Warren Buffett's Circle of Competence

Circle of Competence

One of the most successful investors of all time, Warren Buffett, has two rules to investing:

  1. Never Lose Money
  2. Never Forget Rule #1

To put these rules into practice, Buffett has come up with the "Circle of Competence" concept.

"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."

 Warren Buffett's Circle of Competence ( image source )

Warren Buffett's Circle of Competence (image source)

Buffett mentions reading Ted William's book, The Science of Hitting, as the inspiration for his concept.

Ted Williams knew that if he waited for the right pitch, within the right location, he'd have much more success.  He noticed his batting average was higher in this specific area.  And thus, a lower average in others.

Applying this Ted Williams hitting approach to investing was a major part of Buffett's success.

 you won't have a good average if you swing at everything ( image source )

you won't have a good average if you swing at everything (image source)

Investing is no where close to my Circle of Competence.  

The most investing I do is deciding what concerts to spend my money on (The Dawes stock is going up). 

Nonetheless, I think it's a profound concept.  And I think it can apply to many things in life.

The Circle of Life

 it's learning that Scar should not be within your perimeter ( image source)

it's learning that Scar should not be within your perimeter (image source)

The Circle of Competence can apply to anything in life that requires knowledge and skills.

If we're ever making a decision or taking action, we should consider our own circle of competence.

Acknowledging this will not only help us improve our area of expertise, but it will also prevent us from making the blunder of thinking we know what we do not.

It applies to work, communication, relationships, learning, exercise, sports, etc.

With a better circle of competence we could get more accomplished, save time, have less arguments, prevent errors, and find better resources.

Finding the Circle

An important part of developing this concept is reducing biases and refining awareness.  Because if we're clouded with poor thinking patterns we'll have a poor assessment.  And a poor assessment is just the beginning of a bad outcome.

After cleaning our lenses, there are 2 main things we want to assess:

  1. Strengths - so we can maximize and leverage them to create effective work
  2. Weaknesses - so we can avoid them and save time to create efficient work

No one is good at everything.  No one is bad at everything.

The difference is knowing which is which, and finding an expert to refer to for the latter.

Go Deeper, Not Further

Cultivating the Circle of Competence isn't about an end point.  It's not about reaching an external goal.

It's a process of mastery.  It's going deeper within, not further out.

It has to be an intrinsic practice.  Almost like a Zen approach to business.

Another way to look at it is finding the "flow" area.

 it's not just a mental state as mihaly csikszentmihalyi discusses, it can also be viewed as an area of expertise ( image source )

it's not just a mental state as mihaly csikszentmihalyi discusses, it can also be viewed as an area of expertise (image source)

Some Examples

As a physical therapist I know I'm good at coaching movement patterns, understanding biomechanics, dry needling, and fascial release.  I know I'm not very good at manipulations, manual trigger point releases, or patients that refuse to exercise.  So I've dropped the ego of trying to be great at everything and learned to focus on having success within my circle (or referring out).

As a guitar player I know I'm very good at improvisational jamming in funky blues/jazz music.  I'm not great at technical shredding or avant-garde discordant music.  So when I play with other musicians I try to stay within my circle instead of creating dissonance by trying to play like someone I'm not.

 outside my circle of competence (image source)

outside my circle of competence (image source)

For exercise I've realized I feel the best with a blend of kettlebells, yoga, steady-state cycling, with a side of corrective exercises.  I'm good at those things and continue to get better.  On the other hand, if I try to perform olympic lifts and long distance running I feel awful.  So instead of forcing movements that don't fit my body, I stay close to my circle and stay healthy.

Which leads me to...

A Side Rant on Movement & Exercise

A great deal of injuries occur from people going outside their Movement Circle of Competence.

Mainly, this often occurs because they don't know where the perimeter of their circle is.  They have never been assessed by a movement professional or been to physical therapy.

Another reason is because they follow some fitness dogma or read online to become "google-experts".  It's a confirmation bias induced injury.

As mentioned above, not everyone is good at everything, not everyone is bad at everything.

In movement there are a great deal of variables (morphology, genetics, movement history growing up, cultural influence, work posture, motivation, etc.).  So not everyone will be able to do everything.

We see this all the time with the deep squat.  Yes, everyone should be able to squat.  But some people should not be training to squat twice their body weight.  Yet, many do despite it being outside their Circle of Competence.

 i think he might be outside his circle of competence ( image source )

i think he might be outside his circle of competence (image source)

Runners are notorious for this as well.  Not everyone should be running marathons.  Some people would be much better off doing a sprint triathlon or cycling.  Yet, many continue to grind away at it despite it being outside their Circle of Competence.

This is not to say you can't work diligently and adapt your body's capacity to handle specific tasks.  The body is very resilient.

It's just that most people with injuries fail to recognize their areas of weaknesses in the first place.

If you listen to your body and find your Movement Circle of Competence you'll be able to either work on your weaknesses to allow for more movement competency, or avoid them to stay within the healthy strengths.

 don't live like  maverick , stay out of the danger zone when exercising ( image source )

don't live like maverick, stay out of the danger zone when exercising (image source)

Summary

Recognizing what you're good at, and what you're not, is a major part of success.

Going outside of this circle is necessary for personal growth, enjoyment, and development.

But when it matters, we should be like Ted Williams and Warren Buffett.  Only swing at the pitches we know we can hit.

The most important thing in terms of your circle of competence is not how large the area is, but how well you’ve defined the perimeter
— Warren Buffett

Warren Buffett's Generosity

 (image source)

(image source)

We live in a current culture where many are infatuated with greed, consumerism, and materialistic values.

Many of the rich are getting richer. (it's not politics, it's facts).

However, Warren Buffett is not following suit.  He  is giving away 99% of his wealth to philanthropic causes.

Hopefully more will follow his lead to truly change the world for those that need it most.

When you have more than you need, build a longer table not a higher fence.