Circle of Competence - AI Analysis Prompt
Use this Warren Buffett rule prompt to apply “Circle of Competence” to a specific company. It turns a vague opinion into a repeatable checklist: what facts you must verify, which assumptions matter most, what would invalidate the thesis, and the common misreads that create false certainty. Expect a written output you can save: a thesis summary, key risks, and next-step questions for filings and earnings calls. If a claim matters, require primary-source citations before you act. Educational only — not investment advice.
Full Prompt
You are an investment clarity analyst trained in Warren Buffett's "Circle of Competence" principle. Your task is to help an investor determine whether {Company Name} falls within their circle of competence and whether the business is truly understandable.
## Analysis Framework
### 1. Business Model Transparency
- Can you explain how this company makes money in one paragraph?
- What are the top 3 revenue streams and their percentages?
- Is the business model straightforward or complex?
- How many steps are there between the product and the end customer?
- Are there hidden revenue dependencies (e.g., regulatory, subsidy-driven)?
### 2. Predictability Assessment
- Can you reasonably estimate revenue and earnings 5 years from now?
- How stable are revenues? (Coefficient of variation over 10 years)
- Are earnings driven by predictable demand or cyclical/project-based?
- Does the company have recurring revenue or long-term contracts?
- Rate the predictability: High / Medium / Low
### 3. Industry Understandability
- How well do you understand the industry dynamics?
- Can you name the top 5 competitors and their market shares?
- What drives demand in this industry?
- What are the key success factors?
- Are there technical aspects you cannot evaluate (e.g., biotech, semiconductors)?
### 4. Key Risks You Can vs. Cannot Assess
- List risks you understand well and can monitor
- List risks that are beyond your expertise to evaluate
- Are the critical risks assessable or opaque?
- Does the company rely on technologies you don't understand?
- Are there regulatory or geopolitical risks that are hard to predict?
### 5. Information Advantage Check
- Do you have any edge in understanding this business?
- Are you a customer, employee, or industry participant?
- Can you access meaningful information beyond Wall Street research?
- Are the financial statements clear and auditable?
- Does management communicate transparently?
### 6. Circle of Competence Verdict
- Does this company fall within a typical investor's circle of competence?
- What knowledge gaps exist?
- Recommendation: Invest / Study More / Stay Away
- What would someone need to learn before investing confidently?
- Suggested resources for expanding competence in this area
## Output Format
Be honest about uncertainty. End with a "Know What You Know" summary.Related reading (close the loop)
Pick one path below to turn the output into a checkable, repeatable decision policy.
- Read the matching principleDefinition, boundaries, pitfalls, and a minimal checklist.
- Master profileMethodology summary + common misreads for this framework.
- Practice in scenariosTranslate conclusions into “what I do under stress”.
- More prompts from this masterTriangulate with multiple rules instead of anchoring on one prompt.
Educational only. Verify facts with primary sources and apply your own constraints.
Basic Questions
What is "Circle of Competence" and why does it matter?
Buffett avoided tech stocks for decades, not because tech was bad, but because he admitted he "couldn't understand" them.
Why it matters:
1. Within your circle, you can identify opportunities and risks others miss
2. Outside your circle, you're relying on luck
3. Most investor losses come from investing in things they don't understand
Buffett says: "Knowing what you know and knowing what you don't know — that is true knowledge."
Usage Tips
Any special advice for industry professionals?
✅ You can evaluate product quality and competitive landscape
✅ You understand real customer pain points and stickiness
✅ You can sense industry trend changes
✅ You know industry insiders and have information channels
⚠️ But there are traps too:
- Overconfidence ("I know this industry best")
- Emotional bias (favoring companies in your industry)
- Compliance risks with inside information
When using this prompt, provide your industry knowledge as additional input to AI for more precise analysis.
Getting started
Does this prompt give investment advice or buy/sell calls?
What inputs should I provide for a reliable result?
Validation and boundaries
How do I validate the output?
When should I NOT act on the output?
More Rule Prompts
Explore other investment principles from this master.
Never Lose Money
Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.
→When to Sell
When the facts change, I change my mind. What do you do, sir?
→Wonderful Company at Fair Price
It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.
→Admit Mistakes
Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks.
→Greedy When Others Fearful
Be fearful when others are greedy and greedy when others are fearful.
→Courage to Act
Have the courage to act when opportunity presents itself. Hesitation leads to missed opportunities.
→Gradual Position Building
I never try to buy at the bottom and I always buy too early. But that doesn't matter because I have long-term goals.
→Insist on Margin of Safety
Never pay more than a business is worth. Wait for prices that provide a significant margin of safety. Being patient for the right price is more important than finding great businesses.
→Dollar Cost Averaging
If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds.
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