Understanding where you excel and where you fall short is a key advantage in avoiding problems, identifying opportunities, and accelerating your learning.
We all possess a “circle of competence,” a domain where our experience and knowledge run deep. The size of this circle is less important than recognising when you’re reaching its edge. Inside this circle, you have the upper hand. But as you approach its boundaries, your advantage diminishes. Cross the line, and you’ve entered a space where others hold the upper hand. Suddenly, you’re playing a game on their terms.
Being proficient in one area doesn’t mean you’re skilled in everything.
A chess Grandmaster dominates the board, but that mastery doesn’t carry over to other fields, like cooking. In fact, extreme expertise in one area can often result in glaring weaknesses in others.
“I want to engage where I have an edge over others. I don’t want to play where others are better positioned. It’s wiser to compete where I hold the advantage,” said Charlie Munger.
As you approach the boundaries of your expertise, your confidence might remain high, but your competence falls off more quickly. This is the real danger of stepping outside your circle of competence—being blindsided by what you don’t know.
Most people focus on enlarging their circle, but it’s far more critical to understand when you’re nearing its perimeter.
Circle of Competence
“I’m no genius. I’m smart in certain areas—but I stick to those areas.”
— Tom Watson Sr., Founder of IBM.
Warren Buffett illustrates the concept through Rose Blumkin, a business manager who founded the largest furniture store in Nebraska. Despite speaking limited English and having little knowledge of stocks, she mastered furniture and real estate. Her sharp focus on her strengths, without venturing into stocks, enabled her success. She didn’t need to broaden her circle of competence, she just stayed focused on what she knew best.
Charlie Munger broadens this concept. He asks: Where should you spend your time to maximise success?
“You have to figure out your aptitudes. If you play where others have the edge, you’ll lose. But if you stay within your circle of competence, your odds of success improve.”
This wisdom extends to everything in life. Say you want to be a tennis champion, but your natural ability can’t compete with others. It may be hopeless. But if you want to be the top plumbing contractor in a small town, that’s within reach if you’re disciplined and work hard. Mastering the plumbing business in Bemidji, for example, is a realistic goal for many.
The same principle applies to Munger’s decisions in business. When asked why Berkshire Hathaway doesn’t invest in pharmaceuticals, he replied:
“By and large, we don’t invest in pharmaceuticals because we have no edge. I don’t know enough about biology or chemistry to accurately assess which drugs will succeed. Why compete in an area where others are far better equipped, especially when the stakes are high?”
To succeed in life, you must strike a balance between confidence and humility. Know what you know, but also recognise what you don’t. If you understand the limits of your knowledge, you make better decisions, take fewer risks, and are less likely to suffer costly failures.
“It’s better to have an IQ of 160 and think it’s 150 than to have an IQ of 160 and think it’s 200. The latter type will be dangerous because they’ll overestimate their abilities.”
Both Buffett and Munger are acutely aware of their strengths and weaknesses. They avoid areas where they don’t have an advantage—like guessing which new pharmaceuticals will succeed—and leave those opportunities to others.
The world offers a vast array of possibilities. You don’t need to chase after every one of them. Sometimes, the smartest move is walking away from something you don’t understand.
How to Strengthen Your Circle of Competence
To increase your chances of success, stick to areas well within your circle of competence. Over time, you can gradually expand it by gaining experience and learning. But always be mindful of its boundaries, and never hesitate to admit when you simply don’t know enough.
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