A circle of competence is a collection of industries or sectors that you understand the most. Or perhaps that you have the most interest in. Warren Buffett makes it very clear that it is important to know what your circle of competence is. He also says that it is important to know what its boundaries are.
The most important thing in terms of your circle of competence is not how large the area is, but how well you’ve defined the perimeter. If you know where the edges are, you’re way better off than somebody that’s got one that’s five times as large but they get very fuzzy at the edges.
When you work within your circle of competence, you are in a much better position to be able to make investing decisions and to understand the nature and strength of the economic moats of the various companies.
