Ep. 316 Do The Math: How To Achieve Trading Serenity By Adjusting For Volatility
59:08 Share

Viking, committed to exploring the world in comfort. Journey through the heart of Europe on an elegant Viking longship with thoughtful service, cultural enrichment, and all-inclusive fares. Discover more at viking.com.

Hello and welcome to another episode of the Investing with IBD podcast. It's Justin Nielsen here, your host, and it is April 16th. We are just on the other side of tax day and we still have a little bit of volatility in this market. Things were settling down, but to help us kind of walk through it is we're returning, having returned to the show, Tom Basso. He, of course, is the author of

of the all-weather trader. So it's probably a good idea when the weather has gotten so kind of rough and stormy to have someone on that has written all about this. Of course, before that, you were also a portfolio manager at Trendstat, also featured on Jack Schwager's series of books as a market wizard. So you've got quite a bit of the chops in terms of...

being notable for your ability to stay calm during a lot of markets. And this is why Schwager labeled you Mr. Serenity. So welcome back to the show, Tom. It's good to be here, Justin.

Yeah. So, um, let's get right into it. And I, I got to start with, again, you know, just looking at your book. I mean, I, I, I remember you kind of describing to me how proud you were of the picture. Um, and, uh, in particular, you know, the fact that that umbrella is kind of, uh, protecting you, uh,

And there's both sides, right? You've got snow in the front. You've got rain in the back. And it does seem like there's a lot of winds swirling around us right now. So how do you handle your volatility? Because this guy that's in the picture, he's not inside the house, you know, just huddled there.

He's battling it. So what's your strategy when the weather is this important? Yeah, if you look very carefully at the picture, there's another little subtle wrinkle to those lines coming inbound against the umbrella. Then they're bouncing upward and to the right, which is what every trader looks for with his equity curve. So what that's kind of a...

I don't know, a subliminal way of saying risk inbound can be positive risk if you deal with it correctly. You know, so in other words, if if you look at it from an all weather standpoint, having a market, say, crash, let's say a market goes on 50 cents, 50 cents on a dollar, 50 percent.

There's a lot of opportunity to do all sorts of things that would make money in that kind of environment. Just the same way that if the market goes up 50%, there's a lot of way to make money there too. It's a lot harder to make very large dollars if the market's just going sideways, but things like credit spreads and other things might be useful to try to make money during those periods. And the all-weather concept is simply to say...

What would be my strategy for different types of markets? What kind of market am I in right now? So therefore, you know, what should be working well and is working well, hopefully. And what should not be working well? If you're a long only buy and hold investor in the stock market and you have a down 3% day in the stock market, are you expecting to have a positive day?

If you are, that's very, very unrealistic, I believe. If you go back in history and look at any day that's that large a downside, it's going to be against your strategy. So try to understand your strategy, understand the good periods when you should have the wind at your back, when you should have the wind in your face, and when it should just bite its time. Maybe you just try to stay out of trouble and go find something else more important to do. I think that's where...

A lot of investors that get into the angst are always trying to predict and they're always trying to get ahead of not what we're doing right now, but what are we going to do next week? And when you start doing that, you start leaning one way or the other. I'm going to be long. I'm going to be short. I'm going to stay out of the market and miss the next big move and kick yourself because you didn't get in when you should have.

So there's just all sorts of psychological pressure people put on themselves. I have strategies for all three types of conditions. I execute them. That's why you can be Mr. Serenity, I guess. Well, and I think that you also have a little bit more of a realistic approach. I think sometimes there's always that chasing of, I want to sell at the top and I want to get in at the bottom. And that's

You don't necessarily put that pressure on yourself. No, not at all. If a market's going up, I want to be long. If it's going down, I want to be short. And if it's not doing anything, I'd love to just be out of it completely if there was a way to do that. And some of my multiple strategies have a way of...

As markets start going into a topping period or a bottoming period, one, the shorter term indicators will take me the other direction and the longer term indicators will stay with the trend and they'll offset each other. And I'm sort of out of the market and not a bad place to be for a while.

Mm-hmm.

