Updated: Sep 21, 2020
Every one of us has a unique background, due to our life experience and expertise through study or work. We accumulate useful knowledge on certain specific areas. Some can be considered general knowledge, while others require special expertise and aptitude to make assessments.
Warren Buffet, the highly regarded investor and fund manager of the 20th Century, and CEO of Berkshire Hathaway stated in his 1996 Shareholder letter:
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; knowing its boundaries, however, is vital.
SO WHAT IS THIS CIRCLE OF COMPETENCE?
This intellectual paradigm can be explained as a “special topic or subject” that matches an individual’s expertise in both knowledge and skills. Mr Buffett advocates the idea to restrain an individual’s financial investments to subjects where the individual would have limited experience or understanding, while focusing on areas where that individual is most familiar. He also stated that associating one’s subjective evaluation with that person’s own genuine capability is essential.
The scope of each person’s COC can be determined by profession, interests, habits and familiarity with specific products and services. Some benefits can be conferred by remaining within one’s own COC, such as possessing unfair advantage in information, reduction of available choices, elimination of bad judgments, and wiser decisions.
HOW TO ASSESS YOUR OWN COC?
Ask yourself these questions:
Which industry are you working in? What are associated industries?
What do you read and watch in your free time? What skills take up your free time. What are interests and hobbies that you feel you are good?
What products and services consume your personal passion?
What, due to your family background, gives you certain expertise in greater depth than the average person in the street?
Which kind or products and services do you use frequently, give you favourable impressions, and lead you to spend time finding more about?
FIND THE LEADING PUBLIC LISTED COMPANIES WITHIN YOUR COC
Research for companies specializing in products and services for industries within your COC. It is also wise to check the macroeconomic trends to verify the economic forecasts for these industries.
After list the major players in that specified industry, shortlist those companies which you feel have potential to thrive, due to innovation, strong fundamentals etc. Then, for each organization, do detailed research to check the competitive edge, business model and management style. You may have to include attending business conferences, reading annual reports and market analysis reports, watching industry news and company press releases, amongst others.
CONTINUE TO EXPAND YOUR COC
Make a second list, highlighting the industries which you have great passion for and not yet have special expertise. These areas are those which would want to have greater and more detailed knowledge and skills because you believe in these industries.
Subsequently, research organisations that fall within this new COC you wish to acquire, create a realistic action plan.
To give an example, I am personally trained in science and engineering. In my previous field of work, I am familiar with workings of the petroleum, natural gas, base petrochemical, water treatment and mining industries – giving me knowledge in the energy sector, and also in base materials, utilities and part of the industrial sector. I later took a finance degree and was therefore introduced to the financial sector which also counts as another COC. I use computers and social media often and took an active interest in the information technology and communications sectors. Finally, I use foods and beverages, household goods, and hygiene products, and am therefore also familiar with the Consumer Staples sector. I have limiting knowledge in healthcare, consumer discretionary and real estate sectors. What I know Is that every sector is affected by industry regulations and also market conditions, including supply of raw materials and demand of consumers.
The effort of continually striving to expand your COC is a long but beneficial process of self improvement. With determination and sufficient discipline, this is an attainable objective.