Tom Basso – Mr Serenity

This article is part of our 'Guru' series - profiles of successful traders, with takeaways for the UK private investor.
You can find the rest of the series here.

Today’s post is a profile of Guru investor Tom Basso, who appears in Jack Schwager’s book New Market Wizards. His chapter is called Mr Serenity.

Tom Basso

Tom Basso appears in Jack Schwager’s book “New Market Wizards”.

• His chapter is called Mr Serenity.

Basso started out as an engineer for Monsanto, dabbling in investment in his spare time.

• He blew up his first commodities futures account, but eventually learned how to be profitable.

He began to manage money (stocks) in 1980, as an offshoot from an investment club.

• In 1984 he began to manage futures accounts as well.

Performance

Schwager admits that Basso wasn’t on his original list of interview subjects.

His track record is solid rather than spectacular.

• He made 16% pa from 1980 (5% pa above the S&P 500).

But he has combined this with a work-life balance – and a mental attitude – far superior to most traders.

Scenarios

I try to keep my models as flexible as I possibly can. I try to imagine scenarios that would almost make good movie plots.

I don’t necessarily design systems that will cope with those situations, but I mentally live through what will happen to my positions, given one of these scenarios.

It helps prepare me for all the different market conditions that can arise. Therefore, I know what I’ll do in any given situation.

Each morning while I’m driving to work, I make a conscious effort to relax. I mentally rehearse any conflict that might happen that day. The process of helps me start my day in a very positive frame of mind.

My mental rehearsal for a catastrophic event is a doctor in a triage situation. He’s in a battlefield emergency operating room. In come fifty bodies. Some are going to live; some are going to die. The doctor has been trained to handle the situation. He’s going to make all the necessary decisions.

He’s calm and collected, not nervous. He knows that he has the best chance of saving the maximum number of lives. He knows that he can’t save them all, but he’s going to do the best he can with what he has.

Risk

I had developed the concept of never taking a trade that would jeopardize my ability to continue trading.

When your account has these massive swings up and down, there’s a tendency to feel a rush when the market is going your way and devastation when it’s going against you.

It’s far better to keep the equity swings manageable and strive for a sense of balance each day, no matter what happens.

I adopted a formula that limited both my profits and drawdowns by notching back the number of contracts traded in each market to a tolerable level. The the number of contracts traded fluctuates in accordance with each market’s volatility.

When I come to work each day, I know that the risk and volatility in my portfolio is exactly the same as it was yesterday, last week, and last month. So why should I let my emotions go up and down?

Mental attitude

I focus my total attention on trading well, and let the results take care of themselves. Instead of saying, “I’m going to do this trade,” you say, “I’m going to watch myself do this trade.” All of a sudden you find that the process is a lot easier.

As long as you learn something from a loss, it’s not really a loss.

Think of each trade as one of the next one thousand trades you’re going to make. You’ve made any single trade seem very inconsequential. Who cares if a particular trade is a winner or a loser? It’s just another trade.

Basso tells a story about the start of the Gulf War, when he lost 15% in one day:

I thought about all the events and actions of the previous evening and that morning. I realized that there was not a single thing I would have done differently. Despite having just lost 15% overnight, I felt phenomenally good.

Trading style

I think investment psychology is by far the most important element, followed by risk control, with the least important consideration being the question of where you buy and sell.

I notice that sometimes the trading signals that I’m intuitively most nervous about turn out to be the best trades. Therefore, over the long run, I think my performance is best served by following my systems unquestioningly.

I find that using systems gets the monkey off your back. If you lose money today, it’s not your fault; it’s the system that had the problem.

Conclusions

Although this interview is light on trading techniques, its very good on the psychology of trading.

• Basso’s serene style is something for all of us to work towards.

Schwager agrees:

Basso is far from being the most successful trader I have interviewed in terms of performance statistics, but he is probably one of the first I would choose as a role model.

Until next time.

Mike Rawson

Mike is the owner of 7 Circles, and a private investor living in London. He has been managing his own money for 40 years, with some success.