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How to invest in what you know?
A thread on knowing your circle of competence.
Let's first listen to what the legend has to say:
A thread on knowing your circle of competence.
Let's first listen to what the legend has to say:
Listen carefully what he says:
"I can look at 1000 different companies and I don't have to be right on every one of them, or even 50 of them"
Even Warren Buffett doesn't know about every listed company out there.
"I can look at 1000 different companies and I don't have to be right on every one of them, or even 50 of them"
Even Warren Buffett doesn't know about every listed company out there.
So what has made him successful over a span of 6 decades is that he has invested only in those companies which he knows very well about.
How do you know what is really in your circle of competence?
How do you know what is really in your circle of competence?
We as humans tend to think that we know more than what we actually know.
Knowing what we don't know is very important when it comes to investing.
“I’m no genius. I’m smart in spots and I stay around those spots.”
- Thomas Watson, IBM Founder
Knowing what we don't know is very important when it comes to investing.
“I’m no genius. I’m smart in spots and I stay around those spots.”
- Thomas Watson, IBM Founder
Firstly, see in what industry you are working. This is the industry you might be knowing about very well.
Someone working in a bank might know more about the lending business than a pharma business.
Someone working in an IT company might be knowing how exactly they work.
Someone working in a bank might know more about the lending business than a pharma business.
Someone working in an IT company might be knowing how exactly they work.
Start from the industry which you work in and slowly start expanding your circle of competence in related industries.
For eg. In an IT company, understand your client's business. In a bank, understand the companies who are dealing with the bank.
For eg. In an IT company, understand your client's business. In a bank, understand the companies who are dealing with the bank.
Don't just buy a stock only because everyone is buying it.
I know many people who don't know a single thing about the API business are buying the stock. I haven't because I really don't know what exactly drives the business.
Accept what you don't know.
I know many people who don't know a single thing about the API business are buying the stock. I haven't because I really don't know what exactly drives the business.
Accept what you don't know.
Before entering a stock you must ask yourself these questions:
1. Do I understand the business? And by understand it, I mean have a reasonably good idea of what it will look like in 5-10 yrs from an economic standpoint.
2. How does the business make money?
1. Do I understand the business? And by understand it, I mean have a reasonably good idea of what it will look like in 5-10 yrs from an economic standpoint.
2. How does the business make money?
3. What kind of products does the company sell?
4. Who are the main competitors? Where does the business stand as compared to them?
5. Who is the target customer?
Once you are able to answer all these questions, use the Feynman technique:
4. Who are the main competitors? Where does the business stand as compared to them?
5. Who is the target customer?
Once you are able to answer all these questions, use the Feynman technique:
You must be able to explain the answers to all these question listed above to a kid in a simple manner such that the kid can understand.
If you can't, probably the company is outside of your circle of competence.
If you can't, probably the company is outside of your circle of competence.