I've thought through how I'm going to try to attack these issues and it's not perfect. I've, I've done statistics. I think I'm running 46% of the days over the last, uh, year that I've been trading. 46% have been profitable days. So that's not even half. Right. I'm, I'm,

I have plenty of losing days. What I try to do is make sure the winning days are a little bit more than the losing days. Try to minimize the losses when you have them. And I think that that's the key to success. Try and understand what it is you're doing, where the good spots are, where the bad spots are, what to expect, and then just let it play out. And if you see anything that's unusual, yeah, maybe that's the time to get concerned and take a closer look. But

Hey, if your strategy should be losing money on a day like today and you've lost money today, then it's not broken. Don't try to fix it. Well, and it's interesting because, again, I think this is another point that a lot of people just starting out maybe don't realize is how often the best traders out there, and I would consider you among them,

are wrong, that they aren't going for necessarily 100% being right all the time. And the recognition that you can actually be under 50% and still do well in the market seems counterintuitive to a lot of people, but it does come down to a lot of times making sure you're really managing your risk. Well, it comes down to simple math. If

If over my lifetime I'm 33% reliable, roughly, probably between 30 to 35, it's just a guess. I've not kept that statistic. That would be a lot of numbers. But say I'm 33%. Well, that means there's 67% of the time I'm wrong, right? So I'd lose money. Not necessarily wrong. I think that's the wrong word. From the standpoint of trading, I'm right all the time, but the market didn't cooperate with me.

Two thirds of the time and one third of the time it did. So, but if you got a two to one mix of reliability and your average gainer is two times your average loser, let's say you just broke even over time. You could do a thousand trades, uh,

and you're probably going to be right around zero. You won't be losing money, won't be making a lot. But some of my strategies over time were hitting 7 to 1, 5 to 1, 3.7 to 1 profit to loss, average profit to average loss ratios, not 2 to 1 like in the example. So that's where you get the edge. If you're losing the 1 and you're making 3.7 or 5 or 7 or whatever,

you're going to be way, way ahead on the profits. So you just got to keep finding those things. And it's, you know, I keep thinking, I say this a lot and it's meant as a guy with 50 years of experience trying to give new traders opportunities

some sense of what they're up against. But if you have an expectancy that's positive, in other words, your strategy over time should make money, then a couple things to think about. You want to do as many of the trades that meet that criteria as possible because you're reproducing that expectancy and those are, on average, going to be profitable for you. So the more you do, the more profits you'll get. The second thing to think about is

The statistical sample, a lot of new traders get so bent out of shape. Like say they went in today and they said, hey, the market's down. I'm going to, I don't know, I'm going to go buy Tesla or something. I'm going to buy the dip. Okay, so you bought it and it goes down some more.

You don't have a strategy. You think it's going to go the other direction, so you're hoping. And you've got no risk management. You may not have any good position sizing. You've put yourself under such pressure, and that need not be the case. Have a strategy. If Tesla meets your strategy, fine. If it's down, you would expect it to be down if you're long Tesla, right? It's down today.

All right. So nothing's unusual. You came up with a plan. You executed it. Everything is happening as you would have expected, given the conditions that exist. And I think if people would just detach a little bit and look at it and say, let's just execute my next 1000 trades.

get a good statistical sample under my belt, rather than being completely emotional about this one trade or that one trade. They get nervous, they're sweating, they're getting greedy, they made too much money today, so they want to take half the profit. All of those psychological things that traders go through are

Right. Yeah.

Well, and I guess that is... I don't sit there and say, wow, I think I'll take a breath now. That would be good. And I think it does come down to, again, when you have that strategy. And one of the things that I remember reading in your book, and this just makes so much sense to a lot of people, is that a lot of times what you're talking about is you're not making these decisions in the heat of the battle. You're kind of making these decisions...

before, long before the trade happens. So I think that kind of puts an element of, you know, your process ahead of time, you know, that it's not always going to work out that, you know, the right way, but you know, long-term what your strategy is. So maybe talk a little bit about the benefit of not trying to turn with every market move by watching the news and, and, you know, trying to keep track of everything like that.

You know, some of the stuff I'm doing today, I did back at Trinstad. I've been retired 20 years. This has been...

trend following whether you use a moving average or use a keltner band or a dungeon or whatever all these different indicators they're all going to give you you know one day or another over a long period of time a buy signal or a sell signal and your job as a trader is to realize that the trend has shifted and jump it you know get on it and ride it as long as you can as long as the markets will cooperate and go your way and

And when I make those decisions, I'm looking at a lot of data. Historically, I'm looking at just logic. You know, it stands to reason that if...

they're deflating the dollar and the price, the earnings stays the same in stock, stock prices should be higher over the long run. It just should mathematically work out that way, especially if you have a growth rate and a growing economy, you would expect stock prices to be on average up more than down, but you would expect along the way, you know, a little down along the way. So

You have to try to understand that you're going to get both. Okay, that's fine. You got that figured out. It's in the head now. And you're doing logical, unemotional thinking at that stage. You're using the creative power of the human brain to come up with your strategy. Once you come up with the strategy and you look at what you have to do every day, I want to get it down to where a simple computer can do it or a spreadsheet or something. I don't want to...

get emotional. I don't want to think a lot. I want to execute at that point. And I think a lot of people during the trading day are looking at the news and they're looking at the charts and they're looking for patterns and they're looking for this and that and next thing and trying to predict what's going to happen. It's going to bounce off of this. It's going to hit this Fibonacci number. It's going to do this, you know, this,

Elliott Wave count, you start getting into the weeds with all that and you just overwhelm the human brain with trying to make a decision. And it's really hard to make a decision and it might end up becoming an emotional decision because you're making it in the heat of the moment. And so you're

It's it's really tough for the human brain to handle all the information, make a logical decision, be unemotional about it and exist. You still got to go to the bathroom, eat lunch, deal with it. And you've got to sleep sometime. We're going to 24 hour trading here in the next year on the New York Stock Exchange. I hear, you know, when are people going to sleep? You got to sleep.

