Sunday, June 18, 2006

Circle of Competence

This post is updated in 2024.

This is another concept from the guru himself. Basically it simply means to invest in industries and sectors that you know well, in fact, so well that you can say you are an expert in it. Buffett terms this as the Circle of Competence.

Essentially, this is saying that you should not be a Jack of all trades. If you just researching the Singapore market then just stick to it. Don't try to be a hero and start analyzing global stocks! After all, there are 600 listed companies in Singapore, that is a lot of companies to research on. It would take years to cover all of them.

So the circle of competence is just that: invest only in areas that you are very familiar with. Over time your circle of competence can grow bigger as you gain more knowledge. (Ok you can try Malaysia when you are ready, but definitely not anything more!) However you must also know your limits and try not to invest in areas where you are weak, or very ignorant and may never gain competence. For Buffett, this was technology. That's why he never participated in the IT boom and bust.

For most of us, the circle of competence will usually be related to our work, or observations from our daily lives. If you encounter other companies in your work that impressed you, might want to know how their stock performed. Similarly, if you wear a particular brand of shoes, and like it so much, it might be worthwhile to do some research on the company that produces the shoes.

See also Investment Philosophy and Process

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