Circle of Competence
The concept of the Circle of Competence has been used over the years by Warren Buffett as a way to focus investors on only operating in areas they knew best. The bones of the concept appear in his 1996 Shareholder Letter:
... See moreWhat an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be
fs.blog • Understanding Your Circle of Competence: How Warren Buffett Avoids Problems
If you want to improve your odds of success in life and business, then define the perimeter of your circle of competence, and operate inside. Over time, work to expand that circle but never fool yourself about where it stands today, and never be afraid to say “I don’t know.”
fs.blog • Understanding Your Circle of Competence: How Warren Buffett Avoids Problems
That basic knowledge, along with some understanding of accounting and a little bit of study, would enable one to evaluate and invest in any number of restaurants and restaurant chains, public or private. It’s not all that complicated.
fs.blog • Understanding Your Circle of Competence: How Warren Buffett Avoids Problems
Reading List
[ ] Check Mental Models volumes to find circle of competence.
[ ] Add a track record of what you know and have experienced doing.
[ ] Create a Performance Journal = What went well and what went wrong
You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.
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Focus and leverage - Charlie Munger - Aptitude of the game you want to engage in.
It did not hurt Mrs. B to have such a narrow area of competence. In fact, one could argue the opposite. Her rigid devotion to that area allowed her to focus. Only with that focus could she have overcome her handicaps to achieve such extreme success.
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tool for focus
Our circle of competence can be widened, but only slowly and over time. Mistakes are most often made when straying from this discipline.
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Growing the circle of competence can be gradual unless we risk making more mistakes along the way. - buffet
1996 Shareholder Letter:
What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries,... See more
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Warren Buffet popularised it.
Farnam Street