Circle of Competence

This is another concept from the guru himself. Basically it simply means to invest in industries and sectors that you know well, in fact, so well that you can say you are an expert in it. Buffett terms this as the Circle of Competence.

The circle of competence is just that: areas that you are very familiar with. Over time your circle of competence can grow bigger as you gain more knowledge. However you must also know your limits and try not to invest in areas where you are weak, or very ignorant and may never gain competence. For Buffett, this was technology. That's why he never participated in the IT boom and bust.

For most of us, the circle of competence will usually be related to our work, or observations from our daily lives. If you encounter other companies in your work that impressed you, might want to know how their stock performed. Similarly, if you use a particular brand of shoes, and like it so much, it might be worthwhile to do some research on the company that produces the shoes.