Money and Finance
- Charlie Munger And Circle Of Competence...
From Charlie Munger: The Complete Investor:Munger has a range of approaches he uses to avoid mistakes. To make this point by analogy, Munger is fond of saying that he wants to know where he will die so he can intentionally never go there. His friend...
- A Few Related Quotes...
As I came across the Russo quote below again, I was reminded of a few others, so I thought I'd group them together. From Tom Russo:…what I have observed about the really great investors is the simple decisions that they end up having to make...
- More From Warren Buffett On Having Good Filters...
Via the notes from the Ivey MBA and HBA student meeting with Warren Buffett: At Berkshire we have certain filters that have been developed. If in the course of a presentation or evaluation part of a proposal[,] an idea hits a filter then there is no way...
- The Capacity Of Self-control
A quick checklist that might be of use by one under the influence of temptation…...be it the temptation to invest outside of one’s circle of competence, the temptation to break a diet, give in to a bad habit one is trying to get rid of, act over an...
- What's Your Investing Edge?
Patience is bitter, but its fruit is sweet. - RousseauI recently attended the CFA Society of Chicago's annual dinner where a fellow attendee and I discussed how one of the more humbling things about going through the CFA Program, besides the difficulty...
Money and Finance
Staying within the Circle
"It is more important to say 'no' to an opportunity, than to say 'yes'." -Warren Buffett
It seems to me that many in the value investing community may be pushing the edges of their circles of competence. I think the run-up from the lows, lack of cheap-looking stocks among the more predictable businesses, and the pull of the Do-Something Aether have led many down the path to search and invest in areas that they would previously not consider; most notably technology, commodities, and many foreign markets (especially China).
Now, I'm all in favor of constantly expanding one's circle and learning about new businesses and new markets, but I think some of the mistakes being made are in mis-defining what it takes to really understand a business, industry, and market - and trying to simplify things that aren't that simple. Many investors getting into these areas have developed the right expertise, but I have a feeling that many others are getting into these areas for the wrong reasons. It's just more exciting for many investors to try new things - and justify one's actions - than to have, for example, 50-100% of his or her portfolio in cash waiting for more easily identifiable 1-foot hurdles to appear. About the concept of a circle of competence, Mr Buffett wrote: "The size of that circle is not very important; knowing its boundaries, however, is vital."
I think those boundaries are being tested by many, although I can't know for sure because I can't get inside other peoples' heads and really know what they know. And I don't have any issue with investors wanting to capitalize on something like the apparent China growth story. It just makes me a little nervous to see so many people put so much confidence in their - or management's - growth projections (and financial statements) for Chinese companies, even if they may be a little wary about sustainable high growth in the Chinese economy as a whole. I think similar concerns can be made about certain endeavors in commodity and technology-related businesses.
So my advice to readers - which you are perfectly within reason to ignore - is to take a step back and take an honest look to make sure you are staying within the boundaries of your circle. Think about what it takes for something to really fall within your circle and remember that there is a strong bias in all of us to want to invest in something in which we've put in a lot of time and work. Value investing is risk management - or risk aversion, as Seth Klarman might say - and the first risk that needs to be dealt with in any investment consideration is the risk that one may be straying outside the boundaries of his or her circle.
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- Charlie Munger And Circle Of Competence...
From Charlie Munger: The Complete Investor:Munger has a range of approaches he uses to avoid mistakes. To make this point by analogy, Munger is fond of saying that he wants to know where he will die so he can intentionally never go there. His friend...
- A Few Related Quotes...
As I came across the Russo quote below again, I was reminded of a few others, so I thought I'd group them together. From Tom Russo:…what I have observed about the really great investors is the simple decisions that they end up having to make...
- More From Warren Buffett On Having Good Filters...
Via the notes from the Ivey MBA and HBA student meeting with Warren Buffett: At Berkshire we have certain filters that have been developed. If in the course of a presentation or evaluation part of a proposal[,] an idea hits a filter then there is no way...
- The Capacity Of Self-control
A quick checklist that might be of use by one under the influence of temptation…...be it the temptation to invest outside of one’s circle of competence, the temptation to break a diet, give in to a bad habit one is trying to get rid of, act over an...
- What's Your Investing Edge?
Patience is bitter, but its fruit is sweet. - RousseauI recently attended the CFA Society of Chicago's annual dinner where a fellow attendee and I discussed how one of the more humbling things about going through the CFA Program, besides the difficulty...