Understanding your circle of competence helps you avoid problems, identify opportunities for improvement, and learn from others.

concept of the Circle of Competence has been used over the years by Warren Buffett as a way to focus investors on only operating in areas they knew best

bones of the concept appear in his 1996 Shareholder Letter:

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. The size of that circle is not very important; knowing its boundaries, however, is vital.

Circle of Competence is simple: Each of us, through experience or study, has built up useful knowledge on certain areas of the world. Some areas are understood by most of us, while some areas require a lot more specialty to evaluate.

“I’m no genius. I’m smart in spots—but I stay around those spots.”

— Tom Watson Sr., Founder of IBM

Our circle of competence can be widened, but only slowly and over time. Mistakes are most often made when straying from this discipline.

Buffett describes the circle of competence of one of his business managers, a Russian immigrant with poor English who built the largest furniture store in Nebraska:

I couldn’t have given her $200 million worth of Berkshire Hathaway stock when I bought the business because she doesn’t understand stock. She understands cash. She understands furniture. She understands real estate. She doesn’t understand stocks, so she doesn’t have anything to do with them. If you deal with Mrs. B in what I would call her circle of competence… She is going to buy 5,000 end tables this afternoon (if the price is right). She is going to buy 20 different carpets in odd lots, and everything else like that [snaps fingers] because she understands carpet. She wouldn’t buy 100 shares of General Motors if it was at 50 cents a share.

It did not hurt Mrs. B to have such a narrow area of competence. In fact, one could argue the opposite. Her rigid devotion to that area allowed her to focus. Only with that focus could she have overcome her handicaps to achieve such extreme success.

essential question he sought to answer: Where should we devote our limited time in life, to achieve the most success?

You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.

If you want to be the best tennis player in the world, you may start out trying and soon find out that it’s hopeless—that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably doable by two-thirds of you. It takes a will. It takes the intelligence. But after a while, you’d gradually know all about the plumbing business in Bemidji and master the art. That is an attainable objective, given enough discipline.

people who could never win a chess tournament or stand in center court in a respectable tennis tournament can rise quite high in life by slowly developing a circle of competence—which results partly from what they were born with and partly from what they slowly develop through work.

If you want to improve your odds of success in life and business, then define the perimeter of your circle of competence, and operate inside. Over time, work to expand that circle but never fool yourself about where it stands today, and never be afraid to say “I don’t know.”