Saturday, August 1, 2020

Circle Of Competence

Let us keep our minds open, by all means, as long as that means keeping our sense of perspective and seeking an understanding of the forces which mould the world. But don’t keep your minds so open that your brains fall out! There are still things in this world which are true and things which are false; acts which are right and acts which are wrong, even if there are statesmen who hide their designs under the cloak of high-sounding phrases.

Walter Kotschnig

When facts change I change my mind. What do you do sir?

John Maynard Keynes

Let’s start with the most successful investor of our times - Warren Buffett. He is a legendary value investor, an icon and role model for his wisdom, philanthropy and simple lifestyle. He owns Berkshire Hathway which is the holding company for all his investments. Since 2002 the S&P 500 has outperformed Berkshire stock by 2% annualised, in spite of him being very active in the 2008 financial crisis and in spite of 20% of his portfolio being Apple which was bought only 4 years ago (stock is more than 3X in last 4 years). One thing explains the underperformance to a large extent – the absence of technology stocks in the portfolio. Warren became legendary by avoiding tech stocks leading to the dot com crash of 2000 He has continued to avoid technology as the tech giants became more and more ingrained into our daily lives over the last twenty years. There is a link in the sources below for a brilliant article on the subject.

Buffett is public about technology being a hole in his “circle of competence” What makes this even more striking is that Bill Gates is one of Buffetts close buddies. Let us see some successful examples of managements expanding their circle of competence -    


UltraTech for Birla

HDFC group successfully seeding and then building several large businesses

WIPRO would still be in the vanaspati business if it had not transformed itself into a software powerhouse

Ajay Piramal from Textiles to Pharma to Financial Services

Reliance from petrochemicals to telecom

Berkershire itself was originally a textile company

Google from search to android to maps to autonomous vehicles to AI

Edelweiss from Investment Bank to Broking to NBFC to ARC to Wealth and Asset Management

To be fair, there are numerous examples of disastrous diversifications and conglomerates becoming too big and unwieldly to manage, but that does not take anything away from the fact that one of the best ways to successfully manage atrophy is to continuously expand your circle of competence.  

We start with some basic ideas and a limited world view. With time if the view does not expand enough to challenge the prevailing conventional wisdom, we have done disservice to ourselves. How can one expand the circle of competence – organically through lifelong learning or inorganically by hiring and empowering competent people. The distinction between the “hype around the shiny new thing” and a new mega trend is indeed difficult to make.     

It is certain that the world will be very different in the next 10, 20, 50, 100 years. The longer the time period the greater the change. However in day to day the world seems the same with minor changes year on year. That is why it becomes important to keep the core principles intact and be flexible about most things. The core principles should not become the excuse not to change. The other certainty is that only those who are able to constantly able to expand their circle of competence will thrive.

Source -

No comments:

Post a Comment