Investing Within Your Circle of Competence

Investing within your circle of competence is the belief that people should choose a single area of focus for investments. The area of choice should be one in which they have developed a familiarity far above that of an average investor. The concept was made popular by the great investor Warren Buffett, who believes that an investor does not need to develop a large circle of competence, but the investor must recognize those areas outside of their area of expertise. For beginning investors, developing a circle of competence is a good way to narrow down all available investment opportunities to a more manageable list.

Peter Lynch, the former and very successful manager of the Fidelity Magellan Fund had a similar philosophy. In fact, he has stated that many of his most successful investments resulted in his own experiences as a consumer and trips to the mall with his family. The “father of value investing”, Benjamin Graham, relayed the story in one of his investment books of an average man who became very familiar with the American Water Works Company and made a fortune over his lifetime in the buying and selling of that single security.

Many investors develop their circle of competence through a simple of review of their life experiences, including education, work experience, and hobbies. An advanced degree in business or finance is not required; you might simply look at the products and services you use on a regular basis and any brand loyalty you might have.

When investing with a circle of competence approach, it’s important to be honest with yourself. Did your part-time high school job at a super market really make you an expert in food and beverages? If you believe, with a reasonable degree of certainty, that you could be run a successful company in a particular industry, you may have found the right niche for yourself.

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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