📖Charlie Munger
Circle of Competence
Knowing the boundaries of your expertise is more valuable than the expertise itself.
Know your circle of competence and stay within it. The size of that circle is not very important; knowing its boundaries, however, is vital.
🏠 Everyday Analogy
📖 Core Interpretation
Know clearly what you truly understand, and act only within your circle of competence. Defining the boundary is more important than expanding its size.
💎 Key Insight：The circle of competence concept forces intellectual honesty. It's not about having a large circle — it's about never straying outside it. Munger and Buffett have passed on thousands of profitable investments because they fell outside their circle. The willingness to say "I don't know" is the most underrated skill in investing.
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❓ Why It Matters
People often overestimate the scope of their own abilities. Venturing into unfamiliar territory is the root of disaster.
🎯 How to Practice
Honestly assess the boundaries of your knowledge and say "no" to opportunities outside your circle of competence.
🎙️ Master's Voice
The number one idea is to view a stock as an ownership of the business and to judge the staying quality of the business in terms of its competitive advantage.
Munger always evaluates competitive advantage first. Everything else depends on whether the business can sustain its position.
⚔️ Practical Guide
✅ Decision Checklist
- Am I evaluating the business or the stock?
- Will the competitive advantage last?
- Is this a business I want to own?
📋 Action Steps
- Analyze the business before the stock
- Evaluate competitive position first
- Think like an owner, not a trader
🚨 Warning Signs
- Focus on stock price, not business
- Ignoring competitive dynamics
- Trading, not investing
⚠️ Common Pitfalls
Do not confuse your circle of competence with your circle of interest.
The circle of competence can be gradually expanded, but it requires genuine learning.
📚 Case Studies
1
Avoiding Technology IPOs (1993)
Munger and Buffett declined to invest in hot early-1990s tech IPOs, citing limited understanding of fast-changing technology and competitive dynamics.
✨ Outcome：Missed some short-term gains but avoided major busts when many overhyped tech names later collapsed.
2
Skipping the Dot-Com Boom (1999)
During the late-1990s internet bubble, Berkshire largely avoided high-flying dot-com stocks outside its circle of competence.
✨ Outcome：Underperformed during the mania but preserved capital and outperformed after the bubble burst in 2000–2002.
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