Identifying Your Circle of Competence

Hi, I’m David and my mission in life is to prepare people for the future of work.?

In this week’s edition of the newsletter the theme revolves around identifying your circle of competence, which results partly from the talents you were born with (i.e. nature) and partly from the skills and expertise you develop through practice over the years (i.e. nurture). Understanding your circle of competence helps you avoid problems, identify opportunities, and learn from others. When you’re operating outside of your area of competence you risk making bad decisions, which in turn can negatively impact your odds of success in life. Thus, your goal should be to identify your area of competence and to stick to it no matter what. Below are some insights and thoughts that will help you identify your circle of competence and what you can do to expand it, while not fooling yourself about where it stands today.

Timeless Insight

“It’s not a competency if you don’t know the edge of it.” – Charlie Munger

We all possess a zone of opportunity, a ‘sweet spot’ where the odds are in our favour. The concept is called circle of competence, and it has been used by Charlie Munger and his more well-known business partner, Warren Buffett, as a way to focus their clients on investing only in the industries they know best and perhaps have a competitive advantage in. The first mentions of the concept appear in Warren Buffett’s 1996 Shareholder Letter where he prescribed that “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. But knowing its boundaries is vital.” Understanding your circle of competence (i.e. knowing where it starts and where it stops) helps you avoid problems, identify opportunities for improvement, and learn from others. However, a common mistake many people make is to confuse familiarity with understanding. Being familiar with a subject and knowing a lot about it doesn’t make you an expert in it. Deep fluency takes a lot of work, and the difference between being a subject-matter expert and a subject-matter enthusiast ultimately boils down to the years of experience one has. Paradoxically, many subject-matter experts don’t see themselves as experts, even if they spent years working on a problem and possess all the qualifications and skills of an expert. On the other hand, subject-matter enthusiasts often attribute themselves an expert status, even if they know that they don’t possess the right traits or have the necessary experience.?

Food for Thought

Building a circle of competence is simple in theory, but difficult in practice. Each of us, through experience or study, has built up useful knowledge on certain areas of the world. Some areas are understood by most of us, while some areas require us to specialise (e.g. understanding the global semiconductor supply chain or the quantum computing industry).?

The Founder of IBM, Thomas J. Watson , once said, “I’m no genius. I’m smart in spots, but I stay around those spots”. In other words, we don’t need to know everything to be successful, which is virtually impossible given the exponential increase of information over the years. What’s more important is to clearly define what we do know and stick to those specific areas.?

Our circle of competence can be slowly widened over time, if we put in the necessary effort. Mistakes are bound to happen as we expand the limits of our knowledge, and so, in order to limit errors as much as possible, we should narrow the area of competence we focus on. The Pareto Principle (80% of the outputs come from 20% of the inputs) can help us do that.??

Having the discipline to focus on one impactful area you want to develop expertise in is key. Charlie Munger takes the Pareto Principle outside of the business world altogether and into the realm of everyday life. The essential question he sought to answer: Where should we devote our limited time on Earth to achieve the most success? Charlie’s suggestion:

“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. For example, 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. 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 intelligence. But after a while, you’d gradually know all about the plumbing business in Bemidji and master the art of plumbing.”

In the quote above, Charlie Munger raises another salient point, which is perhaps as important as developing a circle of competence and sticking to it, setting SMART objectives (i.e. specific, measurable, achievable, relevant, and time-bound). With enough discipline and patience, and by slowly developing a circle of competence, anyone can rise quite high in life.?

To use an analogy from baseball, average batters can turn into great batters if they wait for the right pitch, while the best batters turn into average ones if they swing at the wrong pitch. Being patient and waiting for the right pitch is better than saying yes to every opportunity that comes your way. Impatience, on the other hand, could dramatically lower your success rate.?

If you want to improve your odds of success in business and in life, then define the perimeter of your circle of competence, and operate inside it. Over time, work to expand that circle but never fool yourself about where it stands today, and never be afraid to say ‘I don’t know’.? Remember the famous Socratic paradox , “I know one thing, and that is that I know nothing”.

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Thank you for reading and keep on growing!

David

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