You know, you brought up and I'm just going to throw up a chart real quick here on the dollar. You brought up, you know, kind of some macroeconomic issues. How much of the macroeconomic, you know, what the dollar is doing, what bonds are doing, you know, what what you think of even even the politics of what's happening, global global things. How how much does that kind of come into your thesis that?

Or is it more a matter of, again, coming down to the charts? If you follow me on X, you probably see that I chime in all sorts of times, sometimes to the anguish of some people following me that, oh my gosh, he's saying these things about the macro economy or he's saying these things about tariffs. I would call myself an amateur behavioral economics.

I, I would ask myself always not the direct math effect of a tariff. I would say what would be the behavioral aspect of how everybody in the picture is

would be affected and react to tariffs. That's behavior economics. And I think the most obvious example of that would be the Laffer curve, which I'm a big fan of. When they cut interest rates back in Reaganomics,

you had an explosion in revenues in the U.S. government, just the opposite of what the CBO, the Congressional Budget Office, tends to come up with. They use the simple math of here's the rate, here's how many people have money, and we multiply that and

They completely forget about the effect of when you drop interest rates, there's going to be more growth and more businesses and small businesses and people are going to be less trying to save taxes because they're cheaper. They're not as obnoxious. The higher you go, if you want to go back to the 90% years when...

When you were back in the 60s. Right. Then tax shelters are everywhere. People are not looking for stock portfolios. They're looking for tax shelters because they don't want to pay 90% of their money to the government. So I think what you look at tariffs and macroeconomic items, I use that.

as a way of understanding what's going on in the world around me, which way I lean in terms of voting, what policies the government proposes that I would think are logical and should be beneficial, and which ones people propose that behavioral economics-wise don't make sense to me and I think will harm the economy. So that's how I use behavioral economics. When it comes down to buying gold or selling crude oil,

Or buying a NASDAQ index, zero economics. I look at the price, I look at which way it's going, and I go in that direction. Mm-hmm.

True Stage companies simplify the complex with 90 years of delivering accessible insurance and innovative financial solutions. Let's work together and build a better tomorrow today. Learn more at truestage.com slash WSJ. True Stage is the marketing name for True Stage Financial Group and gets subsidiaries and affiliates. Corporate headquarters is located in Madison, Wisconsin. And just to shift gears a little bit, because some of these things, especially on the macro side,

You know, you're talking about long term effects, but there's a lot of short term movements. And you've mentioned that you have short term strategies, long term strategies. What what's kind of your time frame when you're when you're looking at trades? What what qualifies as a short term trade for you and what qualifies as more of a long term trade for you?

Well, I've got one strategy that I call a counter trend that gets down to looking at the previous days high and low and trying to react off of that from overbought or oversold conditions. So that would be extremely short term. Once it gets into the trade, it tries to milk it as much as it can. It tries to get to break even, sell off half the position, keep the rest, hope it keeps going.

I've got another strategy that's three days. So I'm using triple indicators. I'm using Keltner, Bollinger, and Donchian all together with a three-day look back. And all the parameters are three days. So that's going to be relatively short term. It's going to allow for a market to kind of go up.

maybe back off for a day, maybe deal with it a second day and then recover and continue the trend. If it's beyond three days, it starts shifting in the other direction.

So the nice thing about that is I've got other ones that are out there in the 21 plus days. If you've got a market that's going this way and you turn around and you start coming down three days, normally a lot of long term trend followers would just watch their drawdown all the way back down to maybe their stops way down here. And all of this is drawdown.

But in my case, I've got the long strategy that's long. It stays long. And then the short one, shorter term one, flips over to the downside. It becomes negative. You start adding the portfolio together and I'm out of the position for a while. Now, as soon as the long term one also agrees with the short term ones and they're both heading down, then I'm clocking it. I'm making a lot of money because they're all lining up. Right.

And I look for days like that. I spend a lot of days. You look at it and I've got like today I had 20 profitable positions. I had 12 negative on this one strategy that I have on the screen here. And, you know, I made a couple thousand dollars. It was basically break even for me. That's rare to have a number on my screen of only a couple of thousand dollars.

