Circle of Competence
Know the boundaries of what you truly understand.
Key Principle
Knowing what you don't know is more useful than being brilliant.
Understanding Circle of Competence
Your circle of competence is the subject area that matches your skills and expertise. Inside the circle, you have a genuine understanding. Outside it, you're operating on superficial knowledge or borrowed opinions.
The key insight isn't that you need a large circle—it's that you need to know where its edges are. Many catastrophic failures come from people operating confidently outside their circle of competence without realizing it.
Warren Buffett and Charlie Munger made this concept central to their investment approach. They only invest in businesses they thoroughly understand, which means saying "no" to many opportunities that fall outside their circle—including most technology companies for decades.
Real-World Examples
- Buffett avoided technology stocks for decades because he didn't understand the businesses, despite pressure from investors.
- A software engineer who understands code deeply but recognizes they don't understand marketing shouldn't make marketing decisions alone.
- A doctor who's an expert in cardiology refers complex neurological cases rather than guessing.
- A founder who's great at product but weak at sales hires a sales leader rather than pretending they can do both.
How to Apply This
Before making a decision, honestly assess: Am I inside or outside my circle of competence?
When outside your circle, either learn deeply or delegate to someone whose circle includes that area
Actively work to expand your circle in areas relevant to your goals
Be most skeptical of your opinions in areas where you have surface-level knowledge
Common Mistakes to Avoid
- Overestimating the size of your circle (the Dunning-Kruger effect)
- Refusing to act outside your circle when action is necessary
- Not actively working to expand your circle over time
- Confusing confidence with competence
Notable Quotes
"Knowing what you don't know is more useful than being brilliant."
— Charlie Munger
"What an investor needs is the ability to correctly evaluate selected businesses. Note that word "selected": You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence."
— Warren Buffett
"The size of that circle is not very important; knowing its boundaries, however, is vital."
— Warren Buffett