‘Circle of Competence’

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25th Jan 2024

A circle of competence is a mental model that involves developing knowledge of what areas an individual has an understanding of or experience in.

It can also be defined as an area of the world where you have useful knowledge that gives you an edge.

The concept was developed by Warren Buffett and Charlie Munger. It encompasses industries, sectors, markets, or specific business activities where they excel and have a competitive advantage.

You can think of the circle of competence like a small circle within a big circle. The bigger circle is what you think you know, and the smaller circle inside the bigger one is what you really know.

Just because you are good at something doesn’t mean you are good at everything. For example, a Grandmaster in chess is at home on the chessboard, but those skills don’t translate into being competent in other areas of life, such as cooking in the kitchen.

Charlie Munger once said :

“I want to think about things where I have an advantage over other people. I don’t want to play a game where people have an advantage over me. I don’t play in a game where other people are wise and I am stupid. I look for a game where I am wise and they are stupid. And believe me it works better. God bless our stupid competitors. They make us rich.”

Here is a similar thought from Buffet .

“I don’t want to play in a game where the other guy has an advantage. Somebody asked:

How do you beat Bobby Fisher (Chess Champion )

The answer is you play him in any game except chess.”

One caution though, be careful if your circle of competence is too small & if that area does not  have asymmetrical opportunities, in that case you need to increase the size of your circle.

You can increase your circle of competence by reading, building knowledge  and upskilling.

The simple takeaway here is clear. 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 that circle and stay blessed forever.