Circle of competence

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"I began to understand how multiple factors drive profits at that company. Price movements showed me that the value of Exxon Mobile didn't have a simple relationship to the price of oil. It also responded to interest rates, the value of the US dollar, and especially economic expectations. I also learned more about the supply, demand, and cartel dynamics affecting the price of oil. I realized my knowledge of the oil business and the oil markets was way too shallow to make a call about oil company stock. I'd underestimated the long-term impact of factors driving oil prices down."

Above is an excerpt from a book I have read some time ago (can't recall, but I think is this one). 


When one decides to invest a substantial portion of his money into an asset or company, it should not be based on hope or assumption, it should be based on understanding. One needs to understand the risks involved, what influence the company's earnings and the potential rewards. Only upon analyzing and fully satisfied that the potential reward is way higher than the risk (not a 50:50), should one commit to the investment. Often, as lay investors, we may not have the time, resources or expertise to fully understand something that is outside our circle of competence. We know it takes lots of effort and time to understand something in-depth from scratch, and of course we do that if it really sparks our interest. 


The basic of building our circle of competence is to know our edge. Then we focus on and sharpen it. We can also expand our circle of competence by first knowing the current boundary.


Lately, I am making it a habit to say "I don't know" in self talks. It is kind of like an informal checklist. For instance, "what make me think that this share price will not plunge further?". Well... I don't know, okay I shall seek to find out more on what could influence the share price of this company. 


By being not sure, we avoid commitments and mistakes. We would then work more on finding out what we do not know. Same goes in running a business or making big life decisions.


Some like to say "life is a series of gamble"... if you choose it.

What if you really want to be a professional gambler? 

Yes you can. Just make sure you are darn good in game strategies, rhetoric and probabilities - like Annie Duke. She's an interesting figure whom I have been googling lately - retired professional poker player and author of the book "Thinking in Bets". Sorry I digressed. 


When we engage in FOMO or succumb to peer influences, we may forget to operate within our circle of competence. 

Constantly working towards expanding our circle of competence or learn how to link them would help to improve our investment decisions.
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