What you think you know vs. what you actually know

“I’m no genius. I’m smart in spots – but I stay around those spots.”

– Tom Watson Sr., Founder of IBM

This week I want to share one of my favorite mental models from two of my role models, Charlie Munger and Warren Buffett: the Circle of Competence.

While Buffett and Munger developed the Circle of Competence as a mental model to limit where to make financial investments (based on understanding and / or experience), I’ve found the model to be useful in all areas of life. The idea is to understand where you’re naturally strong and stay within that area.

Think of it like this:

Circle of Competence

Share this mental model with your network and see what they think.

Your circle of competence is the subject area that matches your skills or expertise. And understanding your own will help you concentrate on areas you have the greatest familiarity with while also aligning a subjective assessment of your own competence with your actual competence.

And it’s not the size of the circle that matters, but how well you stick within it.

“Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.”

– Warren Buffett

Andrew Carnegie, potentially the originator of the idea, went so far as to encourage mentees to not only concentrate all of their time and attention within one’s own circle of competence, but to invest every dollar of their own wealth into it.

Sticking strictly to their own circles is what makes Buffett and Munger among the most successful investors in history. They stick to what they know.

And remaining within one’s circle has a number of benefits – an unfair information advantage, a narrower pool of available options, and the reduction of poor decision making. Pretty powerful stuff.

So this weekend I encourage you to think about where the limits of your own circle lie.

– DC

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