What is a Circle of Competence?
In the business world, Warren Buffett is recognized as the greatest investor of all time. Warren Buffett’s personal holdings are now estimated to be worth over $56.9 billion. In 2007, he was listed as the second-richest person in the world by Forbes . One of the key’s to Warren Buffett’s financial success is his belief in the circle of competence. The circle of competence is simply the theory that an investor should choose one particular area in which to focus his efforts. Ideally, this should be an area in which his skills and experience are above that of the average investor. According to Warren Buffett, a successful investor does not need to have a large circle of competence; he merely needs to know when he is operating outside his area of expertise. The circle of competence is a great way for beginners to start investing in stocks because it narrows down the list of available options into something that seems much more manageable. Since this investing strategy plays on an individua
In the business world, Warren Buffett is recognized as the greatest investor of all time. Warren Buffett’s personal holdings are now estimated to be worth over $56.9 billion. In 2007, he was listed as the second-richest person in the world by Forbes . One of the key’s to Warren Buffett’s financial success is his belief in the circle of competence. The circle of competence is simply the theory that an investor should choose one particular area in which to focus his efforts. Ideally, this should be an area in which his skills and experience are above that of the average investor. According to Warren Buffett, a successful investor does not need to have a large circle of competence; he merely needs to know when he is operating outside his area of expertise. The circle of competence is a great way for beginners to start investing in stocks because it narrows down the list of available options into something that seems much more manageable. Since this investing strategy plays on an indiv
A circle of competence is a collection of industries or sectors that you understand the most. Or perhaps that you have the most interest in. Warren Buffett makes it very clear that it is important to know what your circle of competence is. He also says that it is important to know what its boundaries are. 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. If you know where the edges are, you’re way better off than somebody that’s got one that’s five times as large but they get very fuzzy at the edges. When you work within your circle of competence, you are in a much better position to be able to make investing decisions and to understand the nature and strength of the economic moats of the various companies.
