of this year, really. where uh you aren't really going anywhere, but you're going sideways, but you're going sideways with enough swings that it catches a few of those ETFs to the upside and then stops them out for a whipsaw.

And in those types of markets, you want to just try to come up with other strategies that might make money during those periods. So one of the things I do is uh I sell option credits on indexes. So when I have an excessively overbought situation, I'm selling call spreads and making money as the market goes sideways. I just do that once a week and just keep bringing in more and more cash.

from uh the credits because the markets don't carry through anymore. They're going sideways by definition, let's say. And those credit spreads do really well there, where they get hurt is when you have major trends. Well, if you have major trends, I'm making money over in the other one, so I don't care.

I'm losing on the option spreads and I'm making it over in the ETF. So by blending things together like that, what I'm doing is designing various strategies to take care of certain conditions in the market and be the hero. And they take turns being the hero. And uh then I then say to myself, well, what if we have an extended bear market? And it's pretty much downward, but it's downward in a trend that is not so sideways. So the credit spreads aren't going to handle it.

Where could I make money in an extended bear market? Let's say it's a year or two years or three years or God forbid the uh the depression was more like what, 10 or 12 years or something like that back in the early 1900s. How do you deal with stuff like that? Well, you got to look for other opportunities. So trading things like my 26 different futures markets that I'm involved in. gives me the potential to try to make money in uh like lately orange juice making new highs today.

Uh I've been long for a long time. It's been a great market to the upside. It it keeps clocking in uh some nice money every day for the last, I don't know, month and a half or so. So That type of thing, no matter what's happening over in the stock market, is a completely separate and unrelated return stream because orange juice doesn't care what the stock market's doing. Cotton doesn't care. Coffee doesn't care. Cocoa doesn't care. And uh by trading all these things, you get.

Return streams that are unrelated to each other. Coco doesn't really care what corn's doing in the United States. Right. So you get different return streams at any one point in time. You've got one losing, you got another one gaining. Uh it blends it all together into a much more steady uh return stream. And

You can set up indicators and if I had to do everything I'm doing by hand, it would take me about an hour. I've got it down to about thirty-five minutes now, and I'm hoping maybe this afternoon actually uh to automate uh two more of the indicators or strategies that I do and I'll have it down to less than fifteen minutes. So

Yeah. If I'm not being interviewed, uh I I like to go out and outside and either hit golf balls or go go trim some bushes or do something.

the FTXs of the world, it'd be hard for me to waste the time going in and trying to figure out what they're doing and whether I trusted it or not. So to protect myself, um, I've been a futures trader for what 45 years probably now. I understand futures. I understand, you know, the exchanges backing the contract.

all the futures brokers that uh back up the exchange, backing up the exchange. So there's lots of different layers of protection for the position. So that if I make money uh in a crypto positions, I have a good chance that somebody, the exchange, is gonna pay me off. I don't have to worry about the guy if I bought cryptos and he shorted it and he wiped himself out, I don't have to worry about him making good on that trade like you might

if you got into a a weird situation where a firm was about ready to go bankrupt, you might not you might make money and they can't pay you your money. So futures was a logical kind of stick my toe in the water type thing. I could see that the prices move dramatically. And all the studies I've ever done as a trader show that the faster and farther a market moves, the more likely there is for profit. It makes sense. We all

We all have to buy low, sell high, or sell high, buy low. And the farther the buy low, sell high is, the more money you can make. So markets moving is always a good thing for traders. And here's Bitcoin going all over the map. And I'm thinking, well, you know, I'm going to give it a try with the futures. So I set my risk uh and volatility control schemes on my position sizing in there. And uh dialed it in with the equity and

Away we went. Uh and it's been highly profitable, I have to say. Uh it's it's been good. And I have the protection mechanism, the markets behind me. So I feel very comfortable with it. I'm on a profitable trade to the upside right now.

And I try to balance them using the volatility of the strategies. If I uh know that the volatility of my general uh ETF timing is a certain amount, And then I've got my uh futures program dialed in with the right amount of exposure to the equity per position. And I look at those as a total portfolio movement against total portfolio movement of the strategy, the subsection of the total portfolio. If I can match those roughly.

Then I know that there's times where they're both correlating and I'm just slaying it. There's times where the strategies are. you know, maybe this one's struggling, that one's going my way. Uh, and so I'm making less or I'm maybe offsetting each other and I'm just breaking even. But I'm trying to dial each one of those in so that it can contribute to the profits of the total.

