A Secret Mental Model That Made Warren Buffet A Billionaire (Learn how to use it in your life).
Dec 07, 2023 · 2 mins read
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In investing, business, and life decisions, Warren Buffett emphasizes a concept he calls the "Circle of Competence." It's about the importance of knowing one's limitations and staying within the boundaries of what one understands.
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By staying within his circle of competence, he has earned billions of dollars and made wise, level-headed decisions throughout his life. Even if the world was investing in cryptocurrencies, he never did, because it falls outside his circle of competence.
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Defining the Circle of Competence: At its core, it represents the areas in which an individual possesses sufficient knowledge, skills, and expertise. Beyond this circle lies the unknown, where risks and uncertainties increase.
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Warren Buffett's Perspective:
He suggests that investors should focus on businesses they understand well and avoid venturing into unfamiliar territories. For example, if you don't know how the banking industry works, there is no point in buying the shares of some bank.
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Warren Buffet has accumulated over $100 billion worth of net worth following this mental model for making decisions. His top five investments amount to more than 80% of his wealth. Investing in companies he understood deeply was his only focus and he stayed away from the rest.
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How do you identify your Circle of Competence?
Start by reflecting on your skills, experiences, & what you truly understand.
What industries, businesses, or activities align with your knowledge base?
Understanding this is the first step in leveraging the Circle of Competence.
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Identify subjects that genuinely interest you. Your passion and curiosity often indicate areas where you're more likely to gain deep knowledge and understanding. Stay open to learning and expanding your knowledge. This can guide you towards potential areas of competence.
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Keep expanding your circle of competence over time. Read widely across different genres and industries. Distinguish between your comfort zone and areas where you feel challenged but still competent. Striking a balance between familiarity and growth is key.
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Apart from expanding it is also important to know your areas of ignorance, that's where self-awareness comes in. You have to be brutally honest with yourself about your limitations, your knowledge, and skills. This awareness can help you avoid overconfidence and poor decisions.
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In a world filled with complexities, the Circle of Competence serves as a guiding principle, helping you navigate the vast sea of opportunities and challenges. Recognizing the boundaries of what you know is a powerful tool for achieving long-term success.
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