But let's put it in perspective. So, again, we're doing this on Wednesday, a day that was down 3%. Yeah, NASDAQs are down 3.12% right now, I guess.

Yeah. So, so having, you know, having a gain at all is, is pretty remarkable. And, you know, a lot of times because you're using those different timeframes, correct me if I'm wrong, what ends up happening is you're, you're kind of sometimes hedging, right? And so instead of doing nothing, it kind of acts as a hedge to a certain degree until, again, as you said, you might be going, you know,

you know, the other way and go from a long to a short if the trend dictates. Yeah, the shorter term, obviously, you are, the more whipsaws you're going to get and the more reactive you'll be to every little minutia. I mean, the last couple of weeks here, oh my gosh, the short-term models are flipping back and forth and sometimes they're getting clocked doing that because they're getting whipsawed.

And that's part of what you would expect out of a very short-term model. The long-term ones are sitting there saying, I'm not doing anything. I'm just going to watch this insanity and stay with whatever the original trend is. But eventually, a long-term trend will shift directions.

So what I am always looking for is where the trends all line up. The short term is the same as the long term, which might be the same as, say, a nine-day set of indicators, which I call more intermediate term.

And when they're all lining up, oh my gosh, those are the nice days. And they don't last usually very long, but you can make so much in those few days that that's where a lot of the profits that I get over time are coming from. Yeah. And I think that's also a very important point for people to realize is sometimes there's this

I guess, pressure again to try and make a killing every day when the reality is that's just, you know, your equity curve doesn't go in a straight line. There's wiggles. And most of the year can be attributed to a small fraction of days that really kind of made a big difference. We did a study once and we repeated it the year after and

where I had at Trendstad about a 6% or 8% year. It was positive, but it wasn't much to write home about. And I had the guys in the computer department go through every actual trade that we did across the accounts and sort them from the biggest winner to the biggest loser. And we added it all up. And I said, how did we get to 6%? And it turns out that one Japanese yen trade that we had gotten into

6% profits. So that what that says is that out of the other like thousand trades or whatever we did at Trendstat for that entire year, they netted out to zero. One trade made all of our profits per year. You have to be in on that trade. You have to let the trade mature. Turns out that trade lasted for about 15 months. It turns out, but it's,

It was a great trade. This was way back in like 97 or 96 or something like that. It was a long time ago. But...

The point I make is that your job is to get to those thousand trades and you never know which one's going to be your next, you know, cocoa or orange juice or a NASDAQ short sale or whatever, you know, the big move is. And you just have to kind of keep playing the game, make sure you're in it tomorrow, manage your risk, manage your position sizing. That's the stuff that makes a good trader. It's not, you know, correctly predicting that,

Coco is going to go to, you know, 10,000 or something and you're going to make hundreds of dollars a contract on that. That's it happens, but I don't think that's a very smart way to trade over the long run. It'll catch up with you. Yeah. So to that end, like again, you, you, you mentioned the managing your risk part again, which I know is a huge part of what you do. And again,

maybe kind of refer to this current market because when you have swings so large, it, I think, scares people in terms of how do I manage my risk on a day like the past Wednesday when you're up 12% in a single day and you know that you were just down, you know, 9% the previous...

How do you manage your risk there? The way I like to think of it is the market has its own temperament. So lately, we all agree, the market has a lot of volatility. So if this is a normal market, like this is the highs and this is the lows, okay? Lately, it's more like this. Very wide, big swings, higher highs, lower lows.

If this is, you can see it in the length of the bars here, look at the last week or two and look at how big those bars are from top to bottom. And then go back and look at the beginning of the chart back last May, I guess. Look how skinny those bars are, how little small, you hardly see them on this chart.

They're little tiny things. And it's not a difference in scale, right? Because you chose two areas that are almost exactly at the same index level. I mean, they're on the same index in the same year, basically. Okay, so my point is, if we get back to my little fingers here, if I'm buying 100 shares and the market's doing this,

And instead, the market is now doing that maybe twice as much. And it's really lately more like four times as much. I want to have half the position size. So if I got 100 shares sizing my position here and I see this much volatility, I would do 50 shares. And don't I have the same amount of risk of my equity? Right.

Because you're looking at portfolio risk. Right, I'm looking at portfolio risk and I'm keeping everything as a percent of my equity. So I've made the same bet on that volatile stock as I have on the stock when it was a lot skinnier and things were quiet.

And the same would be true as if there's four times the volatility. I can't move my fingers that far, but if it's this much normally and it's now four times the volatility, give me a quarter of the position size and I'm fine.

So start setting, do it in this order. It has to be in this order. You do it opposite, you're really putting yourself in harm's way. Start with the market, start with prices, start with your indicators and your strategy, and say, if I were to buy one share or one contract, if you're doing futures, one, how much risk is logical for this one position?

