We always look for success, benefit and many such things which is good for us but we never look for the reasons why somethings work for someone and not for others. Think about this in this way, why Warren Buffett had earned billions in stock market, why not all who have invested. There are many reasons for this, we may discuss this in any other post but the one of the reason is the Circle Of Competence.
The circle of competence is not limited till investing, you can apply the learning to any field of your life or work.
Circle of competence is knowing the boundaries of your knowings, of your capabilities, of your talent, its all about what you know and what you don't know.
Once you identify that what you know and what you don't know then only the real seeking of the knowledge will start. And the get knowledge keep your ego aside and be open to all the knowledge that you encounter in your life. You can get the knowledge from the good books, from good blogs, from good and knowledgeable people around you, many more sources there,just start looking and observing.
We all as human being have some limits, in fact everything in this world have its limit. In all the fields we can use the wisdom of circle of competence. You can see Circle of competence(CoC) in investing.
In investing it is knowing of your knowledge of the industries, its fundamentals, how the industry work, what are the MOATs in this business etc.
In life, Knowing your limits physically as well as mentally(Your knowledge) is CoC.
In Machinery, knowing the limits of the machine is its CoC.
In construction, knowing the limits of the load is its CoC.
the list will go on......
The well known scientist Richard Feynman said-
Newspapers are full of articles explaining how to live on such-and-such a sum but I have never seen an essay "how to live on 24 hours a day" Yet it has been said that time is money. That proverb understates the case. Time is a great deal more than money. If you have time, you can obtain money-usually. But…you cannot buy yourself a minute more time.
You might had heard of the Butterfly Effect, lets see how the Circle of competence work with butter Fly Effect.
Lets understand Butterfly effect first-
The butterfly effect is the idea that small things can have non-linear impacts on a complex system. The concept is imagined with a butterfly flapping its wings and causing a typhoon.
In investing, everything is hard coupled with everything. If one small incident happen anywhere in the world its impact will come to all the markets of the world.
an analogy of butterfly effect you can make with the habits i.e One small change in your life make huge differences with time. Like a habit of reading make you more knowledgeable, One small investment and allow it to compound for long time makes a huge difference. You can read about it here.
Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others.
In 1996 Shareholder Letter by Warren Buffett to his shareholders:
Value investing is totally based on Circle of competence, Margin of safety and fundamentals of the company and compound effect with the time.
Circle of competence, think of the business like Shoes. How they make the shoe, what is the raw material. What are the machinery required. What kind of knowledge is required to make a shoe. By some research you can understand the shoe business, its market and how they make money. There are many such simple businesses.
But now think about the mobile chip, computer chip. Think how much difficult it is to analyse this businesses, how they make the product and how they make the money out of the business. Its not that you can not understand this businesses, its just it will take more efforts.
Here you are clear that what is your Circle of competence what is not.
Charlie munger suggest on CoC in life as -
Disclosure: To write the post i have taken help from Farnam street blog post
Keep reading, Keep Learning.
Please subscribe
Thanks,
-Mahesh
The circle of competence is not limited till investing, you can apply the learning to any field of your life or work.
The only true wisdom is in knowing you know nothing - SocratesBy the definition -
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.
Circle of competence is knowing the boundaries of your knowings, of your capabilities, of your talent, its all about what you know and what you don't know.
Once you identify that what you know and what you don't know then only the real seeking of the knowledge will start. And the get knowledge keep your ego aside and be open to all the knowledge that you encounter in your life. You can get the knowledge from the good books, from good blogs, from good and knowledgeable people around you, many more sources there,just start looking and observing.
We all as human being have some limits, in fact everything in this world have its limit. In all the fields we can use the wisdom of circle of competence. You can see Circle of competence(CoC) in investing.
In investing it is knowing of your knowledge of the industries, its fundamentals, how the industry work, what are the MOATs in this business etc.
In life, Knowing your limits physically as well as mentally(Your knowledge) is CoC.
In Machinery, knowing the limits of the machine is its CoC.
In construction, knowing the limits of the load is its CoC.
the list will go on......
As Charles Munger suggested to investors at the 2014 DJCO meeting –
Warren and I know better than most people what we know and what we don’t know. That’s even better than having a lot of extra IQ points.
