Last year I spent a few months reading through all of Berkshire Hathaway's Annual Reports spanning the last two decades. Sprinkled amongst the financials are a wealth of anecdotes, theories and mental concepts written in Warren Buffett’s trademark matter-of-fact style.
One of Buffett's philosophies on how Berkshire makes investments particularly resonated with me.
"If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter. Predicting the long-term economics of companies that operate in fast-changing industries is simply far beyond our perimeter. If others claim predictive skill in those industries — and seem to have their claims validated by the behavior of the stock market — we neither envy nor emulate them” - 1999 Annual Letter
I love how he phrases this concept – the circle of competence. In a previous letter back in 1996, he explained further:
"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." - 1996 Annual Letter
I think a lot about expanding our circle of competence across our organization at Versett and individually. But there is also freedom in identifying the boundaries and understanding them inside and out. Depth is more important than breadth.
Three of the hardest words in the English language are “I don’t know”. In this connected, ChatGPT-enabled environment, information is a few prompts away. This contributes to a dangerous illusion – that after a few hours of digging, it's possible to expand your circle of competence. But boundaries don't stretch overnight.
ChatGPT doesn't give us speed, it gives an accessible and malleable surface area to explore deeper. An infinite training machine. Resist the temptation to "dip a toe" into a concept or problem, aim instead for expansion and mastery of the core concepts. Create and test things. Learn by doing. Chip away at the boundaries by digging deeper into the first principles.
Bottom line: Circles of competence are built not acquired. Just because it's accessible doesn’t mean it's the best way to learn something that lasts.