Circle of competence

The set of businesses, assets or markets you understand well enough to judge what they are worth and what could realistically go wrong with them.

Example

A career software engineer may genuinely be able to assess a developer-tools company's product claims, and have no edge whatsoever on a mining lease.

Important

What matters is not how large the circle is but how honestly you have drawn its edge. Widening it is deliberate work; pretending it is already wider costs money quickly.

Related terms

  • Variant perception — A view that differs from what the market price already reflects, in a specific way you could check.
  • Overconfidence bias — Systematically overestimating the accuracy of your own judgement - in particular, being far more certain of a forecast than its track record justifies.

Lessons that explain it

  • The best opportunities are rarely the ones being shown to everyone — Deal flow is not one thing. It arrives through channels with very different quality, and the channel an opportunity came through tells you something before you have read a word of it. (10 min)
  • Being findable and useful beats hunting — Proprietary deal flow comes from relationships and reputation built before you need them. Writing publicly, helping operators and being easy to reach compound over years in a way that outreach campaigns do not. (11 min)
  • When concentration is the right call — Diversification is the correct default and it is not a law. The honest version of the argument is about what you would have to actually possess to justify departing from it. (10 min)
  • Ask whether it fits your thesis before asking whether it is good — A good company outside your thesis is a different decision from a good company inside it. Checking fit first stops attractive deals from quietly rewriting your strategy. (9 min)
  • A thesis is a belief that can be wrong. A preference cannot. — Most people who say they have an investment thesis have a preference - a list of things they like the sound of. The difference is whether anything could show it to be mistaken. (10 min)
  • The list of things you have decided not to do — An anti-thesis is written in advance and costs nothing to write, which is exactly why it works when the attractive version of the thing you swore off finally shows up. (9 min)

All 578 terms in the Investing glossary