So, oh, well, I want to put the stop under this previous low or I want to put it under this Keltner band or I want to put it under this Donchian channel. Whatever your indicator, whatever your strategy, you have a logic to this is where the logical stop would be based on the market action I'm looking at.

Once you have that, then you ask the question secondarily, how many contracts or shares should I buy? If you do it in that order...

You can maintain your exposure to each position. You can level out your portfolio so that every position in the portfolio will have an equal contribution to the portfolio. I mean, there was people back, what, six months ago or whatever with NVIDIA. And if you bought NVIDIA as one of 10 stocks, let's say, and then it did what it did,

Do you really have a diversified portfolio anymore or do you have NVIDIA and nine other things you don't even care about that aren't doing anything for you?

And that's what happened with the S&P 500, right? It was the Magnificent Seven and the other 493. Yeah, and another 493 that nobody cares about. Yeah. And to me, that's not a diversified portfolio. I don't mind having some of the Magnificent Seven, let's say, but why not have some of the other ones and balance them by looking at the volatilities, looking at the risk structures of each, seeing

set some logical entry and exit points. When you have a magnificent seven stock, you're going to have a lot more volatile than you're buying like Procter & Gamble or something. And so you're going to end up with more shares of Procter & Gamble and less shares of XYZ Technologies. But when they act in your portfolio, they're both going to contribute to profits or losses somewhat equally.

That's true diversification in my mind. Well, and what would you say, because I think a lot of people tend to look at the typical way of diversification was kind of that 60-40 portfolio mix, right? And then everyone pointed to 2022 as being a disaster for the 60-40 portfolio. So you don't necessarily restrict yourselves to just

two assets. So how do you achieve your diversification? How many different asset classes are you looking at? Well, let's see. In general terms, I trade, I don't know how many asset classes. I have grains, meats, metals, both precious and industrial, debt instruments, stock indices, lots of soft commodities, so everything from lumber to...

Orange juice, cocoa, all that stuff. So you don't really restrict yourself. No. You'll play anything. Yeah. I have Bitcoin and Ether futures too, long and short.

And I guess one more question here is the other problem sometimes is that I feel like a lot of times, like with the 60-40 portfolio, bonds and stocks mix, people will sometimes say, okay, well, I've got uncorrelated assets. But then sometimes during crises, they have the correlation of crisis, right, where all of a sudden these typically uncorrelated assets start getting really correlated.

And that can happen on both the positive side or the negative side. They're either positive one or positive one. Right, exactly. Yeah, people are going crazy with their euphoria or they are just like the sky is falling and nothing will work. And they're having a really bad day. Right. So how do you kind of recognizing when, and again, a lot of times that crisis happens with higher volatility and everything like that. So do you have measures of kind of,

recognizing when the correlations are getting too close? What I do to offset that, first of all, let me coin a word for people that we used at TrendStat. I have no idea whether anybody else used it. We used it because it was to talk to each other, you know, the computer department, the traders, and we called it lockstep. When markets in general go

hyperbolic they just get crazy the news is you know war is breaking out or there's oil embargoes or whatever is happening tariffs get announced you get these tendencies to have all of the markets even things like live cattle or corn or something they seem to get excited too so I assume when I'm sizing my positions

I assume 1.0 or minus 1.0 correlation because that way I'm always prepared ahead of time for the days when the, the, you know, what hits the fan. Um,

And that's how I deal with it is I get ahead of it. And I lock that into my thinking of how much risk and how much volatility do I want any one position to be of my equity. So I got an equity every day. I can see it on the screen. I got a position I'm about to put on. If I do a futures contract, let's say I'm going to buy sugar tomorrow. It's going to be 0.35%.

percent of my equity the risk of that the volatility as measured by the atr average true range over the last 21 days for sugar is going to end up being 0.2 percent of my equity whichever answer gives me the lower amount of contracts that's the amount of sugar i'm putting on if it breaks out

So that's, those are my exact numbers. Those are my exact formulas. And I cover that in the successful traders size, their position book that I wrote a few years ago. The math is in there. You learned it in junior high school. It's not tough. You don't have to be a rocket scientist or a chemical engineer to be able to do it. A simple spreadsheet or a calculator can handle it. Uh,

That's what I was going to say. That's the benefit is you can just have it in a spreadsheet. And if you don't like math, it can be just done for you. And you can extract the formulas right out of the book and put them in your spreadsheet and you're done. Uh-huh.

It's not that hard. You just have to kind of think through these things and get ahead of it. Don't be doing it when you're about to buy the sugar contract. Have all these things in place so that when the trade comes along, you can do boom, boom, boom. There's the answer put into. There you go. Mm hmm.

