How to Enhance Your Circle of Competence

A conversation with an investment promoter, let’s call him Mr Y, from many years ago came to my mind today when reading the news. It went something like this:

Mr Y: “You HAVE to take a closer look at this.”

Me: “No, thanks. Not for me.”

Mr Y: “No, really, you have no idea what you’re missing.”

Me: That’s probably the case.

Mr Y: “This is a huge dollar payoff right here. I know the guys behind this and they’ve got incredible resumes. The thing is literally “in the bag”. You do realize that I’m offering this to you especially so as to build a long term relationship with you? I could have it oversubscribed very quickly but I’m offering you an opportunity to get an early seat at the table.

Me: It sounds very exciting. You should put some money in.

Mr Y: “F*@k man, you have to be THE most stubborn person in the world! I can’t believe you won’t even take a look at this opportunity. You’ll immediately see the potential here. I was introduced to you by X and led to believe you’re a smart investor with a keen eye for good deals but you’re being a complete ass about this.”

Me: I know. Sometimes I just don’t get it. I blame my upbringing…

I was being pitched a movie deal. I don’t do movie deals. Period. I don’t even watch movies unless on a plane. I know of exactly zero people who have ever made money on movie deals. What edge do I have in that market? Nada!

This particular gent’s critical error was that he’d not done his homework on me. Anyone who knows me knows I have no interest in movie deals and I am definitely not THE most stubborn person in the world.

There are at least 3 others more stubborn in the world. I did some research and there is a guy in Dublin who is at risk of turning in to a mule because he’s so stubborn. Then there is an old lady in Shropshire who, even under hypnosis, is unmovable in her stubbornness. And then there is a 5-year old kid in Beverly Hills who is easily more stubborn than I am.

In truth, I should never have spent more than a few seconds of time on that pitch. I should have insisted on him sending me a dropsheet before taking a call. This was a self inflicted wound. I’ve learnt a few things since then.

I was reminded of that conversation this morning when I read that rapper Snoop Dogg is looking to raise $25M for his cannabis focused VC fund aptly called Casa Verde Capital. For non-Spanish speakers amongst us, “casa verde” in Spanish means “green house”.

Entertainer and investor Snoop Dogg is looking to raise $25 million for his new venture fund, Casa Verde Capital, shows an SEC filing first flagged by Fortune’s Dan Primack.

Among the outfit’s most recent investments: Eaze, a medical marijuana delivery service in California that raised $10 million in April led by DCM Ventures.

This brings up a core tenet of successful investing: to operate within one’s core set of competencies. Snoop Dogg probably has a better chance of making money in the “pot” space than I do in the movie space.

By focusing on marijuana, Snoop Dogg is at least operating within his “circle of competence”.

Snoop_dogOf course, investing in a dope operation, and smoking the product are far from the same thing so we’ll have to see how this all pans out.

The legendary Berkshire Hathaway’s Warren Buffett and Charlie Munger are vocal ambassadors of “the circle of competence”.

In his 1996 Shareholder Letter, Warren Buffett said:

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.

One method of tackling the vast and somewhat difficult world we live in is by partnering with competent partners, colleagues and associates.

I know of few successful businesses, which are one-man bands. It’s why we tend to dislike single founder businesses.

We’re well aware of our chances being slimmer by going into it alone. We seek out people in various sectors, or countries, who are operating within their own circle of competence. This provides leverage for us since it’s not possible to be the fountain of knowledge for all things everywhere all the time.

Circle of Competence
Photo by Farnam Street

By sticking to your area of expertise, you have an information edge over other investors. And by seeking out those who are competent in their own fields of expertise, it’s possible to grow one’s knowledge base as well as leverage others skills and talents.

When I think of all the most successful people I know, from hedge fund managers to company executives, they all share the common trait of sharing knowledge and seeking out others more knowledgeable than themselves in order to share and gain knowledge.

The core premise of capitalism, true capitalism, not this half-breed mongrel of a creature that people mistakenly term capitalism, is based on sharing of knowledge where participants can interact value for value. Knowledge transfer allows for one’s circle of competence to grow and become more robust.

In sharing of knowledge, we are bound to make fewer mistakes and our chances of investment success – or any other success, for that matter – are significantly higher.

It is probably the number one reason I write and I can’t thank you enough for all the feedback provided. If I don’t reply to you it’s because I’ve not cloned myself yet, but I do read all emails.

– Chris

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


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