And so in something like cryptos going from positive correlation to negative correlation, which is just recently is done. Lately it's been negatively correlated, really strange, you know, whatever. Uh I I still run, still make a lot of money over in the crypto. And I've been making a lot of money over in the ETFs, but I've been doing it for the most part in two different directions.

uh until just very recently, you know, where the stock market seems to be doing all right and the and the crypto seems to be faltering here. Um, you know, maybe it's gonna go to negative correlation in the future here. I don't know. But I just keep running the indicators and putting the positions on and don't worry about it too much.

But I'm using a half of one percent risk and point three percent of equity uh volatility on my futures trading on a hundred percent of the equity'cause I only use a very small amount of the equity for my uh futures trading. And then I have similar types of exposures for my crypto. Each one has its own exposure levels. of the total equity, which changes daily, to try to know what my position sizes are going to be for each one of those strategies.

And that's how I kind of balance it is to the best of my abilities. It's never perfect, but it if I can get in into the ballpark, that's enough.

off you go and you can just put it into the computer. You don't have to speak uh Japanese or German or anything else. Back in the day it was very complicated to do international trades, but now it

It's just easy. And so what happens now? It you tend to have New York, let's say, has a dramatic five hundred point down day on the Dow. Well, no surprise, I guess, Tokyo opens up down three percent or two percent or something and Singapore opens up down one point five percent and Hong Kong and then you get over into Europe and they're all down.

And then you get back to New York and start the whole thing all over again. And it's just kind of everybody's going in the same direction. It's just a matter of how much. So the correlations keep creeping higher and higher. And there's plenty of people out there that would try to uh do some time arbitrage and and you know, if one's down a lot and the other one's not down so much, maybe they're

They're trying to sell one by the other and driving them all together into even more correlation. So there's lots of different strategies and games out there that are being played and with the thanks to computers and

The fact that the electron going through the uh internet doesn't really care whether it's a Japanese uh trade or a German trade or a or UK trade or a New York trade. It's all the same and uh the computers can do it. So It's gotten to be a very highly correlated world out there in the stock market.

Tech stocks, for instance, I could try to go in and buy the, you know, the seven top guys that everybody knows about. I could just as easily do XLK as a spider and get exposure to all of those plus a whole bunch of other ones. And I can do one trade in a highly liquid vehicle and I can just track that, automate it, no problem.

To get involved with an individual stock and deal with earnings surprises and all the different things as a retirement program, I would have to bury that corporate risk within a lot of positions, keep track of a lot of things, deal with a lot of data. And it would just take me longer each day to do my work. And I'm not sure I might have the potential of making more money, but

Making more money to me is not my main motivator for doing what I do. Mine is protecting my retirement portfolio, keeping my return to risk high, not return, return to risk. And that's very important distinction. There's a lot of traders out there want to make as much as they can. And that's fine. If that's their puzzle they're trying to solve, then go at it.

uh that's not mine. So I design everything I do to suit me. And um I just don't find individual stocks. So when you get into Japanese stocks, that's another whole layer of slight difficulty I could do it. I'm I know how I would go about doing it if I wanted to to attack that problem. But I think it would just take more time than I want to waste sitting in front of the computer. Mm-hmm.

And I I look at what I'm doing and I, you know, and I and I ask him a few questions. How big's your portfolio? Well, that's thirty thousand dollars. Okay, I'm trading millions and you're trading thirty thousand. What in the world would make you think that you can simulate what I'm doing in a thirty thousand dollar portfolio? Why don't we design

I I'm try to I try to help people, but I try to get them to think realistically about what are you trying to solve here? You can't do what I do with$30,000. But there are things you can do with$30,000. So why don't you design something that fits your situation and your expertise?

I mean I know things that people that other people don't know. I'm a I'm a engineer by background, I've got a math background, I've got a computer background, I'm retired, I have uh good size portfolio, portfolios actually. And Not there's not another person in the world that is exactly the same as Tom Basso. And likewise.

If I were to if somebody was trading a thirty thousand dollar portfolio and turned it into a sixty thousand dollar portfolio because they're so brilliant and they had a great strategy. I'm not likely to copy them because it doesn't fit what I do. I don't want to spend that amount of time or I don't want to, I'm not shooting for those big returns and the volatility that goes with it sometimes.

