The Circle Of Competence

Among the many profound investing philosophies of Warren Buffett and Charlie Munger are some that extend beyond the area of finance.  Today I select one it seems I've cited a lot lately, that being the idea of staying within one's own "Circle of Competence."

The basic premise is simple:  When you don't really know what you're doing, it's much riskier than when you do know what you're doing.  This is one of those premises that everybody knows, but most still violate from time to time, even very smart people.

This concept is straightforward in finance, where another quote Buffett often refers to (not his) works as an explanation:  "When a man with money meets a man with experience, the man with experience leaves with the money, and the man with money leaves with the experience."

Consider, however, the practical, non-financial life applications to the Circle or Competence.  How often don't you hear from someone giving you unsolicited and unqualified advice on issues of relationships?  What about on issues of fashion?  Or how about my most recent favorite, those who have no medical or health training, but want you to accept their understandings and beliefs on all sorts of specific medical or health related issues?

Those offering opinions that are outside their Circle of Competence are doing even more than nothing to help you or themselves.  They're actually going into negative territory, because you may be able to take advantage of their incompetence.  Here again, this may be most readily apparent in the world of finance, but applies to other walks of life.

The most important part of all this is knowing one's own Circle of Competence. Munger was once quoted as saying, in a bit of a self-fulfilling prophetic way, "It isn't a competency if you don't know the edge of it."