Know Your Circle

The circle of competence model is about boundary clarity, not boundary size. You do not need to understand every sector to invest well. You need a clearly defined set of businesses where you can explain how money is made, why customers stay, and what can break the economics. Inside that circle, valuation and conviction are grounded. Outside it, confidence is often borrowed from narratives.

The largest mistakes usually happen when investors think they understand more than they do. Outside your circle, risk is underpriced because key assumptions are shaky. In stress periods, weak understanding becomes weak behavior. Ignoring this principle often creates a pattern of buying stories, then exiting in confusion when facts change and the original thesis was never truly owned.

Maintain a living list of investable and non investable business types. Before buying, force three written answers: profit engine, moat mechanism, and likely long term failure mode. If you cannot explain all three in plain language, pass. Expand the circle through deliberate study and post mortems, not through market excitement or social pressure.