Circle Of Competence

How To Avoid Problems?

Stick To The Knitting!

Strategic Alpha Wealth

Circle Of Competence - Overview

A circle of competence is a clearly defined, narrow area of focus, about which you know a lot and which gives you a competitive edge.

The concept can, allegedly, be traced back to Andrew Carnegie and his single minded focus on steel and iron.

The phrase has come to prominence via Warren Buffet and his partner Charlie Munger in their 1996 shareholder letter.

Buffett and Munger initially developed the idea to limit where they would make financial investments (based on their own understanding and experience).

Buffet and Munger say that it "...is not the product of unique or otherworldly wisdom. Rather, it is merely the mundane result of diligent knowledge acquisition about a targeted subject. Any committed individual can build such a circle of competence, given the will to do so."

Another common and similar phrase with the same meaning is "stick to the knitting" which was popularized by Tom Peters in his book "In Search of Excellence".

Inside the circle lie your skills that you have mastered throughout your career, or life. And beyond the circle are the things you understand only partially, or not at all.

The circle of competence model can be very useful in all areas of life and it is very simple:

• Many people know a little about a lot. But someone with a circle of competence is someone who knows a lot about a clearly defined narrow area of focus.
• It is any area of life or business where through study and experience, you have built up  a bank of useful and practical knowledge.
• This means that you know what works, what doesn't work and why.
• Understand where you’re naturally strong and stay within that area.
• And it’s not the size of the circle of competence that matters, but how well you stick within it.

3 Reasons Why You Should Stay Within Your Circle Of Competence

1. You possess an informational advantage over others.

In my current "day job" I am involved in the fuel business, in what is known as the secondary market, and my specialism is refined fuel and crude oil.

Within this field I have developed deep knowledge of this market. One of the features of this market is the number of fraudsters, scammers and general time-wasters.

Over the past 7 or 8 years I have developed a range of skills and techniques for conducting due diligence to identify these bad people. This is a very narrow field, but within it I have an informational advantage over most of the potential buyers/sellers I meet who do not have as much expertise.

Outside of this niche I have a lot of generalised business experience and expertise. But this market is one of my circles of competence.

2. It narrows down your options of what you get involved in.

I am regularly asked if I can source other commodities, but I always decline. I made the decision several years ago to stick exclusively to the fuel business, and I pass on all such requests, preferring to focus exclusively on this.

3. You make fewer mistakes.

I do still make mistakes, but generally I am able to anticipate and avoid most of the typical errors and mistakes that plague less experienced buyers in this market because I actually know what I am doing.

Return from "Circle Of Competence" to: Mental Models