I want to switch a little bit back to the current market because there is, I

Again, a lot of, I think, people kind of wondering, a lot of what you've done, and I'm just going to go to one of the questions that I got here on YouTube. You know, people are maybe wondering a little bit about how things have changed over time. Algos, market makers, you know, all of that. Has that kind of...

Have you seen kind of a shift to your models because of the change in volume? The options market even has swelled so much and futures as well. All these different products that are available now that weren't available 20 years ago.

Yeah, I was talking to a mutual fund manager calculating. He gets into alternatives and he said, when I started the fund, I thought we had about $9 billion in potential capacity. And he had certain criteria how he calculated that. It was based on the liquidity being a certain percent of the volume daily of each of those markets that he's participating in. So the $9 billion number was calculated and he had this nice formula and spreadsheet to figure it all out.

I saw him just a couple months ago, and I asked him the same question about how much capacity do you think you have now with all these things going crazy? He said, I just did that calculation strangely about two weeks ago, and it was 19 million.

Or 19 billion. 19 billion. 9 billion going to 19 billion. He's more than doubled what he perceives to be his normal capacity without making any changes to his investment strategy. So the answer is, if you're a little guy like me and I don't have any clients, I don't manage a billion dollars. I'm just managing my little retirement portfolio. And in the whole scheme of the world, it's chump change.

I can go in and out with anything I want in any market. And it's a super advantage over what I even had to do back in Trendstat. Trendstat wasn't the biggest manager on the block, but we had a good size. We were at $600 million back in 2000.

In 1998, those dollars were worth a lot more than those dollars are worth today. So we've been managing today's world maybe $1 to $1.5 billion or something, if you adjusted it. But the point I'm making is that when you are managing a larger chunk of money like that, you really have to work it a bit. It's not as easy, but when you're a small investor, like I suspect a lot of the people listening to this program would be,

You've got a big advantage. You really don't have to be worried about buying the dip because you're Warren Buffett trying to take over 10% of Coca-Cola or whatever. You're really just dancing in and out whenever you feel like it. And commissions have become so inexpensive. Bid-ask spreads so tight in many cases.

It's the trading costs have gone way down from when I was doing all this by telephone and written pieces of paper back in the 1970s.

Nowadays, I stick an order over here on my trading machine, which is over this side of me. And by the time I turn my head and look down that way, there's already a confirm at the lower part of my screen. It's that fast. And it's crazy. So it hasn't changed a lot of my strategies. What I think happens, if I could encapsulate all of the evolution I've seen in 50 years of trading, everything just happens faster.

If you were, you know, back in 1973, 74, we had a 50% down in the S&P 500. It took two years. Now you could do that in about, you know, two weeks if you wanted to.

Everything can happen so much quicker in today's world because you're able to funnel all of that volume and orders, in fact, a lot more than you could in 1974 because of the computers. You can funnel that and move prices that much more dramatically so that a 3% day, I saw a post today from one of my followers on Axis said, wow, another 3% to 4% day. Strangely, that seems normal. Yeah.

The new norm, right?

over my entire lifetime as a commodity trading advisor, I had maybe less than a dozen days that were more than 1% one way or the other. They were all at nowadays. That's the open of the stock market is, is more than that. Right. 1% up, 2% up, 2% down. It's crazy, but that's computers move everything faster. As, as kind of a followup question. And this came from YouTube as well. Um,

you're known as a serene, Mr. Serenity. Do you think that's because when you were kind of starting out, it was a calmer and you were able to kind of build your models and everything like that when things were calmer? Or is it just a matter of, hey, I've got my system and it doesn't matter what the market does. My system is my system. Right. I think both of those would be a no. I think it's

The reason that I would be Mr. Serenity would be that I've thought through what I'm doing and I understand mentally myself. What are the goods? What are the bads? When do I expect to make money? When do I expect to lose money? When do I expect to hold my own? How do these different strategies marry together into an entire portfolio and

And I understand that, believe it, am very comfortable with it. I picked risk levels and volatility levels that suit my personality. And when you solve your own financial puzzle to that extent, you're going to be very, very relaxed about executing it. So I don't think it's just...

Didn't have anything to do with that. I, that I started out at all because I was much more of a basket case when back in the seventies, when I had no idea what I was doing and I was predicting just like every other trader and trying to make sense of charts and, and, um, some would sometimes taking on too much of a position or holding on too much of a position and,

No, I was far more, I was less serene back in the early days. But I think coming to grips with all the different things you have to come to grip with as a trader mentally has really led me more into the serene neighborhood because I've really thought a lot of this stuff through and I have what I'm doing designed for me and

Suits me great and I can execute it. I have the ability, computers, quote machines, market data. I've got everything put into place to do it as easy as I possibly can. And I'm working hard to make it easier.

