Circle of Competence
Warren Buffett · 1996
"It isn't the size of the circle that counts, but knowing where its edge is."
Everyone has a domain in which they can reasonably assess risk and reward — their circle of competence. Outside it, they're guessing. Buffett's rule: know where your circle ends, and don't step over the line just because opportunities look interesting.
The circle can grow with study, but only slowly. The costly mistake is not being small — it's being unaware of the edge and confidently opining on things you don't understand. Confidence outside your circle is asymmetric: the upside is normal, the downside is ruinous because you can't see the risks that are obvious to real experts.
What does Buffett say matters most about the circle of competence?
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The explanation above is written with AI assistance. These are the originals — go to them to check it.
- Berkshire Hathaway Shareholder Lettersberkshirehathaway.com
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