The Trichotomy of Competence Circles

(A View on the Nature of Competency Circles and the Investing Process)

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Many of you have likely heard about the concept of an investor’s ‘circle of competence’.

Many of you probably already know that this idea of an investor sticking to investment ideas within their circle of competence originates from Mr Warren Buffett.

In Berkshire’s 1996 Annual Letter, Warren stated the following:

“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.”

- Warren Buffett

Here, Buffett is suggesting that working within pockets of the market (whether that be specific industries (or themes) that you are most knowledgeable about or comfortable with, is more conducive to a successful investment process.

He concludes by sugge…