Staying in your circle of competence

Knowing what investment areas you are knowledgable about and sticking to those areas is crucial to long-term success.

- Simon Brown

I’ve been re-reading a few older Berkshire Hathaway annual letters written by Warren Buffett and found this gem in his 1996 letter: “What an investor needs is the ability to correctly evaluate selected businesses. Note that word ‘selected’: You don’t have to be an expert on every company, or even many. 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.”

It was supposedly inspired by a comment by IBM founder Tom Watson, who said: “I’m no genius. I’m smart in spots – but I stay around those spots.” It got me to wondering how often we leave our circle of competence as investors. I suspect far too often.