How did Charlie Munger and Warren Buffet become the most successful investors in history?
Not by calling the right shots, but by avoiding the bad ones.
And they avoid unforced errors by staying within their “Circle of Competence.”
The Circle of Competence is a very simple concept: The risks are greater when you don’t know what you’re doing, than when you do.
And how do you know if you know? That’s also simple:
“If you have competence, you pretty much know its boundaries already. To ask the question is to answer it.”
—CHARLIE MUNGER, BERKSHIRE ANNUAL MEETING, 2002
If you have to ask, then you’re outside your circle.
Staying within your circle doesn’t mean NOT trying new things. In fact trying new things is how you form new circles.
The trick is to try new things in small doses so that you don’t hurt yourself when you make the inevitable beginner mistakes.
Then save the big bets for things that are unquestioningly within your circle of competence.
