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Circle of Competence

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updated 21 Feb 2023

Warren Buffett: Circle of Competence

The Circle of Competence is a concept in investing that was popularized by Warren Buffett, one of the most successful investors of all time. The idea behind the Circle of Competence is that investors should only invest in companies and industries that they understand well and have expertise in.

The Circle of Competence represents an area where an investor has sufficient knowledge, experience, and expertise to evaluate a business or industry and make informed investment decisions. For example, a healthcare professional may have a Circle of Competence in the healthcare industry and be better equipped to understand and evaluate healthcare companies than a non-expert investor.

Investors who operate within their Circle of Competence are more likely to make informed investment decisions and avoid costly mistakes. However, it's important to note that the Circle of Competence is not fixed and can expand over time as an investor gains more knowledge and experience.

Investors can determine their Circle of Competence by assessing their skills, interests, and professional background. They can also expand their Circle of Competence through reading and research, attending industry conferences and events, and seeking out advice and guidance from experts in a particular field.

In summary, the Circle of Competence is a concept that emphasizes the importance of investing within one's area of expertise and knowledge to achieve long-term investment success.