Defining Your Circle of Competence

Recently, i've been reading up books on investment and i would like to particularly highlight a topic which i came across from book: The Winning Investment Habits of Warren Buffett & George Soros. I will not highlight content of the book, though, as some of the topics takes more than my knowledge to apprehend. In future, i hope to share the points that i picked up from it to all.

However, there is one particular topic inside the book which i truely agree with and hope to share.

Topic: Defining Your Circle of Competence
- Master Investor is uninterested in investment he don't understand because he knows his own limitations.
- This makes MI always define his circle of competence.
- MI makes money easily when he stay within that circle of competence.
- He is not inerested investing in something that is outside that circle although grass may be greener somewhere outside his circle.

To MI, his investment style is a fit to his personality. Doing something else is equivalent to wearing a suit that doesn't fit. An Armani suit that's too big or too small is worse that a cheap suit that's exact you size.

To Buffett and Soros, they built their circle of competence by answering 3 questions:-
1. What am i interested in?
2. What do i know now?
3. What do i like to know about, and be willing to learn?

Another important point that the author (Mark Tier), highlights is to consider whether if it's possible to make money in an area that interest you? One example of industry which he highlighted is the airline industry, which always fascinated him. However, he mention that airline industry is an investment blackhole requiring enless amount of capital which usually ends up going to pilots' union.

Conclusion:-
By answering the questions above, only then will you be able to zoom into your own investment niche and be very clear about your own limitations. This will also help you stay away from so called "investment opportunities" that fail to meet your criteria.

In other words, for a beginner investor like myself, it is important to find my own investment niche, in the field that i truly have interest in. From there, i will have to gather as much information as possible (A - Z ) about that industry, so that when i start investing in that particular investment niche, i know what is going on within that circle of competence. I know when is the right time to start buying and most importantly, when to sell it and make profit from it. In my opinion, this is one method that beginner or even advance investor should adopt to reduce risk of investment.

"if you dont understand it, don't do it," - Warren Buffett