Circle of competence

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.

The only true wisdom is in knowing you know nothing - Socrates

By 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)

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.

“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.
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.

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.”

Disclosure: To write the post i have taken help from Farnam street blog post

Keep reading, Keep Learning.
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Thanks,
-Mahesh

How to read a book?

“The person who says he knows what he thinks but cannot express it usually does not know what he thinks.”— Mortimer Adler

Knowing the name of something and knowing something is different and to know something you have to understand it to its fullest.

“True freedom is impossible without a mind made free by discipline.” - Mortimer J. Adler

Before reading any book asks the below questions:

What is this book about?
What is being discussed in detail and how?
Is the book true in whole or in part?

What you can get from a books is well explained by the below quote:

“To agree without understanding is inane. To disagree without understanding is impudent.” ― Mortimer J. Adler

Everyday we provide our opinions on lot many issues around us, but do we really understand them to there fullest. You can get the help from books to make an opinion about the subjects of the issues.

If you completed reading a books and you tell someone that you just finished reading a wonderful book. Then, if the person will ask you a simple question, Can you please explain me what you learned from the book? When you start answering this question, you suddenly become a dumb, You just wonder that you don’t remember what you read, Think why? Because you didn’t read the book in a proper way. When we read a book, we are in a argument with the author why he write the way he has written and what other possibilities can be? in what environment the book is written?

When you make the book your own by reading and marking and commenting, means when you own the book not by money but by the knowledge then only you can learn the book to it's depth.

How you own the book?

The answer of this question, we will learn in this post. The answer will come from one book itself. The old classic book How to Read a Book: The Classic Guide to Intelligent reading by Mortimer J. Adler

What the book teaches us, we will see in this post. Mortimer Adler suggests four level of reading:

Elementary
Inspectional
Analytical
Syntopical

Elementary reading is taught in our school, we all know it. the way we read any book now.

Inspectional reading allows us to look at the author's blueprint and evaluate the merits of a deeper reading experience. there are two sub types of inspectional reading:

· * Systematic skimming : This is a quick check of the book by (1) reading the preface (2) studying the table of contents (3) checking the index (4) reading the inside jacket. This should give you sufficient knowledge to understand the chapters in the book pivotal to the author's argument and help you to decide whether to read the book or not. it is first screening of the book.

· * Superficial reading : This is when you just read. Don’t ponder the argument, don’t look things up, don’t write in the margins. If you don’t understand something, move on. What you gain from this quick read will help you later when you go back and put more effort into reading. You now come to another decision point. Now that you have a better understanding of the book's contents and its structure, do you want to understand it? Now once you finish the book and put it aside for some time and then later come back and start reading it again, at this time you understand the book to its fullest.

Analytical reading:

Francis Bacon once remarked,

“some books are to be tasted, others to be swallowed, and some few to be chewed and digested.”

Analytical reading is a deep reading of the book. There are four rules to Analytical Reading

· Classify the book according to kind and subject matter.

State what the whole book is about
Enumerate its major parts in their order and relation
Outline these parts
Identify the problem or problems the author is trying to solve

Syntopical Reading : It involves reading many books on the same subject and comparing and contrasting the ideas, vocabulary, and arguments.By reading like this, we identify the relevant passages, translating the terminology, framing and ordering the questions that need answering, defining the issues, and having a conversation with the responses.

The goal is not to achieve an overall understanding of any particular book, but rather to understand the subject and develop a deep fluency.

There are five steps to syntopical reading:

Finding the Relevant Passages - You need to find the right books and then the passages that are most relevant to filling your needs. So the first step is an inspectional reading of all the works that you have identified as relevant.
Bringing the Author to Terms - In analytical reading, you must identify the keywords and how they are used by the author. This is fairly straightforward. The process becomes more complicated now as each author has probably used different terms and concepts to frame their argument.
Getting the Questions Clear - Rather than focus on the problems the author is trying to solve, you need to focus on the questions that you want answered. Just as we must establish our own terminology. It’s important to frame the questions in such a way that all or most of the authors can be interpreted as providing answers. Sometimes we might not get an answer to our questions because they might not have been seen as questions by the authors.
Defining the Issues - If you’ve asked a clear question to which there are multiple answers then an issue has been defined. Opposing answers, now translated into your terms, must be ordered in relation to one another.
Analyzing the Discussion - It’s presumptuous to expect we’ll find a single unchallenged truth to any of our questions. Our answer is the conflict of opposing answers. The value is the discussion you have with these authors. You can now have an informed opinion.

There is another technique to understand which book to read, how to identify a good book to read:

“The great authors were great readers, and one way to understand them is to read the books they read.”- Mortimer J. Adler

Another technique to grasp the most from a books is: The Feynman Technique

There are four simple steps to the Feynman Technique, which I'll explain below:

Choose a Concept
Teach it to a Toddler
Identify Gaps and Go Back to The Source Material
Review and Simplify

We will cover Feynman technique in other post.

Disclosure : To write this post, i have borrowed the help from farnam street blog.

