Warren Buffett
The circle of competence
The edge matters more than the size
Berkshire letters, 1996
Everyone hears it as a licence to stay small. The working part is the sentence after it, and it is about the edge.
What actually happened?
The formulation in the 1996 letter is that investors need only be able to evaluate selected businesses, and — the part that gets dropped — that the size of the circle is not very important; knowing its boundaries is vital. He stayed out of technology for most of forty years and said so in public, repeatedly, while it was making other people rich. That is not an admission of limitation. It is the discipline itself, performed where everyone could see it.
The boundary is a claim you can check
Inside the circle you can say how the thing makes money in a sentence, and say what would have to happen for it to stop. If either sentence comes out vague, you are outside, whatever your job title says.
He had used the product for years and still could not say who paid, or for what. That is outside, regardless of how familiar it felt.
Familiarity is not competence
The most common way the boundary moves without anyone deciding is that something becomes familiar — in the news, in conversation, in the portfolio of someone you respect — and familiarity gets read as understanding.
Everyone at the table owned it, so it stopped feeling like a decision and started feeling like a default.
Staying out has to be sayable out loud
A boundary you hold privately erodes, because there is no cost to crossing it quietly. Said in public it becomes something you would have to explain reversing, and that friction is the point.
Writing 'we don't do this, and here is why' in the team doc is what stopped it being reopened every quarter by whoever had just read an article.
How do I use it today?
Where you are: about to commit money, time or reputation to something you sort of understand.
Ask first: can you say in one sentence how it makes money, and one sentence for what would stop it? If not, you are outside the edge.
Where it goes wrong: using it as a reason never to learn anything new — the circle is meant to grow, deliberately and slowly, not to be defended forever.
Lines to keep
The size of the circle is not very important. Knowing its boundaries is vital.
Familiarity gets read as understanding, and nobody notices the swap.
A boundary you never say out loud is one you will cross quietly.
Same situation, other people are asking
By the time the data is in, will it be too late?Everyone I know is in this. I don't actually understand it.I keep listing reasons this will work. Should I do the other list?Everything I know about this came up one reporting line.I don't have enough information · all 12 questions →If this one named what you are going through,
send it to someone who needs it, or keep it somewhere you will find it again.