Tuesday, August 11, 2009

Circle of Competence

Here's an interesting exchange between Warren Buffett and Charlie Munger:*

Munger: A foreign correspondent, after talking to me for a while, once said: "You don't seem smart enough to be so good at what you’re doing. Do you have an explanation?" [Laughter] 

Buffett: Was he referring to me or you? [Laughter] 

Munger: I said, "We know the edge of our competency better than most." That's a very worthwhile thing. It's not a competency if you don't know the edge of it.

Also, below are some additional miscellaneous quotes on knowing your circle of competence and the importance of staying within limits:

"There are two kinds of people who lose money. Those who know nothing, and those who know everything." - Henry Kaufman

"If you have competence, you know the edge. It wouldn't be a competence if you didn't know where the boundaries lie. It's a question that almost answers itself." - Charlie Munger

"...Warren and I don't feel like we have any great advantage in the high-tech sector. In fact, we feel like we're at a big disadvantage in trying to understand the nature of technical developments in software, computer chips or what have you. So we tend to avoid that stuff, based on our personal inadequacies.

Again, that is a very, very powerful idea. Every person is going to have a circle of competence. And it's going to be very hard to advance that circle. If I had to make my living as a musician.... I can't even think of a level low enough to describe where I would be sorted out to if music were the measuring standard of the civilization.

So 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." - Charlie Munger

"...just as a man working with a tool has to know its limitations, a man working with his cognitive apparatus has to know its limitations." - Charlie Munger

"Organized common (or uncommon) sense — very basic knowledge — is an enormously powerful tool. There are huge dangers with computers. People calculate too much and think too little." - Charlie Munger

Part of [having uncommon sense] is...to tune out folly, as opposed to recognizing wisdom. If you bat away many things, you don't clutter yourself. - Charlie Munger

"In the corporate world, if you have analysts, due diligence, and no horse sense you've just described hell." - Charlie Munger

"If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter." - Warren Buffett

Much of the above seems straightforward enough but, at times, those who possess excessive confidence -- even those who are otherwise very smart and capable -- misjudge where the true edge of their competence resides.


* Some of these comments are from notes taken at Berkshire Hathaway shareholder meetings. So, in some cases, I've not included quotations because it isn't clear whether the notes reflect the exact words that were used at that meeting.
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