Circle of Competence – 10X10Y

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The dictionary defines competence as the ability to do something successfully or efficiently.

You can either be born with a certain competence or you develop it over time.

Steph curry, the two-time NBA MVP (most valuable player) was born with it. He was the son of a professional basketball player and showed extreme competence in basketball even at the age of 6.

But Phil Knight, the founder of Nike, wasn’t born into shoes. He was a CPA and had an accountant job until he experimented with shoes. But for the next 42 years, he only developed competence in shoes. He’s worth close to $37B today just by focusing on his circle of competence.

Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others.

Here’s from the point of view of the world’s greatest investors, Buffett and Munger.

Buffett in his 1996 shareholder letter said,

‘’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.’’

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Buffett has made several millionaires by buying their businesses. Few of them being, Albert Ueltschi who sold his aviation training company, Larry Van Tuyl who sold a controlling interest in his family’s car dealerships, Charles See who sold his candy company, Rose Blumkin who sold her furniture company and many many more.

There’s atleast one thing common between them except for the fact that they made a truckload of money, they all ran solid businesses with one narrow area of competence. Also, not all area of compentencies have to esoteric and not all companies have to be a SpaceX, Palantir or ARM.

Take the example of Rose Blumki, universally known as Mrs. B, a Russian immigrant with poor English who built the largest furniture store in Nebraska. Mrs. B founded Nebraska Furniture Mart at the age of 44 and worked there until she was 103. Mr. Buffett goes on to describes her circle of competence :

I couldn’t have given her $200 million worth of Berkshire Hathaway stock when I bought the business because she doesn’t understand stock. She understands cash. She understands furniture. She understands real estate. She doesn’t understand stocks, so she doesn’t have anything to do with them. If you deal with Mrs. B in what I would call her circle of competence… She is going to buy 5,000 end tables this afternoon (if the price is right). She is going to buy 20 different carpets in odd lots, and everything else like that [snaps fingers] because she understands carpet. She wouldn’t buy 100 shares of General Motors if it was at 50 cents a share.”

Warren Buffett

Did it hurt Mrs. B to have such a narrow area of competence? Don’t think so. She could focus on one simple business with a tunnel vision and do it perfectly.

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Charlie Munger, Mr. Buffett’s brilliant partner also gives his on-point view :

‘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.

If you want to be the best tennis player in the world, you may start out trying and soon find out that it’s hopeless—that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably doable by two-thirds of you. It takes a will. It takes the intelligence. But after a while, you’d gradually know all about the plumbing business in Bemidji and master the art. That is an attainable objective, given enough discipline. And people who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence—which results partly from what they were born with and partly from what they slowly develop through work.”

Charlie Munger

So we get the gist here, you want to be able to do one thing and do that very very well. Can you imagine Curry as being a struggling wrestler. Kevin O’Leary, the shark in shark tank and my favourite one too, once dreamed of being a rock star and even tried it but soon realized that it doesn’t fall under his circle of competence.

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It’s never too late to fall back into your circle of competence and always too late to be outside your circle of competence.

Article Credits – https://fs.blog/2013/12/circle-of-competence/

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Moulik Jain
Moulik is 24, an Entrepreneur, and a successful Angel Investor at Beardo (exited). He is currently one of India's youngest Angel Investors.
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