MarketWatch: My interview with legendary "Market Wizard" trader Tom Basso

LINK TO ARTICLE: https://bit.ly/3ySQGZ9

"Buffett sold half of his Apple position. Isn’t that market timing?" Stock trader Tom Basso reveals what it takes to win.

Tom Basso, a hedge-fund manager and veteran stock trader, was dubbed ”Mr. Serenity” in Jack Schwager’s classic 1992 book, “New Market Wizards.” 

Here’s how Schwager described Basso more than 30 years ago: “When I first met Basso, I was immediately struck by his incredible ease about trading. He has learned to accept losses in trading not only in an intellectual sense but on an emotional level as well. Moreover, his feelings of exuberance about trading (or, for that matter, about life) bubble right out of him. Basso has managed to be a profitable trader while apparently maintaining complete peace of mind and experiencing great joy.”

After speaking with Basso about the current U.S. stock market environment, it’s clear he hasn’t changed. For him, the headwind for stocks and the challenge for traders and investors now — recession fears, interest rates, geopolitical risk — is just another chapter in a long-running story. 

Basso should know. With 50 years of stock trading under his belt, he has experienced every type of market boom and bust, including the October 1987 U.S. market crash. If you want to know how he usually responds to these ups and downs, it’s spelled out in the educational website for traders he runs: enjoytheride.world.

In this recent interview, which has been edited for length and clarity, Basso talked about trading stocks, sticking to a plan, and how not losing can be more important than winning. 

MarketWatch: “Enjoy the ride, world.” Your trading philosophy sounds like a solution to any challenge, but it’s easier said than done. What advice do you have for stock traders now? 

Basso: You must have a plan. Many new traders, especially those who got their stimulus checks from COVID and were stuck at home because of the lockdowns, decided to take up trading. Many have never seen a disastrous bear market. Most have never seen anything except above-average historical returns on their portfolio. They haven’t been tested very much to the downside. I have been warning everyone to create a plan and then execute it. Otherwise, you will put yourself in harm’s way. 

MarketWatch: What trading plan is best under current market conditions?

Basso: You must have indicators in place that measure where the stock indices are moving. If you are a trend follower, perhaps you notice the market is in a down move. You could sell out of your stocks or exchange-traded funds (ETFs) and move to cash. Other trend followers might get signals to go short. It’s different for different people. Although I use short strategies, some people are restricted from using that strategy. If you’re in cash right now, one plan is to watch until your indicators move to the positive side. Then jump in with full force. 

MarketWatch: Which market indicators get your respect? 

Basso: I follow three indicators that I use in conjunction with each other because each one measures a different form of what I call noise. 

The first one is Donchian Channels, (a technical indicator used to identify bullish and bearish extremes over a period of time). The second indicator is the Keltner Channel, which is basically an exponential moving average that I use over different time periods. The third indicator I use is Bollinger Bands, which uses standard deviation to measure volatility. 

I run all three indicators simultaneously and put stops at the closest point to where the market is. I have plans for the market going sideways, down, or up. This all happens automatically. I could be out playing golf, so I don’t get too stressed about my trades. That’s why [“New Market Wizards” author] Jack Schwager called me “Mr. Serenity.” I do my market work inside of an hour. I’m not sitting in front of a computer screen all day. 

MarketWatch: What does your trading plan look like in action? 

Basso: I don’t know what the market will do. All I know is that if it’s a down move, I act. I already have the plan in place. I have my stops in place. I have the position sized properly for the amount of volatility and the size of my account. I’m neither over-committed or under-committed. I’ll go short, and if the market breaks through the top side, I will get rid of my short positions and go long.

MarketWatch: That sounds like market timing.

Basso: People are fond of saying that you shouldn’t time the market because you can’t afford to miss the 10 best days. I tell them to see what happens when you miss the 10 worst days. Warren Buffett recently sold half of his Apple position. Isn’t that market timing? Buffett has bought and sold lots of companies over the years. To me, everyone is a trader. It’s just a matter of your time frame and what indicators you are using. They are just labels. I don’t worry too much about them. I just measure the market and go with the flow. 

MarketWatch: Many investors rush to buy stocks when the market dips. Is that smart or a recipe for disappointment? 

Basso: If you’re buying the dip when the market is down by 10% or 15%, and the market goes down 50% during a bear market, you’ll be sitting for a long time trying to make back your losses. Every monthly statement that comes in, and every time you look at your account value, will be like a little knife twist in your back. You’re not going to be a happy camper. 

My attitude is to let the market fall to wherever it wants to fall. Sooner or later, buyers will come in, the market will stabilize, turn around and break through to the upside. 

MarketWatch: What are the biggest mistakes traders make? 

Basso: First, they don’t have the right amount of capital. I would encourage traders to save their money and get a second job, then build up a good-sized account so they can diversify and run some sensible strategies. Second, they must size their positions properly. Position sizing affects your results over the long run more than your buy- or sell position. 

MarketWatch: What’s the maximum amount you risk on each trade? 

Basso: I risk no more than 0.5% of my equity on each trade. I learned that from Larry Hite, who was interviewed by Jack Schwager in the first “Market Wizards” book. Don’t lose more than a small percentage on each trade. I cap the risk percent of my equity exactly the same for each trade. I’ve been doing that for over 40 years. Successful traders know how to size their positions. I wrote a book on it and provided the math. A lot of people say they will buy 100 shares of a stock because it’s a nice round number. But 100 shares of Amazon.com is a lot different than 100 shares of a utility company. A lot of new traders hear someone mention X, Y or Z stock, look at a chart, and buy 100 shares without knowing how to size their position, or have a strategy to buy or sell. They are just setting themselves up for failure and a lot of stress.