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.
Likewise, professionals in supply chain management or retail might find tools like SPS Commerce more relatable. These platforms streamline processes between vendors and suppliers, ultimately improving customer shopping experiences—making it easier to identify their potential for long-term success.
If you work in law enforcement, you may be familiar with Axon’s range of products, such as body cameras, tasers, and digital evidence management solutions. As someone exposed to the daily use of these tools, you would better understand their impact on safety, operational efficiency, and accountability. This firsthand experience can provide a strong foundation when evaluating Axon’s business model and growth potential, giving you insights that others might overlook.
This kind of professional exposure gives you a unique advantage, as you are able to assess these companies based on how integral their products are to the industries in which you work.
You Don’t Have to Know Everything—Leverage AI to Learn
It’s important to note that you don’t have to understand every detail about every company in your portfolio. No one can fully grasp all the complexities of every industry. However, with the availability of AI tools today, it’s easier than ever to fill in knowledge gaps.
For instance, if you're intrigued by a company like Fortinet but don’t come from a cybersecurity background, you can use AI chatbot tools to help explain the company's business in simple terms. You might ask something like:
"Please help explain Fortinet’s business in simple terms. I am not from a cybersecurity background, but I am interested in evaluating their medium- to long-term growth potential. How do they make money, how do they distribute their products, and what value do they provide to customers?"AI tools can provide useful insights, but it’s always important to cross-reference their responses with more reliable sources like the company’s investor presentations or quarterly reports. These materials are rich in visual aids and explanations, which can help you better understand the dynamics of a company.
Invest in What You Know, or Take the Time to Learn
In short, investing within your circle of competence can be an effective strategy to assess a company’s long-term potential. You already have a deeper understanding of companies you're exposed to regularly, whether as a customer or a professional. If you're intrigued by a company outside your expertise, AI tools and research can help bridge the gap, ensuring you're making informed decisions based on reliable information.
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