“Everybody's got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”
- Warren Buffet
The difference in performance between many macro and systematic managers is not about their skill but their circle of competence. This a simple principle that can apply to all businesses. For the systematic manager, the circle of competence surrounds models and decisions rules that have been back-tested and reviewed. The discretionary trader believes in his competency at processing information as it enters the market.
The circle is determined by the type of models or decision process employed. The type of models employed is related to competence with working across markets, data, and time-frames. The long-term trader does not feel comfortable making many short-term decisions. The short-term trader's comfort zone is in taking trades for quick profit grabs. Some traders have to stay within a small market sector while others need to be diversified. One key skill is knowing your competence and staying there.
The circle of trust with investors is that they are comfortable with the manager's competency and believe there will not be style drift. The trust is that each manager 'knows thy self".
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