Thoughts on Circle of Competencies [Must Read]

Circle of Competencies was already mentioned in our earlier post about Three Most Important Pillars of Value Investing in this post I am put emphasis on the Circle of Competencies how important that is and what everyone is saying about the circle of competencies. When was it first coined, how it all started; “[W]hy this is something so important and you should not ignore it”

Warren Buffet is one of his letters to the shareholders in 1996 meet.

“What an investor need 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.”

Circle of Competence
Source: www.farnamstreetblog.com

 

“I’m no genius. I’m smart in spots-but I stay around those spots.”
– Tom Watson Sr (Founder of IBM)

“If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter” Warren Buffett

“If you know nothing about at area and haven’t studied the companies and the sector, stay away from it” Roy Neuberger

“The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much.” Charles Munger

“You have to know what you know—your circle of competence.” Joel Greenblatt

“The most important thing in terms of the circle of competence is not how large it is but how well you define the parameter. If you know where your edges are, you are way better off than somebody who has a circle five times as large but is very fuzzy about the border” Warren Buffett

“It’s also important to never be satisfied with anything, including your circle of competence. One of the things you should always be doing with your circles of competence is seen if you can push it a little bit more because the world changes” Thomas Gayner

“The beauty of the stock market is that it gives us the luxury to avoid sectors and/or businesses that are outside our circle of understanding” Mohnish Pabrai

“It’s not how big your circle of competence is – it’s more about how well you know the stuff in your circle” Mohnish Pabrai

Know your core competencies and focus on being great at them. Pay up for people in your core competencies. Get the best. Outside the core competencies, hire people that fit your culture but aren’t as expensive to pay.
Mark Cuban

Great leaders, the research shows, are made as they gradually acquire, in the course of their lives and careers, the competencies that make them so effective. The competencies can be learned by any leader, at any point.
Daniel Goleman

Trust is a competency. It’s something you can get good at. It’s a strength you personally, and your team and your company can master. Being good at it will elevate every other strength you have.
Stephen Covey

Circle of competence essentially comes down to whether we understand the business. There are several sub-questions under than; Do we know the right people in the industry? How well do we understand the products and customer decision-making process? Are there unanalyzed decision-making could have a big impact?” James Chrichton

“Investors who confine themselves to what they know, as difficult as that may be, have a considerable advantage over everyone else” Seth Klarman*

“Most businesses that I look at are typically rejected within two or three minutes or even less. They are rejected in two or three minutes for one of two reasons – they are either outside the circle of competence or the quick look at the price, market cap and such doesn’t make it interesting. They either are things that I don’t understand or they are things that don’t seem to be cheap by any measure that I would have an interest in.” Mohnish Pabrai

“The game of investing is one of making better predictions about the future than other people. How are you going to do that? One way is to limit your tries to areas of competence. If you try to predict the future of everything, you attempt too much.” Charles Munger

“Dealing in a circle of competence, dealing with companies that you have the ability to understand, being able to come up with a good analysis of a company’s value and earning power, is fundamental.” Lou Simpson

“You have to know what you know—your circle of competence.” Joel Greenblatt

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