One of Warren Buffett’s big mental models is the “circle of competence.” In order to be a great investor, Buffett didn’t need to know everything about every company. He only needed to know a few select companies better than anyone else. He could pass on thousands of investments as long as he knew he could correctly evaluate the ones he’d eventually put money into.
“Know your circle of competence, and stick within it,” Buffett says. “The size of that circle is not very important; knowing its boundaries, however, is vital.”
Knowing what you know, what you don’t know, and how much you need to know are the only three parts you need to make better decisions. One big challenge is mapping the terrain between the first two without venturing well into no-idea-territory. Many times in life, you need to go past your limits to find them.
Every now and then, however, a line in the sand will present itself clearly. Like the other day for me, when I realized: I love collecting and investing in Pokémon cards—but I could never run a business around shiny cardboard.
For one, I’d never want to actually sell any of my inventory! I’d always be speculating on the price going up. I would be too greedy in the prices I ask for. I love holding on to good assets way more than I enjoy giving someone a good deal, even though that’s also fun. But a good Pokémon business thrives on turnover. You need tons of transactions and to make enough profit with each one. Me, I’m exhausted from printing 10 shipping labels, prepping all the cards, and ensuring they all go to the right buyers. I love organizing, storing, and tracking. Not moving, packaging, and shipping.
Collecting Pokémon cards with a long-term angle is well within my circle of competence. Running a Pokémon card shop isn’t. It was a dream I had mused over a few times, but when that reflection hit me, I was relieved to realize I wasn’t cut out for it. One thing less to worry about. A beautiful, unlived dream.
When you see the edge of your circle of competence, don’t get greedy. Respect it. Appreciate it. Stick to the arena in which you can excel, and use your learning to build on strengths more so than to compensate weaknesses.
Knowing your boundaries before you hit them is a gift. Accept it.
