Your Share of the Pie
Develop Your Own Circle of Competence
Extraordinary Profits from Ordinary Shares * Winning Stock Market Strategies
In the investment game it is better to be a specialist than a generalist – better to know a few things very well than it is to know everything superficially.
If you have a deep understanding of a certain industry you will be in a hugely advantageous position when making investment decisions on the companies operating in that industry. It is patently obvious that investors should stick to what they know but it is also incredible how many don’t. So many investors would rather buy shares in a company named “Genome Science Genetics” rather than in “Coca-cola”. Who wants to talk about “Coca-cola” at a cocktail party when you can whisper “Genome Science Genetics”, but are we trying to be cool or are we trying to invest intelligently.
As Warren Buffett says: “I want to understand my mistakes. This means I only do things I completely understand.”
This theory of the circle of competence can be put another way. If you make fewer mistakes, your investment performance will be better. Therefore invest in areas where you are competent. Investing is the careful allocation of capital in a way that minimises risk by staying away from investments that you do not understand.
Warren Buffetts partner, Charlie Munger, has this to say about Circle of Competence Investing:
“You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”
I also like the following quote from Tom Watson Sr., Founder of IBM: “I’m no genius. I’m smart in spots – but I stay around those spots.”
Stock promoters know that stock market dummies are lazy and love a good story and a good stock tip more than anything else. Don’t gamble. Let’s be careful out there!
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