Circle of Competence 101

Warren Buffett and Charlie Munger often reference the importance of knowing the boundaries of your circle of competence.

But what is a Circle of Competence and how does it work?

Here's Circle of Competence 101!

1/ First, a few definitions.

A Circle of Competence is the set of topic areas that align with a person's expertise.

If the entire world of information were to be expressed in a circle, an individual's Circle of Competence is the small sub-circle that represents their expertise.
2/ The idea surfaced in the 1996 BH annual letter.

"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."
3/ A Circle of Competence is built over time.

It is built through experience, reading, dedicated study, and effort.

It is dynamic, not static.

It can expand as you deepen your knowledge in new areas. It can contract if you fail to nurture your existing areas of expertise.
4/ To engage this mental model in your life, there are two key processes to go through:

(1) Identify what falls within your circle
(2) Identify the boundaries of your circle

(1) is all about figuring out what you know, while (2) is about humbly admitting what you don’t.
5/ Let’s look at a few examples of where we see the Circle of Competence in action and how it can help you win.

In investing?

Berkshire Hathaway provides the classic example of investing success from sticking within the boundaries of your Circle of Competence.
6/ Warren Buffett and Charlie Munger have consistently passed on investment opportunities that fell outside of their respective Circles of Competence.

At times, it has led to what might look like big misses, including failing to see the potential and invest in Google and Amazon.
7/ But while you hear about these misses (“the anti-portfolio”), you don’t read about all of the bad decisions it saved them from making.

As Munger once said, you can become a consistent winner by “trying to be consistently not stupid, instead of trying to be very intelligent."
8/ In business?

The best operators know their core competencies and are honest about their incompetencies.

The visionary CEOs hire field general, execution-focused COOs.

The field general CEOs hire visionary product leaders.

Own your competencies, outsource the rest.
9/ So how can you implement the Circle of Competence model into your life?

First, identify your circle and its boundaries.

What topics do you know more about than most people?

What topics do others look to you on?

What are you constantly excited by and learning more about?
10/ Next, be ruthlessly honest with yourself about that circle and its boundaries.

Build checks into your decision process that pressure test whether you are remaining true to your Circle of Competence.

Consistently sticking to your circle will lead to good long-term outcomes.
11/ Finally, keep expanding and deepening your Circle of Competence.

Embrace intellectual curiosity!

Is there a new topic you are excited about? Read everything you can get your hands on.

We live in an unprecedented era of access to information.
12/ You no longer need to pay a big tuition bill to learn something new.

You can seek out thought leaders, ask them questions, read their articles, listen to them speak.

It is truly remarkable. Take advantage!

You may just find that your Circle of Competence begins to grow.
13/ So that is Circle of Competence 101. This one sits alongside First Principles Thinking and Second-Order Thinking for me in the realm of foundational topics.

For more, check out the resources below:

https://t.co/ONfwxuZQDd

https://t.co/l5U0yI2gmx

https://t.co/3GgWBNiwyb
14/ As you continue to build your Circle of Competence, I highly recommend checking out @ShaneAParrish and @farnamstreet for high-signal content that has been critical in my development.

You can subscribe to their weekly newsletter below. https://t.co/OkTeX0rMej!
15/ And for more educational threads on business, money, finance, and economics, check out my meta-thread below.

Turn on post notifications so you never miss a thread! https://t.co/53UhhfzIcp

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I just finished Eric Adler's The Battle of the Classics, and wanted to say something about Joel Christiansen's review linked below. I am not sure what motivates the review (I speculate a bit below), but it gives a very misleading impression of the book. 1/x


The meat of the criticism is that the history Adler gives is insufficiently critical. Adler describes a few figures who had a great influence on how the modern US university was formed. It's certainly critical: it focuses on the social Darwinism of these figures. 2/x

Other insinuations and suggestions in the review seem wildly off the mark, distorted, or inappropriate-- for example, that the book is clickbaity (it is scholarly) or conservative (hardly) or connected to the events at the Capitol (give me a break). 3/x

The core question: in what sense is classics inherently racist? Classics is old. On Adler's account, it begins in ancient Rome and is revived in the Renaissance. Slavery (Christiansen's primary concern) is also very old. Let's say classics is an education for slaveowners. 4/x

It's worth remembering that literacy itself is elite throughout most of this history. Literacy is, then, also the education of slaveowners. We can honor oral and musical traditions without denying that literacy is, generally, good. 5/x
Rig Ved 1.36.7

To do a Namaskaar or bow before someone means that you are humble or without pride and ego. This means that we politely bow before you since you are better than me. Pranipaat(प्राणीपात) also means the same that we respect you without any vanity.

1/9


Surrendering False pride is Namaskaar. Even in devotion or bhakti we say the same thing. We want to convey to Ishwar that we have nothing to offer but we leave all our pride and offer you ourselves without any pride in our body. You destroy all our evil karma.

2/9

We bow before you so that you assimilate us and make us that capable. Destruction of our evils and surrender is Namaskaar. Therefore we pray same thing before and after any big rituals.

3/9

तं घे॑मि॒त्था न॑म॒स्विन॒ उप॑ स्व॒राज॑मासते ।
होत्रा॑भिर॒ग्निं मनु॑षः॒ समिं॑धते तिति॒र्वांसो॒ अति॒ स्रिधः॑॥

Translation :

नमस्विनः - To bow.

स्वराजम् - Self illuminating.

तम् - His.

घ ईम् - Yours.

इत्था - This way.

उप - Upaasana.

आसते - To do.

स्त्रिधः - For enemies.

4/9

अति तितिर्वांसः - To defeat fast.

मनुषः - Yajman.

होत्राभिः - In seven numbers.

अग्निम् - Agnidev.

समिन्धते - Illuminated on all sides.

Explanation : Yajmans bow(do Namaskaar) before self illuminating Agnidev by making the offerings of Havi.

5/9