There are two types of knowledge practical and technical. The technical knowledge is the skill acquired from learning techniques often acquired in school. This is the accounting, math, and statistics learned through textbooks. This knowledge is foundational. If you don't know the math, you cannot be a quant. You cannot review a company if you don't know accounting. It does not matter how hard you try; you will fail if you don't have technical skills. Yet, there is a second kind of knowledge that is as important if not more important, practical knowledge.
Practical knowledge is the skills you gain from doing or from experience. It is one thing to know accounting rules. It is another to apply them when reviewing a company. There is a difference between option pricing theory and understanding the dynamic behavior of options. You may be taught how to analyze a set of futures price data, but that is not the same as actually working with the data and trying to understand price behavior.
The price investors pay to managers is their combined technical and practical knowledge. Technical managers without practical knowledge will be discounted. Managers with only experiential trading and practical knowledge will also be discounted.
Here is a list of key issues that have to be addressed by any trend-follower. See the recent article, "Nine mistakes to avoid when using systematic trading systems" by Niels Kaastrup-Larsen and Rob Carver in HedgeNordic June 2020. There is something very noticeable about this list once you think about practical and technical knowledge. The focus is on practical knowledge not technical knowledge. The mistakes that have to be addressed are not focused on core technical issues but on applications of technical knowledge.
- Overconfidence
- Over complicating
- Overfitting
- Living in an ivory tower
- Over-trading
- Over-betting
- Meddling
- Under-diversification
It is practical knowledge that defines the successful manager, and it is the practical knowledge that will support higher fees. Trend-followers have to display both their practical and technical skill to perform and win new allocations.
In the case of trend-following, the math is fairly straight-forward and not overly difficult. The manager looks at extracting a signal from past data that provides some idea of market direction. The technical knowledge can be acquired by most finance people who are math and statistical savvy. The key issue is the practical knowledge of how the models are implemented. Some would call this art, but the right language focus is on the experiential knowledge of how to use these tools.
How to control overconfidence cannot be learned in a classroom. It is practical knowledge. How to limit complication or overfitting are again practical knowledge issues. The technical concepts can be taught but how they are applied is a practical matter. I can talk about the technical aspects for cutting a piece of wood with a saw, but that is not the same as knowing how to use the saw and make a clean cut.
The concepts of practical and technical knowledge were a key focus of the political philosopher, Michael Oakeshott. (See Technical and practical knowledge - You need both for asset management.) There has to be renewed focus on understanding the practical knowledge required of any manager. These somewhat intangible skills have to be reviewed more closely because the choices based on practical knowledge often separate the great from average managers.
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