Right, yeah. I want to switch over to the market again just to kind of get your sense of how are you handling this market? Are you trading index futures kind of on short-term basis, or are you just playing other things right now? No. Well, if you look at today, for instance, I went into the day long and

stock indices in general. So I lost money on every one of my stock indices today in the aggregate. That includes long, short, everything added up together. I was net long going into today. So I lost on those. But my biggest winner was gold. I'm long gold for a long time. I'm long silver. I'm long platinum. Long copper. Long aluminum.

So all the metals, that's where I made most of my money today. 20 positions positive, 12 negative, slight positive for the day. That's a pretty typical day. I have no idea. Tomorrow, the stock market go nuts. I did reverse and go net short. Let's see. What was it? I think I went net short yesterday.

Russell's today. But other than that, I'm still long. So if the thing turns around tomorrow and has a big update, those positions are going to be great. And who knows, gold may be down. So I'm making money over in stock indices. I'm losing it in the metals. Had a nothing day in grains, had a nothing day in some of the other contracts. I mean, lumber was a positive because it was down a bunch.

But basically, you know, you just spread it around. You've got so many different things happening in the portfolio that you're going to have some win, some lose. I very rarely would ever see a screen that I'm looking at that would be all green or all red. Usually it's a mix of both.

And that speaks to your diversification as well. If you have it one way or the other, that might be fun when it's all green, but it does mean that you have a lack of diversification. I'll give traders a little bit of this too. Diversification is a subject that's near and dear to my heart because over my lifetime, when you used to trade, say, the New York Stock Exchange, and you had X number of stocks, maybe 3,000 stocks that were trading there,

You know, if you're going to buy, I don't know, an IBM or a Microsoft and then you're going to buy a P&G and you're going to buy all these other different types of stocks, you're going to put together a portfolio. You'd have some diversification back in the day. There might have been, you know, 68, 72 percent correlations in your portfolios before.

Nowadays, because of computers, everything reacts so quickly. You've got program buying and selling. When you have a situation where one thing like the Magnificent Seven is going up a lot today and everything else just follows it, everything is wired together. So you've got like 90-plus percent correlations. And so the way I look at my portfolio, and people can think I'm crazy doing it, but, hey, what does sugar have to do with the NASDAQ?

I trade both. Now, they both could go up or down on a given day, and you could argue that correlation, mathematician-wise, you'd have a 1.0...

correlation right if it's going up and down a few days in a row the same exact way but in reality you just think about the logic of it sugar doesn't give a hoot what nasdaq's doing right so if sugar's having a big day up or down nasdaq's having a big day up or down and they're going the you know one's going my way and the other one's going against me i'm zeroing out

risk there. And if I do that enough, what it does is it keeps my portfolio very, very stable, except for those days and weeks where all the trends start lining up and they start going in their direction. They start moving a long way. That's where you make a lot of money. So something to think about for traders who are struggling trying to find diversification. There's lots of

a little tiny micro contracts you can get now on the CME and maybe you could get a book or a tutorial on futures trading and get in and try to diversify your portfolio a little bit. Maybe use...

some stock index futures for hedging vehicle to go short when you want to hold your core positions that you did from can slim or whatever, you know, you did the, the can slim, you got this nice core of 10 positions or whatever that you really love and you don't want to sell them out because they're good companies. So maybe you take away some of the market risk using a futures hedge to the downside. There's lots of different things you can do if you just open your mind to

to creating risk aversion and dealing with strategies when, as you said, the heat of the moment is gone. Well, and I guess this is another element because a lot of people might look at that and say, oh, well, gosh, that's so complex. You're trading all these different metals. You're trading all these different commodities, the indexes and everything else. But you use a lot of stops and automatic orders, right?

which means that you don't really have to be watching like a hawk all of these things. If I've got good till cancel stops and I'm trading, say, 35 things, we can do the math on this. If I go to my trader screen and I want to do everything manual, so I look at where those lines are, and I guess my stop is a line across the page, right? I can take my mouse, look at that chart,

See where the indicator is. Know exactly where my stop should be. If it's not there, I grab the line where the stop is. I move the cursor and I release it. My stop's just been moved. And how long did that take me? Right. 10 seconds tops. If we've got 30 things, that's 10 times 30 or 300 seconds. That's like a few minutes. Yeah. It's not that hard. Right.

But you got to get all that stuff into place. You got to understand what you're doing. You got to understand how to positionalize. You got to make sure you understand how to put the order in that was a good till cancel stop. You got to have the discipline to every day sit there and move those darn things. And after a while, believe me, it gets really boring. Try doing it for 50 years.

You'll be saying it's as easy as breathing. It's because you're almost bored. I have to put on music and distract me a little bit and make it fun to listen to a podcast. You can listen to a podcast while you're doing it because it's so boring.