So I'm a big fan of saying sit down and write down your objectives, your financial puzzle. What are you trying to really accomplish with your trading? And design what you do to fit your lifestyle, fit your expertise levels, fit your portfolio size. Once you do that, then execute the darn thing flawlessly and life would be good. You'd be a lot more Mr. Serenities out there floating around the trading world than uh there are these days.

out of the thousand maybe, or out of the five hundred, or out of the two hundred, or whatever number it takes to get to those two or three or whatever trades that are gonna pay for your profits this year. By doing a large sample and doing a larger sample, largest sample you can get to, you increase the odds of finding those one or two or three that are going to be the big winner.

The other thing it does is it deemphasizes in your brain and your your emotions the importance of any one trade. If I'm putting on a Japanese yen and I don't know that the Japanese yen's gonna go 75 to 150 against the dollar like it did back in, I think it were, was it 150 down to 75? I forget it's been so long, but back in uh 1997, I think it was.

There was a a major move. I mean the face value of the yen went in half, I think, or something. When you have a situation like that and you're trading currencies, as I was then, uh FX, um Yeah, you're gonna have the potential to make massive sums of money because of the leverage and everything. You don't know that that's going to happen when you put the position on. So you just are following, you're getting that next data point in the next 1,000 trades and off it goes.

But the other thing that it does for you, when once the yen does start moving your way and the position starts becoming very profitable, the second part of your question was a good one because how do you manage that? And that's why I wrote the book uh Successful Traders Size Their Positions, Why and How? Because I took the exact algorithms we used at Trendstat and I still use today.

to not only size my position appropriately out of the gate on the trade. So when I put the first position on, I've got it properly sized according to what I believe works for me at least. And then there's the ongoing position size. And I track that every day. And I limit that to a certain risk of equity and a certain volatility of equity. So as markets get insane.

As the risk gets higher, I'm peeling off part of that position to maintain a proper exposure in the portfolio. So I don't let Say, you know, if you think about uh somebody that bought Amazon in their stock portfolio way back when when it was, I don't know, twenty dollars or something.

And they just held on to it and they didn't change their position size or do anything. Well, right now, if they had a stock portfolio, they'd have an Amazon position and everything else. And their portfolio would be dominated by Amazon. So if you don't do anything different, What you end up with is not a portfolio anymore. You have one big position and a whole bunch of other non, non-important stuff.

That's not the way to run to me, a logical, diversified, protected portfolio. You have to continue on the job managing your position sizes. and trying to maintain exposure uh in some kind of a sensible way across a portfolio. And you can choose to

To do what I talk about in the book, or you can come up with your own. There's lots of different ways of measuring equity. I like mark-to-market equity. Some people like What's called core equity, which is your uh after all your stops are hit, your basic um the amount of cash that's gonna be left.

Uh there's lots of people that just use realized. So there's lots of different ways to to slice it. But I think in the end to not have any way of managing your ongoing equity is is a problem because like that Japanese yen trade we were talking about, uh it would become a portfolio of Japanese yen and 20 other things that don't make any difference anymore. So by keeping them balanced, you you can stay balanced. Yeah.

Is is looking like it could get really shaky really quickly, but here the stock market's making new highs. Um And so thank goodness I've separated my economic brain from my trader brain. And I just with trading, I just do what I'm supposed to do and I don't worry about it.

So I've had a nice run here uh to the upside. But I would have thought going, you know, a year, a month or two ago, just seeing what was laying out in the world, the wars breaking out, everything, I figured, boy, this would be a tough period economic-wise. But what I do with economy to try to get a little bit more my personal planning of what I'm trying to do with my own personal life and be prepared for what might come up.

is I look at behavior of any economic decision that the government Fed anybody else that would try to make What would be the likely behavioral reaction of your average citizen or if they're, let's say, taxing the rich, what would be the logical reaction from the rich? Uh whatever happens out there, behavior in the end will drive that economy. So be if you can try to pay attention to any kind of economic decision or policy or debate that's going on in Congress.

And ask yourself what would be the logical behavior reaction of the population in general? You'll probably be able to tell what will happen. The reason, say the Laffer curve, which

people badmouth sometimes. I mean it was the I think the standpoint or the uh the the the critical underpinning uh to Reaganomics where you cut taxes, well what would be the logical reaction going into the cutting of those taxes, we had the very excessively high uh tax rates and people were doing tax shelters, stupid investments just to save tax money.

