Tom Basso - Investing Is A Mental Game More Than It Is Having The Perfect Indicator Or…Even The Perfect Position Sizing | #244

Episode Summary

Executive Summary: Tom Basso discusses his evolution from novice futures trader to disciplined trend follower, emphasizing that position sizing, risk control, and mental discipline matter more than prediction. He explains how outlier trades drive results, why most trades are small wins/losses, and how multiple complementary strategies plus rebalancing can improve survivability and return-to-risk. The conversation also covers his retirement, website, and broader life philosophy.

Main Topics: Early trading lessons in corn and silver (Priority: 5/5): Basso recounts his first futures trades, learning contract sizing the hard way in corn, then enduring the emotional roller coaster of the famous silver squeeze trade. Position sizing as the core edge (Priority: 5/5): He argues that how much you buy or sell is often more important than what you buy or sell, and that adaptive sizing stabilizes drawdowns and emotions. Outliers and power laws in trend following (Priority: 5/5): Basso explains that a small number of large trades often account for most annual profits, making patience and stop discipline essential. Mental game and trading discipline (Priority: 4/5): He frames trading as a psychological endeavor where following the plan matters more than any single day’s profit or loss. Multiple symbiotic strategies and diversification (Priority: 4/5): He advocates combining complementary strategies, such as long equity exposure with trend-following hedges, to reduce risk and exploit different market regimes. Client behavior, drawdowns, and liquidity (Priority: 4/5): Basso discusses how investors chase performance, redeem at bottoms, and add at tops, hurting real-world outcomes relative to manager track records. Retirement, education, and the Enjoy the Ride website (Priority: 2/5): He describes how his site organizes his research, videos, reading list, and answers to common trader questions in an asynchronous format.

Key Arguments: A trading system needs three parts: a buy/sell engine, position sizing, and a mental framework; the last two are often neglected. Trend-following can work even with a low batting average because rare outlier winners pay for many small losses and small wins. Adaptive position sizing helps reduce psychological stress and drawdowns while preserving participation in big trends. The market’s regime changes constantly, so position sizes should change too rather than remain fixed throughout a trade. Many investors and even professionals focus on recent performance, but the real determinant of long-term success is behavior through drawdowns. Liquidity is not always a benefit for investors because it encourages performance chasing and poorly timed inflows/outflows. Combining uncorrelated or symbiotic strategies can improve survivability more than trying to build one perfect strategy. Rebalancing can improve return-to-risk when transaction costs are low or near zero. Most portfolios appear diversified but still concentrate heavily in a single risk factor, often U.S. equities.

Data Points: Initial corn futures account size: $2,000 - Basso’s first futures account when he began trading corn. Corn loss on first breakout trade: $600 - He lost this amount and had to learn the contract math and sizing. Silver trade account growth: From about $130,000 to about $500,000 - During the silver squeeze, his futures account surged before the eventual stop-out. Final silver trade account value: $250,000 - After the exchange changed margin rules and the market gapped down. TrendStat firm run: 28 years - He says the firm operated for 28 years without bankruptcy and later closed voluntarily. Estimated number of trades over career: About 50,000 - Basso estimates his lifetime trade count in the tens of thousands. Estimated trend-following win rate: 33% - His rough estimate of winning trades over his career. Time market is sideways: About two-thirds of the time - He argues traders spend most time in non-trending conditions. Time market is up or down: About 25%-30% of the time total - He estimates directional regimes occupy only a minority of market time. March 2020 performance: Best single month of his life - He attributes this to extreme volatility and strong trend capture during COVID crash. CTA investor holding tolerance: 3 years or less - Citing a study that 95% of institutions would fire underperforming managers within this window. Farmland cropland loss: Approximately 4.8 acres per minute - Mentioned in the AcreTrader ad read about urbanization and farmland scarcity. Farmland investment minimum: $15,000 - AcreTrader’s minimum passive farmland investment size. Website monthly visitors: 4,000-6,000 traders per month - Traffic to his Enjoy the Ride website. Website build cost: About $5,000-$7,000 - He estimates the cost to create the site. CreamMiser market share: Over 90% - His side investment in bulk cream dispensing achieved dominant market share.

Pivotal Quotes: "The market will do what the market will do." — Tom Basso: His core philosophy on humility and execution in trading. "A good day for a trader is when he follows his trading plan. It has nothing to do whether he made money or not." — Tom Basso: He defines success as process adherence, not daily P&L. "You want to get on board that one big one." — Tom Basso: Explaining why outlier trades dominate trend-following returns.

Implications: For investors, the episode argues that survivability comes from position sizing, diversification, and disciplined behavior, not prediction. For the industry, it highlights how performance chasing and rigid thinking undermine long-term results, while systematic, adaptive trend-following remains a robust framework.