Well, and I should say that, you know, that is the easy part. The mechanics actually end up becoming the easy part. Correct. Because you've done all that thought ahead of time. It's the part that can be done by computer. If you want to take the time to learn programming or hire a programmer or you've got a kid that knows how to program and you ask him to help you out or whatever.

There's lots of ways to solve the problem, but first you have to understand where you're headed. What is your problem? What is your financial challenge? Are you sitting in Australia? Are you sitting in the U.S.? Every country's got different legal rules on what you can trade, not trade, what your tax structure is, what kind of IRAs or retirement accounts you can manage.

And so each person is a little different, different skill levels, different. You may not be good at math. I love math, so I'm pretty good with math. I'm pretty good with computers. So I lean towards solving my problems a little bit more that way, but I'm

You don't have to be a computer genius to do this. But if you can take your skill sets and your assets, the size of assets you're managing, what markets you can trade in, and really dig in and say, okay, well, I don't know anything about futures. Oh, but I bet you there's a book at Barnes & Noble I can go buy that would give me a primer in what a futures contract is. And, you know, I wasn't born with a knowledge of futures, but I've been trading them 50 years now. Mm-hmm.

And I know that you really like futures, the tax efficiency. It's 60-40 thanks to the old tax straddles we used to do when I had black hair or dark brown hair instead of gray. They used to buy and sell silver contracts and you bought –

You bought, let's say, a December contract and you sold January and then you'd get rid of the loser in December and take the loss in this tax year. And then you'd take on January 2nd, you'd sell out the other side of it and you'd take the profit. And all of a sudden, you're moving all this income into the next year. And the IRS said, no, that's not in the spirit of...

What do you think should happen here? So a negotiated settlement was to make all of your stuff mark-to-market at year-end in futures and take 60% of it and make it long-term gains and 40% short-term. So it becomes a pretty attractive tax structure. What about – because you mentioned retirement accounts. What are you doing there? I have bought a mutual fund that's an alternative mutual fund.

So it has futures aspects to it, and it also has exposure to long-only ETFs, so it's struggled the last...

a couple of weeks as the market's gone down. The future side of it has helped some mitigate some of the losses, but it's definitely swimming upstream the last couple of weeks, but it'll come out of the other side of it. And when you hit an up market, it'll, it'll do well. And then I also do, my broker will let me do a future strategy inside my IRA. However,

They charge me three times the normal margin, which is probably pretty much okay with me because I don't trade that leveraged. Yeah, right. So I just use it for getting exposures, and that works great. So at any one day, I probably got – let's see, what would it be? I probably have –

Probably between 25% to 30% of my account is sitting in just interest-bearing cash. Not doing anything. The rest of it is committed to various margins, either in the mutual fund or in the futures trading. So, yeah, it's pretty easy to do. Well...

Tom, I got to say, it's been another serene meeting up with you, especially, again, with all the volatility that's been going on lately. It's good to kind of get back to those basic principles of what can make things easier on yourself, easier on your sanity. And I don't think I mentioned this at the beginning, but I should also send folks to your website, which is enjoytheride.com.

Right. ETR, because that's that's kind of your motto. And that's how you get to that point where you enjoy the ride instead of feeling like, oh, my gosh, I have to I have to have a computer in my shower so that I don't miss anything with 24 hours. I've heard I used to hear guys in the currency trading businesses is 24 hours.

that would wake up at night and they'd have a Reuters terminal down on their side of the bed. Right. On, so they could see what the euro was doing or the Japanese yen or what the dollar was doing. They're waking up in the middle of the night and looking down at the floor to figure out what way the market's going. You've got to be kidding me. I get seven and a half, eight hours of sleep every night. Yeah, I still do.

Well, hey, that's a good equation for serenity as well. So, Tom, it's really been great having you on. Really appreciate all the wisdom that you share with our listeners. And again, for folks that haven't gotten the book, I want to do one more plug for that because it's got a lot of great stuff in there, a lot of great charts and tables and things where you've run simulations before.

Very useful in kind of, you know, boiling down a lot of these concepts of risk, position size in a very, very accessible way. So I think you did a really good job with that, Tom. So thanks again for being on. All right. Thanks.

Okay. That's going to wrap it up for us this week. Thank you so much for watching and don't forget to join us next week. We're going to be back live at 5 PM Eastern, and this is going to be with Ed Carson. He hasn't been on the show for a while. So we're going to have Ed Carson, our own, uh, investors business daily news editor. Uh,

We also refer to him as Econ Ed, so not a bad time to have Econ Ed on to kind of help us walk through how much of the economic side of things you're going to pay attention to and how much is going to be on the chart. So we'll get into that next week. Hope you join us. Thanks for watching.