Most people want to be an investor
But most people don't understand how to invest within their circle of competence
Here is how important investing within your circle is:
But most people don't understand how to invest within their circle of competence
Here is how important investing within your circle is:
1/ Warren Buffett coined the term “circle of competence” and it simply means to invest in what you understand. This seems like a very simple concept, right?
However, individual and institutional investors invest in stocks that they do not understand on a daily basis.
However, individual and institutional investors invest in stocks that they do not understand on a daily basis.
2/ An investor should fully understand a business before you invest in it.
Before you invest in a stock, you should have a total understanding of how a business makes money, how it spends its money, and what variables impact its operation.
Before you invest in a stock, you should have a total understanding of how a business makes money, how it spends its money, and what variables impact its operation.
3/ The size of your circle doesn't matter.
The important part is knowing your circle’s boundaries and never crossing these boundaries. Therefore, you should always know what companies you are able to understand and which ones you are not.
The important part is knowing your circle’s boundaries and never crossing these boundaries. Therefore, you should always know what companies you are able to understand and which ones you are not.
4/ For example, if you gamble on sports every single weekend, there is a good chance that sports gambling companies will fall in your circle of competence.
If you are a pharmacist, there is a good chance that most biotech companies will fall in your circle of competence.
If you are a pharmacist, there is a good chance that most biotech companies will fall in your circle of competence.
5/ When explaining circle of competence, I believe that it is best to break it down into 3 different categories.
-Outer Circle
-Middle Circle
-Inner Circle
-Outer Circle
-Middle Circle
-Inner Circle
6/ The Outer Circle
The circle on the outside are the companies that you do not understand at all
If you ever invest in a company in your outer circle, it is usually because you got a stock tip from your uber driver or friend who just recently started investing.
DO NOT INVEST
The circle on the outside are the companies that you do not understand at all
If you ever invest in a company in your outer circle, it is usually because you got a stock tip from your uber driver or friend who just recently started investing.
DO NOT INVEST
7/ The Middle Circle
The middle circle is when you invest in a company that you think you understand, but you actually do not.
This is the circle that gets every investor in trouble. I personally have fallen into the trap of the middle circle, and it is never fun.
The middle circle is when you invest in a company that you think you understand, but you actually do not.
This is the circle that gets every investor in trouble. I personally have fallen into the trap of the middle circle, and it is never fun.
7A/ The Middle Circle
Just because you read an article on Seeking Alpha, heard about the company from Jim Cramer, or from a friend does not mean you understand the company
you do not have a good understanding of the business and its industry from just analyzing its financials
Just because you read an article on Seeking Alpha, heard about the company from Jim Cramer, or from a friend does not mean you understand the company
you do not have a good understanding of the business and its industry from just analyzing its financials
7B/ The Middle Circle
You need to understand every aspect of the business from their financials to their management team, competitors, and the industry outlook.
Therefore, you needed to have a great understanding of the company and their whole industry
You need to understand every aspect of the business from their financials to their management team, competitors, and the industry outlook.
Therefore, you needed to have a great understanding of the company and their whole industry
7C/ The Middle Circle
In short, if you want to be successful at investing over the long run, you should avoid investing in the middle circle. You might have some short term success, but this will not hold up over the long haul.
In short, if you want to be successful at investing over the long run, you should avoid investing in the middle circle. You might have some short term success, but this will not hold up over the long haul.
8/ The inner circle is your circle of competence, which includes the companies that you are capable of understanding thoroughly.
It does not matter the size of your circle, but it does always help to keep expanding the size of your inner circle.
It does not matter the size of your circle, but it does always help to keep expanding the size of your inner circle.
8A/ The Inner Circle
My family has been in the funeral industry since 1947, therefore, I have a great understanding of Death Care stocks.
Bitcoin mining stocks are another industry that I have a great understanding of
You should always invest in companies within your inner
My family has been in the funeral industry since 1947, therefore, I have a great understanding of Death Care stocks.
Bitcoin mining stocks are another industry that I have a great understanding of
You should always invest in companies within your inner
9/You should look at your career, your hobbies, and products/services that you regularly buy.
Write a list of companies that you think you understand and then start reading their 10K Annual Reports
This is the best way to start
Write a list of companies that you think you understand and then start reading their 10K Annual Reports
This is the best way to start
10/ Thank you for reading!
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I tweet things like this everyday to help people create generational wealth
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