281- Circle of Competence

Invest in what you understand. Sounds simple, right? Shouldn’t everyone be investing in what they understand? Warren Buffett once stated that defining your circle of competence is the most important aspect of investing. 

Circle of competence is tricky to define, but is essentially built by the things you are passionate about, what you’re talented or good at, and things you spend money on. It could even be related to the industry you currently work in and are knowledgeable about. The goal is to be proud of the companies you own, and how your money is being used to support those businesses.

In many ways, defining your circle of competence comes naturally. However, as you live your life, your interests will change and expand, and you can apply these new interests to your investing strategy.

Take Warren Buffett for example. Much of the reason why he invested in Coca Cola is simply because he appreciates the company and enjoys the product. It aligns with his values, thus making it a great fit within his circle of competence. 

Let me give you another example. I’m a fan of motorcycles, so researching and investing in Harley Davidson was a natural choice for me. Since Harley Davidson is a company that is within my circle of competence, I enjoyed learning about them, I understand their business more easily, and am happy to have owned the company.

Investing in your circle of confidence will help you reduce risk and makes your initial stages of research much more enjoyable. Although, it’s an often overlooked factor since many investors feel that they can make money with any company—regardless of whether they understand it or whether it aligns with their values. 

Today, Phil and Danielle dive deeper into the concept of circle of competence, and why it is a critical part of successful investing.

If you want to learn more about your own circle of competence, download my FREE 3 Circles Exercise Guide. It will help point you in the right direction so you can invest in businesses you understand!: https://bit.ly/3luGI4V

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