The Circle of Competence: What You Know and What You Think You Know
Wisdom
One piece of wisdom that motivates, encourages and empowers you to grow.
“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
Insight
One insight that helps you deeply understand a situation, idea, or concept.
Circle of Competence
The circle of competence is a powerful mental model centred around identifying areas where you possess deep understanding and expertise. Knowing your circle of competence allows you to focus on the areas where you are most knowledgeable.
Think of it like this:
Throughout life, we accumulate valuable knowledge in specific domains. By acknowledging your strengths, you can avoid venturing into unfamiliar territories and minimize potential risks.
In a letter addressed to Berkshire Hathaway shareholders, Warren Buffett emphasized the importance of accurately assessing businesses, highlighting the need to focus on companies within one's circle of competence rather than attempting to master every industry:
"To be a successful investor, you don't need to understand every company or industry, but rather only those that fall within your circle of competence."
Buffett and Munger built their empire by investing solely in businesses they comprehended. Leveraging their combined knowledge, they maintained confidence in their investment decisions by staying within their respective circles of competence.
Honesty with yourself is paramount when identifying your circle of competence. As Buffett aptly stated, “The size of the circle is not very important.” What matters is defining its boundaries.
Reflect upon the areas where you possess an advantage over most people, whether through education, work experience, or life experience. Everyone has a circle of competence.
For instance, a lawyer who has spent years studying and practicing law would have a highly specialized circle of competence centred around legal matters, providing a clear advantage in that domain.
Consider your own expertise and knowledge that sets you apart from the average investor. This discovery and definition of your circle are crucial. Echoing Munger’s words:
“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.”
For example, if you have a passion for gaming, investing in gaming companies may be a smart decision. Similarly, as a software developer, you can leverage your knowledge of the industry to identify software stocks with promising growth prospects. On the other hand, it is essential to acknowledge our limitations, which is why I refrain from investing in pharmaceutical stocks since it falls outside my area of expertise.
Once you have defined your circle of competence, you can consider expanding it if desired.
Living Legend
One inspiring story of a famous person who is still living for doing something exceptionally well.
Charlie Munger
Charlie Munger's incredible journey stands as a testament to the extraordinary power of the circle of competence. This esteemed American businessman, investor, and philanthropist has consistently embodied the principles of this concept throughout his illustrious career.
Munger's story begins with the establishment of the esteemed law firm Munger, Tolles & Olson. With a laser-like focus on real estate law, he skillfully operated within the boundaries of his circle of competence. His profound understanding of the field allowed him to offer exceptional counsel and forge a path of remarkable success.
Fuelled by an unrelenting thirst for knowledge, Munger fearlessly expanded his circle of competence into the realm of investing. Collaborating with the legendary Warren Buffett at Berkshire Hathaway, he showcased an unrivalled comprehension of businesses and industries. Munger famously stressed the importance of grasping the "inner nature" of companies, employing his mental models and extensive experiences to make astute investment decisions.
During the tumultuous 2008 financial crisis, Munger's adept application of the circle of competence shone with unparalleled brilliance. While numerous investors were paralyzed by apprehension, his profound knowledge of banks enabled him to discern their long-term value. This audacious move proved to be immensely profitable as the banking industry rebounded, cementing his reputation as an astute and insightful investor.
Munger's ability to assess risks and uncover hidden opportunities extended well beyond the world of investing. His visionary foresight was evident in his early recognition of the transformative potential of technology, including industry titans like Google and Apple. This remarkable acumen allowed him to make shrewd investments, reaping substantial rewards as these companies soared to new heights.
At the heart of Munger's success lies his unwavering commitment to lifelong learning. Possessing an insatiable appetite for reading and an expansive range of interests, he perpetually expands his circle of competence. This voracious intellectual curiosity enables him to draw insights from diverse fields, augmenting his decision-making process with a distinctive edge.
Charlie Munger's extraordinary narrative serves as a profound illustration of the extraordinary influence wielded by the Circle of Competence. By diligently identifying his areas of expertise and steadfastly operating within their boundaries, he has magnified his potential and achieved unparalleled success.
His story serves as an enduring inspiration, encouraging individuals to wholeheartedly embrace their own circles, incessantly broaden their knowledge horizons, and flourish in their chosen fields.
Final Thoughts
Questions for you to ponder and think carefully about.
Here is how you can integrate the circle of competence into your life.
What are the boundaries and components of your circle of competence?
Where do you possess more knowledge than others?
Which subject areas do others seek your expertise or guidance in?
Cheers,
Ben Mumme
Founder and CEO of Living Your Greatness
P.S. Vincent Van Gogh’s exquisite painting “Starry Night" will always remain a mesmerizing masterpiece.
Notes
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Great article, common sense, Dad