Trend Following Mindset

The Genius of Legendary Trader Tom Basso

Michael Covel

• Publisher: Harriman House
• Year: 2021
• ISBN:
  9780857198150
• Topic: Business
• Subtopic: Stocks
• Index: Business

Trend Following Mindset brings to life the timeless conversations between Tom Basso and Michael Covel originally featured on Michael's renowned Trend Following podcast. In these profound and enlightening exchanges, Tom shares with Michael his deep wisdom on trading, business, life, and the how and why of his mindset.Tom Basso, dubbed Mr. Serenity by Jack Schwager, is one of the most experienced and knowledgeable trend-following traders in the world today—a trading legend who lives life to the fullest.Tom's most important trend following research papers are presented together for the first time, delivering a treasure trove of trading insights.Michael also pulls from Tom his perspective on: How to get started in trading; What trend following is, and how and why it works so well; Constructing your trading system; Position sizing and account management; The work-life balance of a trader; The transition from independent trader to professional money manager; and so much more. Trend Following Mindset will teach you the mindset of one of the great trend followers. Most important of all, it will show you how to do as Tom does … and enjoy the ride.

Part 1: Interviews

Enjoy the Ride

Episode 10: April 25, 2012

Tom Basso: This is the first interview I’ve done in about eight years since I retired.

Michael Covel: I find that in trend trading, experience doesn’t have a half-life; it doesn’t go away. There’s a lot of wisdom that we can all pick up from folks that have been down the dusty trail. I sometimes hear people telling me, “Oh, Covel, what are you going to learn from these guys from decades ago?” My response is always along the lines of, “Eh, are you serious?”

Tom: Not much changes, Michael. It’s the same thing. I was just looking today to make sure I knew where everything was, since I haven’t been interviewed in so long. I just did a Google search on my name and TrendStat, my old firm’s name, and I was amazed at what I found … I gave up after 30 pages of results. It was amazing to see all the information that stays on the web. Once it’s on there it stays there forever, so I had a trip down memory lane.

Michael: Let’s start with your younger days. A lot of people want to know, “What was Tom Basso like at 13 or 16?” What were you thinking about? What were you doing early on, and how did the migration happen, the switch?

Tom: When I was 12 years old, I delivered papers—the Syracuse Herald-Journal—in the evenings. I had about 82 subscribers and made about $10 a week. Around that time, a mutual fund salesman showed up at my dad’s house. I listened in to their conversation, got interested in what I heard, and then started buying mutual funds.

Michael: 12! That’s a head start.

Tom: By the time I got to college, I had gotten back to break-even on that position, due to the amount of fees the salesman was taking out of the front end. I was about 18 years old, and I was just breaking even on the funds. It was then that I realized the markets went up and down. In junior year of college I started worrying about where was I going to get a job as a chemical engineer—which is what I graduated in from Clarkson University up in Potsdam, New York.

I had about 25 different job offers, so I thought one way to look at this might be to plot the stock of some of these companies, and take a look at what they did. I ended up going to work for Monsanto in St. Louis. I plotted Monsanto’s stock and ended up trading Monsanto because it went up and down. I realized that it’d be foolish to just buy and hold it because it seemed to pop up to 40 and go down to 20. I figured I’d might as well make money each time it does that because it didn’t seem to get much above 40 in those days. I’m talking back in the ’70s.

That led me more to trying to quantify, “How do I do this without having to think too much about it?” Because I was a busy guy. I was getting an MBA, working as a chemical engineer, and starting up with the original firm that was the precursor of TrendStat, called Kennedy Capital. And actually, Kennedy Capital still exists today in St. Louis as a small cap manager. I sold my share at Kennedy Capital and started TrendStat. It was an evolution getting into futures and currencies using trend following techniques. I ran out of futures capacity. One thing leads to another and pretty soon 28 years have gone by, and I’m retiring.

Michael: Guys like yourself, you tell that whole story really fast, about 30 seconds. I’m not going to let you off the hook that quick. Beyond your own internal studies and looking at charts and observing this up and down nature of trends, were you inspired or influenced by anybody that came before you?

Tom: Not really. I was an engineer by background, and was very good with computers, but you’ve got to realize that I never was a broker. I never worked at an investment bank. Never was on the floor of any exchange. I really started out managing other people’s money by way of an investment club. A lot of the investment club people were lazy, and they left it to two of us to do most of the work. I was one of those two guys.

Having been an engineer by background gave me a real heavy dosage of math, logic, problem-solving, and how to do things efficiently. I began to see human endeavor categorized in two camps. There was the production side of things where you’re grinding out something that you could teach a computer to do, but for some reason you’ve decided to do it as a human being. And the other side of human endeavor is more the creative side: The side where you can’t really teach a computer how to create something new—a piece of art or whatever.

I realized that I had a limited amount of time. If I was ever going to be creative and take trading to a new level by reading new books and exploring new research angles, I had to get the actual trading function: The buying and selling. Where am I going to buy and where am I going to sell? How much am I going to buy and how much am I going to sell?

I had to get those functions to a point where it was so cookbook I could get it done in very short amounts of time so that I’d have time left to do the creative things I enjoy.

You remember the RadioShack TRS-80? That was the first computer I got. I went from there to the IBM PC and bought an AT after that. I just kept programming and programming. My sole purpose was to just put myself out of work in terms of trading every day. I evolved my trading into a very, very automated TrendStat Capital that basically made no decisions by human beings day after day. It was a highly automated operation covering some 80 futures markets, 30 currency markets and about 20 mutual funds that we traded by many different strategies and many different dollars. It was quite complicated, but we would just buy another computer, and crank our system into it.

Michael: You’re self-taught. You are on the outside. You are not a part of the trading floor up in New York City somewhere. You’re not on the exchange floor. Talk to me about when it hit you that, “There’s all these guys out there doing fundamentals.” Warren Buffett, for example, is a value guy. But you’ve made the decision that you’re going to use prices as your core variable, and you’re going to start to code this.

This was all the buying and selling of price as a variable and figuring out how much to bet. That was something that you were figuring out on your own by trial and error without any outside influences?

Tom: I started looking at some of my early stuff that I did, like my mutual fund purchase with the mutual fund salesman, and other purchases of actual stock after that. I looked a little bit at fundamentals and realized it was a quagmire of accounting information to get through. It took too much time.

I realized that no matter what I did it seemed like there was always going to be somebody with a lot more time and staffs of people. I had other engineers at Monsanto, and we’d be sitting there in lunch and they’d say, “What makes you think you can do any better than some Wall Street firm with teams of analysts figuring all this stuff out?” I got to thinking about that and started getting more global and distant from it all. When you take a step back and look at what these other guys do, you realize that everything these people do ends up somehow in a battle.

I imagined going back to the Waterloo days and you’ve got Napoleon and Wellington up on the hills watching their armies down in the valley. And then you could watch the frontline going to the left or going to the right depending on who’s winning at any one point in time. I thought that was a good picture for what goes on in a market. There’re lots of people doing lots of different things, and some of them are buying, and some of them are selling, and they all think they’re right. They all think they know what they’re doing, and they’re doing it for a reason.

But the sum total of all of that is where the price ends up. Or in the case of the battle, where the frontline is. So I thought, “Well if I could chart this, then I would know where everybody that’s participating wants to put this price, and if I just watch, I can see that the battle is being won by one side over the other.” In other words, “If the buyers are beating the sellers this time around, then I might as well lean that way because it looks like they are winning the battle. If the sellers are winning the battle, it’d probably be good to go that way.” I never think much more about it than that. That’s still my thinking for what I do in everyday life, even up to t...