The Circle of Competence in Practice
Buffett's own, frequently-cited examples of investments he deliberately avoided — not because they looked bad, but because they fell outside what he could genuinely evaluate.
Munger's circle of competence concept, covered in this Book Club's Poor Charlie's Almanack course, shows up throughout Buffett's own letters in concrete, specific form — he writes repeatedly about investment opportunities he deliberately passed on not because the businesses looked bad, but because they fell outside an area he could genuinely evaluate with real confidence, technology investments during the 1990s being his most frequently cited example.
What makes Buffett's application distinctive is his willingness to publicly acknowledge missing genuinely enormous gains as a direct, accepted cost of this discipline — treating the foregone upside not as a regret to explain away, but as the expected, bounded price of staying rigorously within a boundary he could actually assess.
It's worth being precise about what the circle actually protects against, since it's a narrower claim than simply "avoid unfamiliar industries." Buffett has never argued that an area outside the circle is a bad place to invest for everyone — only that it is a bad place for him personally to invest, given that he cannot reliably tell a genuinely durable competitive advantage in that area from a temporary one. The discipline is about honest self-assessment of what he can actually evaluate, not a judgment about the quality of the businesses themselves.
Buffett's willingness to specifically name investments he passed on and that went on to perform exceptionally well is itself a form of accountability that reinforces the circle-of-competence discipline for his own future decisions — a leader who quietly avoided ever mentioning missed opportunities would face far less pressure to maintain the same discipline going forward, while one who publicly and repeatedly acknowledges the cost has a stronger, self-imposed reason to keep applying the same standard rather than relaxing it out of fear of missing the next one.
This connects directly to the chapter later in this course on Buffett's admitted mistakes: a circle-of-competence miss isn't quite the same category of error as a bad decision made within the circle, but Buffett treats both with the same public candor, on the theory that a shareholder base that only ever hears about successes has no real way to judge management's honesty about anything else in the letter.
During periods when technology stocks were generating enormous returns, Buffett publicly and repeatedly explained Berkshire's absence from that sector as a direct consequence of his circle-of-competence discipline, rather than offering excuses about the sector being overvalued or claiming he'd correctly predicted a future decline. This specific honesty — "I don't understand this well enough to invest in it," not "this is a bad investment" — is a distinct, more disciplined position than most public investors are willing to state plainly.
Buffett has made the point, in various forms, that having a small circle of competence is not itself a disadvantage — what matters is knowing precisely where the boundary sits and refusing to act as though it extends further than it actually does. An investor with a narrow but accurately-known circle who never invests outside it will, over a full career, outperform an investor with a wider but poorly-known circle who occasionally strays past its real edge without realizing it, since the second investor pays for that overconfidence eventually even if it takes years to show up.
Imagine two investors: one who can genuinely, reliably evaluate only a handful of straightforward, easy-to-understand industries, and knows exactly which those are, versus one who believes their circle spans dozens of industries but is actually mistaken about several of them. The first investor looks more limited on paper but will make far fewer expensive analytical errors, because every decision they make falls inside ground they can genuinely assess — the accuracy of the boundary, not its size, is what actually protects capital.
- Buffett's own letters provide concrete, named examples of circle-of-competence discipline in practice — most famously, largely avoiding technology investments through a period of enormous sector gains.
- He frames the resulting missed gains as an accepted, bounded cost of the discipline, not a mistake requiring justification — a distinction that matters for how the discipline holds up under real pressure to chase performance.
- The circle protects against Buffett acting on a business he personally cannot evaluate reliably — it is not a claim that businesses outside it are inferior, only that he is not the right judge of them.
- Publicly naming missed opportunities functions as a form of self-imposed accountability, reinforcing the discipline for future decisions rather than quietly abandoning it once the cost becomes visible.
- Knowing the accurate boundary of a circle matters more than the size of the circle itself — a small, accurately-known circle produces fewer costly errors than a wide but poorly-known one.