Disclaimer: This communication is provided for information purposes only and is not intended as a recommendation or a solicitation to buy, sell or hold any investment product. Readers are solely responsible for their own investment decisions.
KEYPOINTS
Investing within your circle of competence helps you make more informed decisions by focusing on businesses you understand.
Leverage personal and professional exposure to gain unique insights into a company’s products and services.
Use AI tools and thorough research to fill knowledge gaps and evaluate companies outside your expertise.
When it comes to building a strong, long-term stock portfolio, understanding the businesses you invest in is crucial. As Warren Buffett once said, "It’s no sin to miss a great opportunity outside one's area of competence" [Buffett, 1977-2013, 1989]". This advice highlights the power of focusing on companies whose products or services you genuinely understand.
The Circle of Competence: Why It Matters
Investing within your circle of competence is more than just a safeguard—it's a tool to make better investment decisions. By focusing on companies whose business models you understand, you can more accurately assess the potential for growth, risks, and the company's position within its industry.
For example, if you're someone who frequently uses services like Spotify for music, Apple for electronic devices, Netflix for shows, or Meta for social media, Lululemon for your workout clothes, IBKR for investment brokerage, you already have insight into the quality of their products and services. You’re a user, and that user experience gives you a deeper perspective on how these companies are positioned in the marketplace.
Leveraging Personal and Professional Exposure
Your personal experiences and professional background can give you an edge when evaluating companies. For instance, software engineers might be more familiar with cloud infrastructure and understand the growing importance of platforms like Microsoft Azure. Similarly, cybersecurity professionals may have an advantage when evaluating companies like Fortinet, knowing how critical their technology is in the industry. People in sales roles, on the other hand, might be more inclined to appreciate the power of Customer Relationship Management (CRM) tools like Hubspot, recognizing how they enhance sales efficiency and processes.