The 'Circle Of Competence'

The 'Circle Of Competence' Theory Will Help You Make Vastly Smarter Decisions                   

“I’m no genius. I’m smart in spots—but I stay around those spots.”
— Tom Watson Sr., Founder of IBM

The 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. The 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.

It’s a simple concept: 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.

 

For example, most of us have a basic understanding of the economics of a restaurant: You rent or buy space, spend money to outfit the place and then hire employees to seat, serve, cook, and clean. (And, if you don’t want to do it yourself, manage.)

 

From there it’s a matter of generating enough traffic and setting the appropriate prices to generate a profit on the food and drinks you serve—after all of your operating expenses have been paid. Though the cuisine, atmosphere, and price points will vary by restaurant, they all have to follow the same economic formula.

 

That basic knowledge, along with some understanding of accounting and a little bit of study, would enable one to evaluate and invest in any number of restaurants and restaurant chains; public or private. It’s not all that complicated.

 

However, can most of us say we understand the workings of a micro-chip company or a biotech drug company at the same level? Perhaps not.

 

But as Buffett put so eloquently, we do not necessarily need to understand these more esoteric areas to invest capital. Far more important is to honestly define what we do know and to stick to those areas. The circle can be widened, but only slowly and over time. Mistakes are most often made when straying from this discipline.

 

* * *

The concept applies outside of investing.

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, thusly:

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.

In fact, Charlie Munger takes this concept outside of business altogether and into the realm of life in general. The essential question he sought to answer: Where should we devote our limited time in life, in order to achieve the most success? Charlie’s simple prescription:

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. And 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.

So, the simple takeaway here is clear. 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.”

 

Circle of Competence is part of the Farnam Street latticework of mental models.

Read more: http://www.farnamstreetblog.com/2013/12/mental-model-circle-of-competence#ixzz2mfGI0rTp

How to Set Goals: 10 Steps to Stay Focused

How to Set Goals: 10 Steps to Stay Focused August 29 by Sarah Hansen 

For most people, creating goals is easy! The execution and application is the struggle. As Diana Scharf Hunt says, “Goals are just dreams with a deadline!” Everyone has dreams, but successful people turn them into goals that they accomplish. In order to ensure you reach the finish line with your goals achieved, here are 10 steps to help you move from dreamer to doer.

1. Utilize the SMART Goal Approach

We are what we repeatedly do. Excellence, therefore, is not an act but a habit. – Aristotle

SMART goals have been utilized for years, because they work. Make sure your goals are:

 

Specific:

 

A specific goal will usually answer the five Ws (What, Why, Who, Where, and Which). Writing specific objectives fleshes out your goal so you can easily identify what you want to accomplish.

 

Measurable:

 

If your goal isn’t measurable, there will be no way to know if you’re making progress. You need to address the question, “How will I know when this is accomplished?”

 

Attainable:

 

Your goal must be something that you can realistically attain. I would love to fly like a bird by jumping off a cliff with no parachute, but gravity would have the last word in that interaction. However, learning to jump off a cliff with a hang glider is more realistic.

 

Relevant:

 

If your goal doesn’t mean anything to you, then it isn’t worth pursuing. Tie your goals to your deeper values to give them more meaning. Make sure you are behind the goal 100% so you stay motivated to achieve it.

 

Time Bound:

 

You need to have a deadline. Otherwise it’s just a dream that never becomes reality. Putting down a deadline makes you more committed to bringing it to fruition.

 

2. Write your goals down and display them!

“I hear and I forget; I see and I remember; I write and I understand.” – Chinese Proverb

 

A large portion of your goal is already accomplished as soon as you write it down. A study showed that among people who wrote down their goals with actionable commitments that they put into weekly progress reports and shared with friends, 76% accomplished them. This is in comparison to a control group who were just asked to think about their goals. In this group, only 43% accomplished their objectives. Writing down your goals makes them real; they are tangible words on paper, not an ethereal dream in your mind.

3. Break big goals into smaller ones!

“How do you eat an elephant? One bite at a time!”

 

It’s the same for big goals! Break them down into manageable weekly and daily actionable bites. If you don’t, you can sometimes lose motivation if the goal seems far away or too big to accomplish.

4. Make an action plan and follow it!

“If you fail to plan, you are planning to fail!” – Benjamin Franklin

 

The best gift you can give yourself is a well thought-out action plan. Take time to organize all of your smaller daily and weekly goals in one place so you can easily check your progress or send it to others to hold you accountable.

5. Do your goals as early in the day as possible!

“The sun has not caught me in bed in fifty years.” – Thomas Jefferson

 

If you study successful people, you will find that most of the time they do more before the sun rises than the rest of the world does in a day. Get your goals done first thing in the morning to feel like you’ve started your day right. That way, you will always find time to do them.

6. Tell others your goals to keep you accountable!

“Accountability breeds response-ability.” – Steven R. Covey

 

When you know someone is going to check your progress, it lights a fire under you to follow through. Find a good friend or mentor who will take on the role of motivator and occasional butt-kicker. You will come to value this service immensely when you see your efficiency and effectiveness improve.

7. Make sure your goals excite you!

“If you want to live a happy life, tie it to a goal, not to people or things.” – Albert Einstein

 

Your goals should be a source of joy in your life. They should be one of the main reasons you get out of bed in the morning. If your goals don’t excite you, then you need to re-evaluate them.

8. Use positive language in your goals!

“The major reason for setting a goal is for what it makes of you to accomplish it. What it makes of you will always be the far greater value than what you get.” – Jim Rohn

 

Setting and accomplishing your goals changes you. You become a positive person who is more excited about life. Make sure your goals reflect this. Don’t say, “My goal is not to mess up today.” Instead your goal could say, “My goal is to excel today in my career by doing X, Y, and Z.” Do you see the language difference? No one can get passionate about going through the day trying to avoid something negative. Instead, turn it around so you spend your day chasing and catching success.

9. Set goals in multiple life areas!

“The greatest danger for most of us is not that our aim is too high and we miss it, but that it is too low and we reach it.” – Michelangelo

 

Don’t just reserve your goals for your career. You should challenge yourself to set fitness goals, finance goals, family goals, relationships goals, educational goals, spiritual goals, health goals, and adventure goals. Every area of your life that you value should have a goal to help you improve upon it.

10. Set performance vs. outcome goals!

“The ultimate reason for setting goals is to entice you to become the person it takes to achieve them.” – Jim Rohn

 

Many things are outside your control. For example, you may have an adventure goal to climb Mount Everest. You follow an action plan and train daily. You reach the moment when you are ready to ascend the mountain’s icy slopes with your team. Suddenly, a huge storm turns you back. The weather was out of your sphere of influence. You met all of your performance goals. Just because the outcome didn’t happen this time does not mean you failed. You were prepared. Life just happened and you weren’t able to climb the mountain – this time. However, regardless of the outcome, you became the person who could climb your mountain should life open the door. That’s the deeper endeavor. When you set your goals, don’t say, “My goal is to climb Mt. Everest by January 2014.” Instead, say, “My goal is to be completely prepared to climb Mt. Everest by January 2014, and to do all that is within my power to reach the top.” The first goal is only attainable if everything works in your favor. The second goal is completely attainable, as it depends solely on you.

 

“In the long run, men hit only what they aim at. Therefore, they had better aim at something high.” – Henry David Thoreau

 

So what are you aiming for? If your answer is nothing, then you probably won’t like what you get out of this life. Instead of simply drifting along reacting to what life brings you, take proactive steps to go out and create the future you want. While we can’t control everything that happens to us, we can control ourselves by following goals that bring out our passion for life.