Berkshire Hathaway 2002 Annual Meeting Audience Question # 29

How young people can develop and define their circle of competence

Warren Buffett:

What was the first question again that…

Audience Member:

It was how a youngster like myself would define and develop a circle of competence.

Warren Buffett:

Oh, yeah, that’s a good question. And I’m… you know. I’d… I would say this, if you have doubts about something being into your circle of competence, it isn’t.

You know, I mean, in other words, I would look down the list of businesses and I would bet you that you can… I mean, you can understand a Coke bottler. You can understand the Coca-Cola Company. You can understand McDonald’s.

You can understand, you know, you can understand, in a general way, General Motors. You may not be able to value it.

But there are all kinds of businesses. You can certainly understand Walmart. That doesn’t mean whether you decide whether the price… what the price should be… but you understand Walmart. You can understand Costco.

And if you get to something that your friend is buying, or that everybody says a lot of money’s going to be made, and you don’t… you’re not sure whether you understand it or not, you don’t.

You know, I mean, and it’s better to be well within the circle than to be trying to tiptoe along the line.

And you’ll find plenty of things within the circle. I mean, it’s not terrible to have a small circle of competence. I’d say my circle of competence is pretty small, but it’s big enough. You know, I can find a few things.

And when somebody calls me with a Larson-Juhl, that is within my circle of competence. I hadn’t even thought about it before, but

I know it’s within it. I mean, I can evaluate a business like that.

And if I get called… I got called the other day on a very large finance company. I understand what they do, but I don’t understand everything that’s going on within it, and I don’t understand that… whether I can continually fund it, you know, on a basis, independent from using Berkshire’s credit, and so on.

So, even though I could understand every individual transaction they did, I don’t regard the whole enterprise, or the operation of it, necessarily as being within my circle of competence.


Charlie Munger:

Yeah, I think that if you have competence, you almost automatically have a feeling of where the edge of the competence is.

Because after all, it wouldn’t be much of a competence if you didn’t know its boundary. And so, I think you’ve asked a question that almost answers itself.

And my guess is you do know what you’re perfectly competent to do, you know, all kinds of areas. And you do have all kinds of other areas where you know you’d be over your depth.

I mean, you’re not trying to play chess against Bobby Fischer or do stunts on the high trapeze if you’ve had no training for it.

And my guess is you know pretty well where the boundaries of your competence lies. And I think you also probably know pretty well where you want to stretch the boundary. And you’ve got to stretch the boundary by working at it, including practice.

Warren Buffett:

And one of the drawbacks to Berkshire, of course, is that Charlie and I, our circles largely overlap, so you don’t get two big complete circles at all, but that’s just the way it is. And it’s probably why we get along so well, too.

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