Warren Buffett has been a public spectacle for a number of years at this point, and is constantly looked toward for advice in business and investing. He tends to keep it simple, which is still the case with his”Circle of Competence” theory.
“What an investor needs is the ability to correctly evaluate selected businesses… You don’t have to be an expert on every company, or even many,” Buffett introduced the subject in his 1996 shareholder letter, “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, however, is vital.”
The concept is basic enough, which is no surprise since Warren Buffett is an advocate. Rather than trying to spread yourself thin, it’s important to zero in on what you are sure that you know and run with it. Obviously, trying to do something when you aren’t sure what you are doing is a whole lot riskier than if you do know what you are doing.
If you feel as though you’re lacking the knowledge to confidently place something in your circle of competence, follow some of Warren Buffett’s money tips and educate yourself! You can even check out a list of his 14 must read books to get started. Warren Buffett’s vice president at Berkshire Hathaway, Charlie Munger, wholeheartedly agrees with the strategy.
“Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency,” Munger said. “We only look at industries and companies which we have a core competency in. Every person has to do the same thing. You have a limited amount of time and talent and you have to allocate it smartly.”
Buffett and Munger both put this strategy into action by keeping there investments simple: Dairy Queen, Kraft, Coca-Cola, Visa, Mastercard, and American Express are among Berkshire’s popular investments. See the simple patterns? It’s pretty easy to derive what’s in their circles of competence— but look at the success they’ve had!