Keep reading, Keep learning

-Mahesh

Tools of Mass destruction -TV, News channels, Social media, Mobile

Chains of habit are too light to be felt until they are too heavy to be broken - Warren Buffett

Many people say that they don't get time for the things that they want to do in their life like reading good books, writing some stuff like the blog, explore a new place, there are many more. But i surprise those people that while everyone has the some stuff to do but still the more productive people will always have time for the things that they like to do but the less productive people will always have excuses that they don't have time.

Observe the billionaire Mr. Warren Buffett and Mr. Charlie Munger and see their life style, they have lot of time for the things they like. They read a lot, they write and with this all they do their business of investing. We must learn from them, how to live and how to use the time properly?

What the prof. Sanjay Bakshi(Sanjay Bakshi is a professor at MIT and a renowned value investor) wrote about the Device of mass destruction on his blog:

"Even though I don’t watch TV, my “anti-library” — books I own and desperately want to read but can’t just find the time do it — keeps growing. A while back I realized that the deadliest weapon of mass distraction in my life is my smartphone. With apps like Twitter and Facebook on it, it’s just too tempting to go to them than to reach out for my Kindle where most of my books reside waiting for me… And so I decided to act. I deleted Facebook and Twitter apps from my smartphone. I can still go to them through my browser but I must log in every time. (can’t delete the browser damn!). And because that requires some effort, the time I spend on those apps has dropped by more than 70% On my laptop I use technology to fight technology. I have actively started using this app called Self Control. It’s an absolute boon because it lets you block your own access to distracting websites, your mail servers, or anything else on the Internet. Just set a period to block for, add sites to your blacklist, and click “Start.” Until that timer expires, you will be unable to access those sites–even if you restart your computer or delete the application. For several hours of the day, I block myself from all social media and google news (noise?). Then, I switched off most notifications from my phone. No more sound or vibration when a message (including from dear wife) or a mail arrives and no notification on number of unread messages/mails etc. I also switched off most notifications on my laptop. And I use the do-not-disturb feature on my iPhone which blocks all calls or messages or those from unknown numbers if I want. For my professional work, which requires focus on long term fundamental performance rather than real time stock price movements, I deleted the google finance bookmark from my laptop and deleted all apps on my phone which gave real-time stock prices. Sorry Bloomberg! I love technology and what it can do for me. But I absolutely hate it’s ability to distract me from reading and from my work. The above measures have caused my productivity to increase significantly. Perhaps, they will be of some use to you."

Technology is useful servant but a dangerous master.

Let's calculate the time we waste on TV, Mobile, Social Media, WhatsApp:

We all have 24 hours a day and how we use them it totally depends on us. I am just portraying a rough estimation of our time:

On a rough estimation, we have 2 hrs. left, lets remove one more hour for any other activity, but still we have 1 hour. Now it depends on us, where we are using this 1 hr. of time daily.

People say, what 1 hr. can impact, let's see the impact of 1 hr.:

The 1hr a day activity will give you 336 hrs. per year. I did not count he weekend and holidays here as you have the entire day to use on these days. If on a rough estimation, if I count the weekend and holidays as well then, the yearly hrs. may cross 500 hrs.

500 hrs. meaning around 21 days in a year.

Let's see how you can use this 21 days in a productive way:

I just saved only 1 hr. per day and I can do whatever i want to do like reading and writing. You can do it in your own way.

I have written one blog post on how the mobile is ruining our life, you can read the post here and how a small change will improve your life in a positive way here.

You can read, how small habit will help you to improve your life , here.

I am not trying to manipulate anyone that don't use mobile, TV, social media but what I am against is the misuse of them. Use them for your benefit. We are all surrounded by useless information and our mind have limitations of consuming knowledge, in search of more knowledge we consume useless information from this device and fill the garbage of our mind attic with useless information. We should keep space for factual knowledge that come from reading good books.

In a long run news will also not help you to improve your life, you can test it, whatever news you are consuming daily, where you are using that, it is impacting your psychology as well throughout the day but we don't think consciously about it.

Consuming and liking picture of others on social media, is it helping you in any way to improve the quality of your life. Why you are giving all your information to the world. Information like where you are now, where you are going by what travel mode you are going, what you are watching, with whom you are watching.... This all are your personal information bro. Do you think people really care of this information, even the people who likes this picture also don't care...? You are just sharing your information to the world who don't care of you. And one question, the more like on you picture, will it bring any award to you...if yes, please share more pictures.

Use the technology for your benefit, not for the owner of the company benefits.

Use the mobile for the actual use and the app in the mobile to make your life easier, not difficult that you always keep saying that i don't have time for the real things in my life.

Watch TV, only for the meaningful use, not anything that is coming on the TV. Understand the TV show is a business to take your time from you and engage you throughout the day to sell some production by ads or any other medium.

Nothing is free in this world, everything has a cost attached. The format of the cost may vary. It may be money, may be time or any other thing.

Time is the most precious asset in this world, you can bring it back on any cost.

Save the time, use it in right way for your benefit.

Let me share the quote from goodreads:

“It's easier for a rich man to ride that camel through the eye of a needle directly into the Kingdom of Heaven, than for some of us to give up our cell phone.”

Keep reading, Keep leering

-Mahesh