FFB-Post 7
When it comes to investing, you don’t need to be an expert on every company or even many companies. You only need to be able to evaluate businesses within your circle of competence. The size of that circle isn’t important, but knowing its boundaries is vital.
You might feel that this approach is limiting, but it’s crucial to understand the importance of focusing on what you know and are interested in. Invest only in what you understand.
Defining Your Circle of Competence
Your circle of competence will likely include companies or sectors related to where you earn or spend money. These are areas where you have some level of understanding.
Some Common Sectors:
- Basic Materials: Aluminum, copper, gold, silver, oil & gas, agriculture.
- Consumer Goods: Liquor, cigarettes, dairy, electronics, farm products, meat, tobacco.
- Health Care: Pharmaceuticals, biotech, hospitals, medical devices.
- Financial: Insurance, credit, REITs, banks.
- Industrial Goods: Cement, lumber, construction, contractors, textiles, waste management.
- Technology: IT, software, semiconductors, telecom.
- Services: Advertising, delivery, TV, radio, retail stores, gaming, movies, publishing.
These examples are to give you a broad idea. Circle at least three sectors that fall within your area of competence. Knowing where to focus your efforts is crucial. Trying to be good at everything often results in being mediocre at many things.
Importance of Knowing Your Boundaries
Understanding your circle of competence helps you make more informed and confident investment decisions. It allows you to leverage your existing knowledge and interest, reducing the risk associated with unfamiliar industries.
Next Steps
In the next post, I’ll share the sectors I feel are great and explain my reasoning. This will help you see how to apply the concept of the circle of competence to your investment strategy.
Stay tuned for more insights and practical tips on building your investment portfolio.
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