“Know your circle of competence, and stick within it. The size of the circle is not very important; knowing its boundaries is.” — Warren Buffett Listening to Warren Buffett is how I first learned about the “circle of competence.” It’s blindingly simple, so much so that I wish someone had explained it to me when I first started investing. Understanding this concept early on would’ve saved me a lot of time, doubt, and bad decisions. In this post, I’ll break down what a circle of competence is, why it matters, and how it can make you a more confident investor. You’ll learn how to recognize your own circle, how to stick to it, and how to expand it over time without feeling overwhelmed. What is a circle of competence? Think of your circle of competence as your investing comfort zone. It’s built from your knowledge, experiences, and interests. What topics are you naturally drawn to? What industries do you understand without needing a crash course? The articles you choose to read, the work you’ve done, the hobbies you pursue, these shape the limits of your circle. For example, during and after high school, I worked in retail. I spent about eight years in a supermarket, eventually becoming very familiar with how the business runs. Today, one of my largest holdings is the same company I once worked for. I still shop there regularly, and I understand their pricing, product flow, customer base, and how they compete. That kind of familiarity gives me confidence as an investor. It’s not about insider knowledge, it’s about knowing what you’re looking at. Why It Works: Lessons from Warren Buffett Warren Buffett and Charlie Munger often stress one core idea, invest in what you understand. Successful investing isn’t about guessing right or catching the next big thing. It’s about knowing the businesses you put your money into and having the patience to stick with them. When you understand a company or industry, you’re not just gambling, you’re making educated decisions based on how that business works and how it makes money. That insight gives you the confidence to stay calm during market swings and avoid getting pulled into shiny trends you don’t fully grasp. Sure, chasing a meme stock might feel exciting, but so does skydiving without a parachute. One just ends better than the other. Compounding growth comes from companies that grow steadily and predictably, not from rolling the dice on hype. Use your brain, not your adrenaline. How do you know what’s in your circle? A company or sector belongs in your circle of competence when you already understand how the business works. You should know what drives its revenue, who the key players are, and what common pitfalls exist in that market. So how do you know if something is outside your circle? Simple. If you have to Google every single term or concept related to the business, chances are it’s not in your circle, yet. A good rule of thumb is this: if you can’t explain the company or investment in plain language to someone else, you probably don’t understand it well enough to invest confidently. When researching a stock or ETF, take notes like you’re preparing for an exam or a presentation. I keep mine in OneNote, but any kind of journal or document works. This is also where AI can help. Ask it questions, challenge your understanding, and then double-check the facts. One trick I really like is talking to a friend or family member about the company. If your explanation starts falling apart mid-sentence, that’s a pretty clear sign you’re not quite there yet. Can you expand your circle? Absolutely. But it should be done with purpose, not just curiosity. Your circle of competence isn’t fixed, it can grow, but only with time and effort. Maybe you’re switching careers, diving into a new sector, or simply taking an interest in a field you’ve brushed up against before. Start by reading annual reports or listening to earnings calls. Follow news stories in that industry. Don’t aim to master it all at once, begin with companies that overlap with what you already know or seem naturally understandable to you. The key is patience. Building true competence takes time. You’re not just gathering facts, you’re developing intuition. Think of it more like learning a language than cramming for a quiz. How wide is wide enough? There’s no fixed number of sectors you need to be competent in. It really depends on the depth of the knowledge you already have. In general, it’s better to have a deep understanding of a few areas than a shallow grasp of many. For example, if you’re comfortable with tech and healthcare, there’s nothing wrong with focusing your investments on just those two sectors. But let’s be clear, skimming a few headlines isn’t the same as understanding a business. You need to know what decisions are being made, how the company earns money, and what risks it faces. That doesn’t mean you have to follow every press release after buying, but you do need to do your homework upfront. It’s like buying shoes. You wouldn’t blow half your salary on a pair of sneakers without trying them on first, especially if you couldn’t return them. You want to know they fit before you commit to running a marathon in them. It’s not about how big your circle is. It’s about knowing exactly where the boundaries are. Final thoughts Take some time for honest reflection and focus on your strengths. Write down industries or companies where you already have some base knowledge, or where you’re genuinely interested in learning more. Once you have that list, dive deeper and start figuring out what really makes those businesses tick. A classic example is Coca-Cola. It’s simple to understand. They make soft drinks. They sell them around the world through retail stores and restaurants. You’ll see why many investors use such blue‑chip stocks for dividends in my guide →