And the the investment would be driven by the amount of savings they can make on their taxes. And of course the IRS would go after the shelters. Some of them would fall apart. There'd be penalties. There was a lot of wasted non productive to the economy effort just to try to get away from taxes. So enter Reagan, cut the taxes, take interest rates up to knock down inflation. Inflation gets reasonable. taxes are a lot lower, well, there's no motivation to go find a tax shelter now.

So might as well like buy the stock market or, you know, put up some money in a new a new offering uh because it looks promising. They've got a new drug or they've got a new invention. You know, let's take a chance there. People are starting to make money. People are starting to trade those stocks. Taxable consequence. So with a lower tax rate. Revenues to the government actually went up, not what you would expect when you cut tax rates.

Why? Because people behavior created an environment where because it's a lower tax rate, I'm more likely to do a taxable consequence transaction because it's not going to hurt me so bad. Mm-hmm. And so that's the kind of concept of thinking through how people react to the reality of the world out there. And as you change economic policy, well, how what effects that going to have on the human psyche and what they're going to try to react to? Because people are always going to try to

uh maximize their own economic utility. Uh, you know, if taxes are lower, then hey, maybe you trade, you day trade. You don't have to worry about anything. I mean, you can if taxes were zero, you could just Do taxable consequence transactions anytime you wanted. If they're minimal, you're not gonna make that a dominant part of your uh your uh psyche, but i if it's 90% tax rate, uh if you start taxing the wealthy,

At 90%, they're going to go out of their way to move money out of the country. They're going to go out of their way to not do taxable consequences. And it will actually hurt government revenues. It will not help. With all due respect to the uh Keynesians out there uh and the some of the idiot uh economic uh Mines over at the Wall Street Journal or the New York Times, especially. I I just shake my head at some of the things that come out of their mouths. Mm-hmm.

I don't wanna obsess either way. I wanna be more even keeled because I wanna be logical. I wanna run my strategies. I don't want to have my emotions high and low all the time. It's exhausting. So By being aware any way you can do it, I for me it was uh putting the sticky note there and having an alarm go off and then

I would ask myself, was I aware just now? And if I wasn't, I would sort of do an assessment of what was going on in my head that moment and was it what was I thinking of? Was I totally consumed with doing something and not thinking of how I felt or how nervous I was, or was I nervous, or was I little too enthusiastic? Was I a little too depressed or anxious or any other type of uh emotional state.

By getting myself back into the awareness mode, what ends up happening is you start calming yourself down into a steady state a little bit more when you're doing something like trading. And that's a great way to be because then you're You see some setup and you want to go long, but then at the same time your neutral brain says, Okay, well let's assess the risk. Let's see what the reward is. Let's make a logical decision. You don't get yourself excited or depressed or anything.

you keep yourself even killed. And if you ever notice yourself not being that way, you get yourself back to that mental state. And uh so I encourage people to increase their awareness. I think it'll help in your interpersonal relationships with other other people, try to be sensitive to what they're going on with their lives and helps you react to them better and um I think life just gets better.

Let's take the next trade and keep going. Don't worry about it. So yeah, the the emotional swings you get in life can be dramatic. I mean it can cause things ranging from depression, suicide to you know, bipolar behavior that manic uh depressive, you know, go swing to the enthusiasm side to the to the negative side and all over the place. And I don't think that's a great way to live your life.

Tom, thanks for coming on chat with traders.

uh my explanation of my hedging strategy. If you want to be more curious about what I do with hedging, just a lot of information there. Uh go and take some time and wander around and enjoy. uh the read instead of the ride. Probably the most people find me on social media on Twitter. I got like almost fifty-two thousand followers on Twitter at at Basso underscore Tom.

Be careful. Social media, the guy like me that's got a lot of exposure, gets tons of impostors. Do not ever buy anything. I don't sell anything by direct message. I don't want your crypto business. I don't want you to invest in a a charity that I'm sponsoring or something. Uh, I'll do that elsewhere if I I do it anywhere. Just be careful. I've had friends scammed uh by thinking they were talking to me and they weren't.

So I try to do what I can to get rid of the impostors, but uh I appreciate anybody out there pointing out uh some of my impostors so that I can report them to the authorities. Uh I'm also on Facebook and LinkedIn uh pretty heavily, and that seems to be an increasing part of the people following me. Mm-hmm. But that's pretty much it. So I also have a Substack. I kind of write some articles when I when the mood ex you know strikes me as uh I have something I want to say, I'll put it on Substack.

And send it out to the Substack list. So you can subscribe to my Substack publications and you'll get it into your email if you want it. So there's lots of ways.