Circle of Competence: The Key to Smart Investing

Hello, dear Investors!

I hope this letter finds you well and eager to delve deep into the realms of value investing. Today, we turn our attention to a principle that's both deceptively simple and profoundly significant: the circle of competence.

In todays letter

• Learning: Dollar cost averaging strategy and why most people use it

• News insights

  • European Gas Up 40% Amid Supply Fears

  • AI Bigwigs Losing American Trust

  • Apple Card Savings Hits $10 Billion Mark

• Key takeaways from Charlie Munger's interview: advice on investing and life choices

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Understanding the Circle of Competence

The circle of competence refers to the set of topics or areas where one has profound expertise or understanding. As Warren Buffett once put it, "It's not important how large your circle is; what's paramount is knowing its boundaries." Recognizing and staying within our circle of competence makes decision-making clearer, reduces the chances of errors, and, in the investment world, can be the key to financial success.

Why is it so critical? When we stray outside this circle, we enter a territory where our understanding is not deep enough, leading to uninformed decisions. Mistakes often cost money in the world of investing, but they can be minimized by sticking to what we truly know.

Illustrating with an Example

Let's say you're an expert in the tech sector, with a deep understanding of emerging technologies and market trends. Investing in a new, innovative tech startup would be within your circle of competence. However, if you suddenly decide to venture into pharmaceutical investments without the requisite knowledge, you'd be stepping outside your circle, thereby increasing the risk of making a costly mistake.

5 Ways to Expand Your Circle of Competence

1. Continuous Learning: Regularly update yourself with books, articles, and courses. The world evolves, and so should your knowledge.

2. Engage in Healthy Debates: Discussing with peers and experts can challenge your perspectives, making your understanding more rounded.

3. Practice Reflection: Analyze your past decisions, both the hits and misses. Understanding where you went wrong or right can expand your circle.

4. Stay Curious: Curiosity might have killed the cat, but it certainly broadens the investor's circle of competence. Ask questions and seek answers relentlessly.

5. Limit Overconfidence: Overestimating our abilities can blind us to our actual competence. Be aware of the Dunning-Kruger effect, where one's ignorance on a subject can lead them to overestimate their knowledge.

Fact to Ponder: Did you know that Warren Buffett's investment in Coca-Cola was based on his deep understanding and belief in the brand's value, falling squarely within his circle of competence? On the other hand, Buffett often avoided tech stocks for a long time, acknowledging that they were outside his area of expertise. It wasn't until much later, with the likes of Apple, that he ventured into tech, but only after a thorough understanding.

The circle of competence is not static; it evolves and grows as we do. However, recognizing its boundaries at any given time is crucial. In the words of Charlie Munger, "You have to know what you know and what you don't know. It's not the size of the circle that counts; it's the quality." So, dear readers, as we journey through the investment landscape, let's ensure we're armed with the right knowledge and always aware of our circle's boundaries.

News insights

European Gas Up 40% Amid Supply Fears

European natural gas prices experienced a significant rise of nearly 40% due to concerns over a potential disruption in global liquefied natural gas supply from Australia. The concern stems from reports that workers at key LNG plants in Australia are considering strike action for improved pay and job security, leading to heightened fears despite European gas storage levels nearing full capacity.

[📝Full article]

Key takeaway

This surge in gas prices illustrates the fragility and interconnectedness of the global energy market. For investors, this indicates that the energy sector remains volatile, with external factors like geopolitical tensions and labor disputes having profound impacts. It would be prudent for investors to monitor these developments closely and diversify their energy portfolios to mitigate potential risks.

AI Bigwigs Losing American Trust

Zoom has come under scrutiny over its utilization of customer data to train artificial intelligence, leading to increased mistrust. A recent YouGov poll revealed that 82% of American voters do not trust tech executives to regulate AI, indicating widespread concerns about tech giants' handling of AI and associated user data.

[📝Full article]

Key takeaway

The mounting mistrust towards AI tech giants, as evidenced by the backlash Zoom faced and the YouGov poll, signifies a changing sentiment among consumers. For investors, this underscores the importance of investing in companies that prioritize transparency and ethical AI practices, and it may be prudent to monitor tech companies' governance and public reputation closely before making investment decisions.

Apple Card Savings Hits $10 Billion Mark

Since its launch in April, Apple Card's high-yield Savings account offered by Goldman Sachs has amassed over $10 billion in deposits. The savings account, integrated into the Apple Wallet, offers a high-yield APY of 4.15 percent and aims to promote financial health for its users, with 97 percent of users opting to have their Daily Cash automatically deposited.

[📝Full article]

Key takeaway

The impressive uptake of the Apple Card’s Savings account indicates strong consumer trust in the Apple-Goldman Sachs partnership and showcases the increasing convergence of tech and finance sectors. Investors should watch for further innovations from tech giants in the financial space, but always consult with financial advisors before making investment decisions based on such news.

Key takeaways from Charlie Munger's interview: advice on investing and life choices

Here are five key takeaways from the interview:

1. Charlie Munger's Role at Berkshire Hathaway: Charlie Munger has been a significant figure at Berkshire Hathaway for over 40 years, serving as the vice-chairman. He is not only Warren Buffett's right-hand man but also an investing legend in his own right. In the 1960s and 70s, Munger ran a firm that achieved returns of over 24% per year.

2. The Nature of Common Sense: Munger emphasizes that when people refer to "common sense," they often mean "uncommon sense." He believes that the standard human condition is ignorance and stupidity, and what is often termed as common sense is actually a rare quality.

3. US Economy and Money Printing: Munger acknowledges that the US economy is currently booming. He points out that the country has never printed and spent money at such a scale before, which was a risky move but turned out to be a wise response to the economic challenges. This massive money printing and spending was a bipartisan decision made by both Congress and the presidency.

4. Wealth and Income Inequality: Munger believes that the current wealth and income inequality in the US is a byproduct of governmental decisions made to combat the Great Recession. He thinks that it will eventually correct itself and that there's no need for extreme measures. However, he does believe in the potential benefits of raising the minimum wage and enlarging the social safety net.

5. Political Partisanship: Munger expresses concern about the extreme partisanship and anger seen in both major political parties. He reminisces about a time when there was more civility in politics and wishes for a return to such a state.

[🎥Full video]

Until next time, stay informed and invest wisely!