Mastering Your Investment Universe

Hello,

Today, I aim to shed light on a crucial aspect of the investing process: knowing when you've analyzed enough information about a company to make a decision. This insight springs from my personal journey and experiences in investing.

In an era where we are constantly bombarded with information - news updates, social media posts, and glimpses into others' lives - it's easy to believe that the same principle applies to analyzing a company. However, my experience has taught me that isn't always the case. Sometimes, a one-hour interview with the CEO and a quick 10-minute skim through the annual report can provide sufficient insight to hit that 'Buy Stock' button confidently. Yet, there are instances when weeks of meticulous analysis are necessary. This is what Charlie Munger refers to as a 'cinch.' There are moments when it becomes blatantly obvious that a company is a good investment.

Let's take Prosus as an example. This company is a holding giant that owns around 80 companies and holds a stake in Tencent, a Chinese tech behemoth with an almost monopolistic hold on the IT business. When Prosus's stock dropped, it became a 'cinch' that this business deserved a thorough look.

But how do we identify these 'cinches'? The answer lies in expanding our 'Circle of Competence.' For those unfamiliar with the term, the 'Circle of Competence' is a concept used by Warren Buffett to focus investors on operating only within areas they know best. Essentially, it's about understanding your strengths and sticking to them. It's not important how large your circle is; what matters is that you know its boundaries and operate within them.

So how can we expand our Circle of Competence? Here are four key strategies:

1. Know Your Boundaries: First and foremost, understand what you do and do not know. Be honest with yourself about your current competencies, and don't be afraid to admit when you don't know something.

2. Slow and Steady Learning: Take your time to gradually and consistently learn and absorb new information. This approach will help to slowly broaden your circle.

3. Experimentation: While it's essential to operate within your Circle of Competence, sometimes stepping outside can lead to innovation and discovery. A calculated risk could be beneficial for growth and learning.

4. Balance: Find a balance between operating within your Circle of Competence and venturing outside it. Spend 80% of your time on what you're proficient in and 20% on expanding your horizons.

If you're interested in delving deeper into the concept of the Circle of Competence, here are three insightful videos featuring Warren Buffett, Charlie Munger, and Mohnish Pabrai:

1. Warren Buffett - How To Know Your Circle Of Competence

2. Charlie Munger on Circle of Competence | Daily Journal 2019

3. Mohnish Pabrai on how to develop a circle of competence

Broadening the context, let's consider Charlie Munger's application of the Circle of Competence concept in life. According to Munger, it's all about identifying and playing within your own aptitudes. This principle doesn't just apply to investing or business; it's applicable to all aspects of life, be it becoming a great tennis player or a successful plumbing contractor. The key is to continuously develop your circle of competence, partly through inherent skills and partly through diligent work.

In conclusion, the Circle of Competence is a powerful tool for making informed decisions, both in investing and in life. It's about understanding your strengths, sticking to them, but also expanding them when you can. This approach has served me well in my investing journey, and I hope it will help you in your endeavors as well.