Book Review: Trend Following Mindset

Richard Gill reviews Trend Following Mindset, where author Michael Covel brings to life the conversations between himself and Tom Basso so readers can get into the mindset of the legendary calm trend trader.

The life of a financial trader is far from stress free. Quite the opposite in fact. With the pressure to make profits and high stakes decisions having to be made within seconds, trading the markets can certainly get the heart racing. A 2005 study published in the journal Stress & Health confirmed this, with 32% of the 326 professional traders examined reporting “very high” or “extremely high” levels of stress.

While some research shows that traders with high stress levels are more likely to do well, too much stress can have the opposite effect, not only in the form of profits but also on mental and physical health. Stress can also amplify certain emotions, such as fear and greed, both of which can be very dangerous for traders to act upon. That’s why many top traders believe that controlling their emotions will help them to become better at their profession. 

One trader who seems to have mastered controlling his emotions is former hedge fund manager Tom Basso, who had a successful career as CEO of commodity trader TrendStat Capital Management. In author Jack Schwager’s 1992 book New Market Wizards, a collection of interviews with top traders, Basso was famously given the nickname “Mr. Serenity” in reflection of his calm mindset, serene trading style and attitude to work/life balance. Basso’s focus is now primarily on the latter, having retired in 2003 to enjoy his vast range of hobbies including golf and winemaking. He still finds time to stay involved in the financial markets however, continuing to manage his own portfolio and help new traders manage theirs.

Trend Friends

In new book Trend Following Mindset, author Michael Covel brings to life the conversations between himself and Tom Basso which were originally featured on Covel’s popular Trend Following podcast. He partially credits the success of his podcast to Basso, who has appeared several times as a guest on his show and proved to be very popular with listeners. The book combines content from Covel’s interviews with Basso, along with his most important trend following research papers, so readers can get into the mindset of the legendary calm trend trader.

The book is divided into two parts, the first of which covers the various podcast episodes featuring Basso. Write ups of the interviews are provided, the first of which was back in 2012 and the first interview Basso had done since he retired. The conversations with Covel, along with Q&A sessions from listeners, cover everything from business to life in general, but most importantly his advice on how to be a successful trader.

Basso developed an interest in the financial markets early on in life, starting off buying mutual funds in his teens after overhearing his father having a conversation with a salesman. Getting a decent job as a chemical engineer after graduating, he practically self-taught himself how to trade the markets, learning how to be successful along the way before founding TrendStat. Some of the core trading themes covered throughout the book examine the importance of creating your own set of trading rules, having self confidence in your trading systems and how to manage volatility and risk. 

Unsurprisingly, Basso is a big believer in psychology, saying that it is the most important thing in investing, way ahead of the second most important thing, money management. One other non-financial aspect Basso believes is very important in being a successful trader is looking after your health. Going against the stereotypical City trader who stays out boozing until 2 am in the morning, he thinks that traders should view themselves as an athlete, keeping their body and mind in top shape to keep up with the requirements of the job. Basso always stayed at hotels with fitness facilities when he was on the road with his job and got a good night’s sleep to keep himself sharp. 

Part 2 of the book goes on to give detailed insights about trading pulled from Basso’s career research. Areas covered include algorithmic trading, currency investing, using financial leverage, asset allocation and timing the market. The latter topic is one of the most interesting, with Basso taking a contrarian view to the general belief that timing based strategies don’t work. Instead, he says he would never feel comfortable buying and holding the stock market and argues that everyone should consider having some form of timed investment as part of a well-diversified portfolio.

Like any good investment book there are also a list of golden rules to follow, with Basso providing his own ten regarding hedge funds. Amongst other things, he advises investors to look out for independent calculations of assets, to consider whether historic returns are repeatable and that the annual accounts are audited. My favourite piece of advice here however is that investors should remember that very low probability risks shouldn’t be considered synonymous with having “no risk”. That is a very dangerous view to take because low risk, high severity events do happen and can cause catastrophic losses.

Enjoy the ride

Trend Following Mindset is a fascinating insight into the mind, career and research of Tom Basso. It covers a range of topics, from the basics to more advanced techniques, including how to get started in trading, what trend following is and how and why it works so well, constructing a trading system and managing work-life balance. His practical experience is supported by data driven research which will give both amateur and professional investors alike more ideas to incorporate into their trading and potentially make better returns.

Basso likes to conclude many of his social media posts with the comment “enjoy the ride”. This reminds his followers that in the long-term we’re all dead, so in the meantime we need to enjoy what we do and take in all our experiences all the way. Trading for some may be a means to build up wealth and get rich, but what’s the point of it all if we don’t have fun and end up miserable instead? This book will teach you not only how to be a good trader but also how to take time along the way to appreciate the fruits of your success. Enjoy the ride!