Playing An Unfair Game

Introduction

I was inspired to write in dialogue form by the book ‘All I want to know where I am going to die so that I will never go there again’ - Peter Bevlin

If i were to think of an imaginary conversation involving Charlie munger, Warren Buffett and myself about circle of competence it would’ve gone something like this (the following are actual quotes by the two legends i have tried my best to put them in dialogue form, i go on to explain the concept further in the blog so you can skip this part if you wish too):

Charlie Munger : “As it may appear to you if your 5’2 you don’t have much of a future in the National Basketball team League and if you’re 95 years of age you probably shouldn’t try and act the romantic lead part of Hollywood and if you weigh 350 pounds you shouldn’t try and dance the lead part of the bull choi ballet and if you can hardly count cards at all you probably shouldn’t try and win cards unless playing blindfolders and so on and so on..”

Warren Buffet : [jokes] “You’re ruling out everything I want to do”

Me : [thinks about it, gets curious wants to hear more]

Charlie Munger : [laughs and continues] “I want to think about things where I have an advantage over other people. I don’t want to play a game where people have an advantage over me. I don’t play in a game where other people are wise and I am stupid. I look for a game where I am wise and they are stupid. And believe me it works better. God bless our stupid competitors. They make us rich.”

Me : So sir, things that give you significant and unimaginable competitive advantages make your circle of competence, but then I would have very little to work with, wouldn’t it be more beneficial if I sought things outside my circle of competence because I see people around me benefitting by doing things which are beyond my comprehension, billionaire Elon Musk for instance become a billionaire by building an electric vehicle and earned his fame by launching his SpaceX rockets, space rockets electric vehicles it’s too much too comprehend but i would have to do it to become a billionaire wouldn’t I?

Warren Buffett : “Everybody’s got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”

Let’s take Mr’s B for example

“I couldn’t have given her $200 million worth of Berkshire Hathaway stock when I bought the business because she doesn’t understand stock. She understands cash. She understands furniture. She understands real estate. She doesn’t understand stocks, so she doesn’t have anything to do with them. If you deal with Mrs. B in what I would call her circle of competence… She is going to buy 5,000 end tables this afternoon (if the price is right). She is going to buy 20 different carpets in odd lots, and everything else like that [snaps fingers] because she understands carpet. She wouldn’t buy 100 shares of General Motors if it was at 50 cents a share.”

Charlie Munger : “You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.”

Me: [lagged] Ohh.. now i get, this idea of circle of competence is finally becoming more clearer to me, Thank you sir.

I’m guessing if you read it then by now you have a fairly decent idea of what this mental model really is, in case you haven’t let me try and simply things for you. Circle of competence are all those things in which you are already good at, these are those areas where you have a head start over the others and you tend to grasp knowledge about these subjects way faster than others, think of them as gods gift to you, in scientific terms this is your aptitude I am talking about here. You need to have humility to fully acknowledge the perimeter of your circle of competence since staying within it gives you that unfair advantage over others, like Warren Buffett once said:

“How do you beat Bobby Fischer? You play him at any game but chess. I try to stay in games where I have an edge.”

Venturing outside your circle of competence in investing is as good as gambling off all your money on black jack, it’s a reward for an extreme risk based on pure luck and uncertainty. Because for example if I invested in a pharmaceutical business, or in a chemical business I would probably be outsmarted by a person who had taken chemistry and biology in grade 10/11/12, so of-course they would have a better shot at understanding the chemical compounds or the drugs these companies sold and of-course it would make them better suited to understand the market for it and the developments these companies were making on a yearly basis. Now does owning a pharma business really make sense for me personally, when on the other hand I could own auto ancillary, pure lending and FMCG business (I am still working on my circle of competence however for understanding purposes lets go with these for now, lets for a minute imagine i am an expert in these sectors). The idea is that people who don’t understand these businesses or those who don’t want to understand these business are going to sell them at dirt cheap valuations when Mr Market is in a foul mood and since I do understand these businesses better than others I would buy them if I see improving fundamentals and also know when to sell them, that’s saying I would would be better at identifying deteriorating fundamentals or I would be better at identifying when the earnings have peeked.

Let’s take this idea forward…

For a moment here lets picture our circle of competence as a round cake. A cake with only one speciality it’s chocolate flavouring. Now my question to you; is the cake at it’s best? Most people would say ‘no’, there is still a lot that we can add on it, the icing, the cherry, the layers etc. The point I am trying to make here is that even though you have an aptitude for something doesn’t really mean that you know everything there is to know even when you think you know it all, to maximise your potential in your own area of expertise you need to have humility to question everything you know, re-think that and at the same time acknowledge the fact that there is more to know about this subject.

“Learning requires the humility to realize one has something to learn “- Elizabeth Krumrei Mancuso, psychologist.

Only by constantly learning and re-thinking theories one can make their pie of competence a true delight

Conclusion

In all the theory of circle of competence is resourceful mental model to have, to know one’s limitations and to know one’s strength’s is the beginning of knowing which unfair game you are playing are the odds in favour or against. I believe you should work on your strengths, some people make the mistake of working on their limitations rather than their strengths only to discover that there is an endless list of limitations and one can’t master all there is to master in all disciplines and domains in life but can be extraordinarily good at handful of them.