Your circle of competence: knowing what you don’t know
When it comes to buying stocks, Peter Lynch has a simple mantra: invest in what you know. But what does it mean to know something? How do you gauge your knowledge and skills? Warren Buffett has a useful concept for this conundrum: your circle of competence....Many people think that investors fail because they don’t know enough.
I beg to differ.
In my experience, it is our ego that blinds us and makes us do stupid things.
Mark Twain said it best: It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.We often make mistakes because we are too confident in our knowledge. And it gets worse when we find out that we were wrong.
That’s why, as investors, one of the first things we should admit is simply: “I don’t know”.