People chronically misappraise the limits of their own knowledge; that’s one of the most basic parts of human nature. Knowing the edge of your circle of competence is one of the most difficult things for a human being to do.
Knowing what you don’t know is much more useful in life and business than being brilliant.
The well known scientist Richard Feynman said-
“The first principle is that you must not fool yourself — and you are the easiest person to fool.”
By not working under our CoC we are bound to make ourself a fool.
How you can improve you Circle of Competence is guided by Chalie Munger-
"Spend each day trying to be a little wiser than you were when you woke up. Discharge your duties faithfully and well. Systematically you get ahead, but not necessarily in fast spurts. Nevertheless, you build discipline by preparing for fast spurts. Slug it out one inch at a time, day by day. At the end of the day – if you live long enough – most people get what they deserve.”
To make the Circle of Competence in our life, we must ask the question like -
how can we make the best use of our lives? How can we make the best use of our time?
“We shall never have more time.
We have, and have always had,
all the time there is.”
Newspapers are full of articles explaining how to live on such-and-such a sum but I have never seen an essay "how to live on 24 hours a day" Yet it has been said that time is money. That proverb understates the case. Time is a great deal more than money. If you have time, you can obtain money-usually. But…you cannot buy yourself a minute more time.
people have to realize that what a wonder it is that our daily allocation of time appears anew each time we wake:
The supply of time is truly a daily miracle. You wake up in the morning and lo! your purse is magically filled with 24 hours of the unmanufactured tissue of the universe of your life! It is yours.
You cannot draw on the future. Impossible to get into debt! You can only waste the passing moment. You cannot waste tomorrow, it is kept from you.
You have to live on this 24 hours of time. Out of it you have to spin health, pleasure, money, content, respect and the evolution of your immortal soul. It’s right use…is a matter of the highest urgency.
You might had heard of the Butterfly Effect, lets see how the Circle of competence work with butter Fly Effect.
Lets understand Butterfly effect first-
“You could not remove a single grain of sand from its place without thereby … changing something throughout all parts of the immeasurable whole.”— Fichte, The Vocation of Man (1800)
In investing, everything is hard coupled with everything. If one small incident happen anywhere in the world its impact will come to all the markets of the world.
an analogy of butterfly effect you can make with the habits i.e One small change in your life make huge differences with time. Like a habit of reading make you more knowledgeable, One small investment and allow it to compound for long time makes a huge difference. You can read about it here.
Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others.
“I’m no genius. I’m smart in spots—but I stay around those spots.” — Tom Watson Sr., Founder of IBM
In 1996 Shareholder Letter by Warren Buffett to his shareholders:
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.
Value investing is totally based on Circle of competence, Margin of safety and fundamentals of the company and compound effect with the time.
Circle of competence, think of the business like Shoes. How they make the shoe, what is the raw material. What are the machinery required. What kind of knowledge is required to make a shoe. By some research you can understand the shoe business, its market and how they make money. There are many such simple businesses.
But now think about the mobile chip, computer chip. Think how much difficult it is to analyse this businesses, how they make the product and how they make the money out of the business. Its not that you can not understand this businesses, its just it will take more efforts.
Here you are clear that what is your Circle of competence what is not.
Charlie munger suggest on CoC in life as -
You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don't, you're going to lose. And that's as close to certain as any prediction that you can make. You have to figure out where you've got an edge. And you've got to play within your own circle of competence.So, the simple takeaway from Circle of competence is, if you want to improve your odds of success in life and business then define the perimeter of your circle of competence, and operate inside it. Over time, work to expand that circle but never fool yourself about where it stands today, and never be afraid to say “I don’t know.”
If you want to be the best tennis player in the world, you may start out trying and soon find out that it's hopeless—that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably doable by two-thirds of you. It takes a will. It takes the intelligence. But after a while, you'd gradually know all about the plumbing business in Bemidji and master the art. That is an attainable objective, given enough discipline. And people who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence—which results partly from what they were born with and partly from what they slowly develop through work.
Disclosure: To write the post i have taken help from Farnam street blog post
Keep reading, Keep Learning.
Please subscribe
Thanks,
-Mahesh
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