Knowing what must be avoided is an important part of the secret of success.
Do you know what it Farnam Street? This is an online publication that is named after the street where the headquarters of Berkshire Hathway Omaha is located in a small town in the United States.
Farnam Street website (FS.BLOG) describes itself as ‘brain food’.
It is not solely dedicated to investing or Warren Buffett though anyone who reads it will see some sort of connection, similarities between the ideas on the blog and how Buffett and vice investment approach.
One of the most interesting themes is the ‘circle of competence’.
Blog Farnam Street, there is an interesting story about a baseball player named Ted Williams says the blog is the greatest hitter in the game.
I do not know anything about baseball so bear with me here.
This man managed to hit the ball 40 percent of the time which seems incredible in that sport.
Using an interesting diagram, the article shows the key to success Williams in what he does not try to press.
In the case where the ball comes (roughly like line and length in cricket, as far as I can find), he knows where his success zone and try to avoid anything beyond that.
This zone is a ‘circle of competence’.
Beyond that, is what might be called the ‘donut incompetence’, which is my phrase to describe anything that is outside the circle.
It is good to have a large circle and a small donut may be, but the important thing is to know where the boundary lies and remain in it.
Buffett and Munger have never many famous experiment with technology stocks.
They now have a large holding in Apple but invested in the stock only when it effectively becomes a luxury consumer durable companies.
Historically, people have said that the couple were misjudged the growth of technology.
Munger has a funny incident to be told from the beginning of his career.
One of the earliest stock that he bought derived from William Miller Instruments, a company whose founders have found a better way to record sound, something like a wax cylinder enhanced.
He thinks that it will take over all the recording technology and petite also think so.
However, others, about the same time, finding the magnetic tape.
Tape is superior to that of companies that have invested Munger in selling only three instruments.
The entire investment is removal.
Normal reaction to this is to learn more about each technology and thereby better predict.
But no, it was not a foregone conclusion Mürger.
Instead he decided that technological change is something to be avoided.
If you have two things to be invested, you understand and others you can not, what is the point of investing in one you did not commit? 75 years have passed since then, but the idea of ​​living in the ‘circle of competence’ someone has presented Munger and Buffett well.
As he said, “I’m trying to avoid being stupid.
I’m not trying to be successful in my pile is too hard.
The most important thing is to know where you are competent and where you do not.
The human mind tries to make you believe you are smarter from you.
rub your nose in your error.
“it’s a difficult thing to do – rub your own nose in your mistakes, but it is one of the secrets of success.
Most of us, when we are wrong investment, try to justify why we are not to blame, that something unexpected happened.
Of course, to say that one should not deviate into the inability donut easy, doing so may be more difficult.
When we started to invest, few of us know anything about anything.
Given the limits of one’s life experience, your circle of competence is more like a dot so how it is? What is clear – and very workable – the answer is a mutual fund, coupled with a self-conscious attempts to acquire knowledge.
The statement ‘I do not know x’ should not be accepted, on the contrary, it should be ‘I do not know x’.
The author is the founder and CEO of Value Research