Circle of Competence

You can save yourself a huge amount of money just by avoiding the things you don’t understand and just by knowing more about the things you truly understand. People end up investing in Pharmaceutical companies where people doesn’t know the basic of chemicals and other stuff. You don’t have to buy things just because they are trendy. Because when the fall starts, you lose your hard end money.

Mrs B, founder of Nebraska Furniture Mart, sold her company to buffet and refused to accept the stocks of Berkshire Hathaway worth of $200 million as the old lady’s circle of competence is cash not stock. She will buy 20 different carpets at different rates. She may even buy 100 chairs just in one go(if the price is right). But she would refrain to buy stocks any established companies at even 50 cents. Narrowing the competence of focus has helped her achieve the tremendous success in business and life.

Knowing ones circle of incompetence is vital so that you can avoid the those things. You don’t have to understand each and every thing ranging from Technology to Chemicals to FMCG to Telecom to Real State to Banking to Retail and so on. Knowing a few will really help in the long run.

There might be high possibility that you don’t know your circle of competence. That’s true for everyone in the beginning. You have to keep on exploring until you figure out those things which are easier to understand and simple for you. As you will know the ups and downs for the business from your analysis. Don’t be in a hurry. After all as Football coach Vince Lombardi put it well, “The will to win is not nearly so important as the will to prepare to win.”

Until then…