Circle of Competence

One of the quietest superpowers in investing is knowing where your edge actually lies – and having the discipline to stay inside it.

Warren Buffett and Charlie Munger popularized the idea of the “circle of competence.”

It's a deceptively simple mental model: only invest in what you understand deeply. Not just the surface narrative, but the drivers, risks, incentives, and mechanics. Know the terrain so well that, when the market panics, you're still standing on solid ground.

But here's the nuance most people miss: your circle of competence isn’t fixed. It’s a living thing. You can cultivate and grow it over time.

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Why It Matters

In public markets, the illusion of information abundance can be dangerous. Just because you can access 10 years of financials, listen to 5 podcasts, and read 3 analyst reports doesn’t mean you actually understand the business.

Competence isn’t consumption. It’s comprehension.

Can you explain – clearly – how the company makes money, who its real competitors are, what breaks the model, and what a good year vs. a bad year looks like? Can you build the bull and the bear case in your own words?

If not, you’re operating on borrowed conviction – and the markets will be quick to punish.

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How to Build a Circle of Competence (Deliberately)

🧭 1. Take Inventory of What You Know

Start with first-hand domains: industries you've worked in, businesses you've studied, products you’ve used deeply.

Ask:

• What spaces do I understand from the inside?
• Which value chains have I seen play out in real life?
• Where do I already have pattern recognition?

Even something like a side hustle, a failed business, or years spent gaming can become an edge – if you reflect on it properly.
(Peter Lynch talks about this around the 10m:10s mark.)

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📚 2. Pick a Couple of Areas to Go Deep

Don’t try to know everything. Know a few things well.

Choose one or two sectors you’re naturally curious about and commit to studying them with intent. Read annual reports. Follow management. Track competitors. Learn the jargon, the KPIs, the pain points. Write up investment cases, even if just for yourself.

“If you can’t explain the whole market structure and where the company sits in three minutes, you’re still outside the circle.”

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🔁 3. Build Pattern Recognition Through Reps

Real competence comes from repetition over time:

• Read earnings calls and investor letters
• Compare expectations to actual results
• Track strategy changes and market reactions
• Log your thinking before and after each report

Each cycle makes your judgment sharper. You’ll start spotting what’s signal and what’s spin.

Test yourself: before reading a new report, write out your expectations. After reading, compare. Did margins trend as expected? Did the company mention the risks you anticipated? That delta is where growth happens.

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🚫 4. Know the Edge – and the Edge Cases

Just as important as knowing what’s in the circle is knowing what’s not.

If you can't model the business, explain its moat, or understand its risks, proceed with extreme caution. Curiosity is good. Overconfidence is fatal.

“The size of your circle doesn’t matter. Knowing the boundaries does.” – Buffett

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🧠 5. Build Feedback Loops

Your circle improves through iteration. Set up simple systems:

• Keep a decision journal or Notion tracker
• Write post-mortems on your calls (both good and bad)
• Share your theses with people who will challenge them

And revisit old calls. Were you right for the right reasons? What changed? What did you miss?

This meta-awareness – tracking how you think – is where real compounding happens.

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🔄 6. Expand Slowly and Logically

Once you’ve developed real fluency in one domain, it often connects to others. Let your circle expand through adjacency:

• Understand SaaS? Study usage-based pricing, dev tools, or cybersecurity.
• Understand retail? Dig into logistics, payments, or supply chain tech.
• Understand Layer 1s in crypto? Explore gaming, DeFi, or real-world asset tokenization.

Ask: what skills transfer? What assumptions don’t?

Don’t jump from semiconductors to fashion. Move one concentric ring at a time.

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Final Thought: Edge Comes from Depth, Not Breadth

Everyone wants to have takes on everything. But the best investors know that not knowing is just as powerful. It saves you from chasing hype, overpaying for noise, or misunderstanding a signal.

Your circle of competence is a filter. It helps you say no more often, and yes more confidently.

And over a lifetime, that’s where the real alpha lies – not in predicting the future, but in staying anchored to what you truly understand.

You don’t need to be an expert on every company. Only the ones you choose to bet on.