Circle of Competence
So, here is a fancy term called ‘Circle of Competence’. I have come across this term on multiple occasions and found it useful and relevant in many cases. So, let’s see what all the fuss is about and what does the Circle of competence mean.
Meaning
If you take the extent of knowledge a person has on any particular topic and put all such topics, on which the person has expertise, together, you will have that person’s circle of competence. However, there is often a great deal of difference between ‘what we think we know’ and ‘what we actually know’. The circle of competence is formed of the latter.
Origin
The term finds its origin in Berkshire Hathway’s 1996 annual letter where Warren Buffet says
“You don’t have to be an expert on every company…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.”
Now you know why the blue space is marked as trouble. The circle of competence is dynamic and usually keeps growing. It is the sum total of your readings, your learning and your experiences. Thus, its size is of little importance because it can eventually grow. However, knowing where your circle ends is very important. Often times, the gap between where the circle ends and where we think it ends is the place where we find ourselves out of our depths. So, how is this useful you ask?
Uses
In investing, getting stuck in ‘the gap’ can spell troubles. Let’s take an example. Consider you think that trading in F&O is lucrative and start doing so without actually getting the fundamental know-how (I myself read somewhere only a few days back that option pricing is based on the prices of underlying futures and not on the prices of underlying itself. And I had studied chapters on options pricing during my finals). Under these circumstances, more likely than not, you will lose money because you might not be knowing the entry and exit cues.
Even Buffet and Munger have missed out on investing in Google and Amazon because they did not know enough about them. But for every google they missed out on; their approach must have saved them from at least a couple of sinking ships. And in the world of investing, consistency > spikes.
In business, best operators know their core competencies and have the courage to recognize their shortcomings. The visionary leaders hire execution focused specialists while a focused leader hires visionary product manager. Own your competencies and outsource the rest.
Now let’s see how we can adopt Circle of competence model in our life
First of all, identify what you like learning about, what others expect answers from you on and what you know more than them. An example can be that I want to write articles or start my podcast.
Secondly, be brutally honest about the extent of knowledge on all of these topics. Many of us have a fear of accepting that we don’t know something. But it is only when we accept our lack of knowledge that we can start learning. The biggest obstacle in my case would be to acknowledge that I am not good at writing currently. But once I acknowledge that, I can start learning from others who write creative and great content.
We live an unprecedented era of easy access to information. Read a lot about what you like. Follow people in your field of interest, listen to them speak and learn what you can.
And once you start learning, you, along with your circle of competence, start growing. Build checks and ask questions about whether what you are doing falls into your circle of competence. Writing, I would like to think, is coming slowly into mine (Investing in cryptocurrencies on the other hand is not and thus I don’t do that)
Know what you know and know what you don’t. Keep expanding the former while squeezing the latter by learning and being consistent.
Thoughts are always welcome. Let me know yours in comments. CHEERS!
