Skip to main content

Circle of competence



"I began to understand how multiple factors drive profits at that company. Price movements showed me that the value of Exxon Mobile didn't have a simple relationship to the price of oil. It also responded to interest rates, the value of the US dollar, and especially economic expectations. I also learned more about the supply, demand, and cartel dynamics affecting the price of oil. I realized my knowledge of the oil business and the oil markets was way too shallow to make a call about oil company stock. I'd underestimated the long-term impact of factors driving oil prices down."

Above is an excerpt from a book I have read some time ago (can't recall, but I think is this one). 


When one decides to invest a substantial portion of his money into an asset or company, it should not be based on hope or assumption, it should be based on understanding. One needs to understand the risks involved, what influence the company's earnings and the potential rewards. Only upon analyzing and fully satisfied that the potential reward is way higher than the risk (not a 50:50), should one commit to the investment. Often, as lay investors, we may not have the time, resources or expertise to fully understand something that is outside our circle of competence. We know it takes lots of effort and time to understand something in-depth from scratch, and of course we do that if it really sparks our interest. 


The basic of building our circle of competence is to know our edge. Then we focus on and sharpen it. We can also expand our circle of competence by first knowing the current boundary.


Lately, I am making it a habit to say "I don't know" in self talks. It is kind of like an informal checklist. For instance, "what make me think that this share price will not plunge further?". Well... I don't know, okay I shall seek to find out more on what could influence the share price of this company. 


By being not sure, we avoid commitments and mistakes. We would then work more on finding out what we do not know. Same goes in running a business or making big life decisions.


Some like to say "life is a series of gamble"... if you choose it.

What if you really want to be a professional gambler? 

Yes you can. Just make sure you are darn good in game strategies, rhetoric and probabilities - like Annie Duke. She's an interesting figure whom I have been googling lately - retired professional poker player and author of the book "Thinking in Bets". Sorry I digressed. 


When we engage in FOMO or succumb to peer influences, we may forget to operate within our circle of competence. 

Constantly working towards expanding our circle of competence or learn how to link them would help to improve our investment decisions.
***
Like what you read? View my other posts here
or support by clicking the ads.
Labels:

Comments

Post a Comment

Popular posts from this blog

Reflections for year 2024

2024 has been a relatively peaceful year. So peaceful that I have read countless novels and other books, met my sports buddies almost every weekend and picked up horticulture. Physical and mental health As we say, health is wealth. I have stuck fairly consistently with my exercise regime and tried to include more fruits and vegetables in my meals (although I eat out more and cook less these days). My weight, BP and cholesterol levels are doing ok. For those 40 years and above, remember to get your  subsidized health screenings from the government . Working less and meeting up with friends more contributed to an improved mental health. I see that the government has stepped up on initiatives in the community but work place initiatives from employers still seemed lackluster, especially for those who can't WFH and need to commit 44 hours or more a week at frontline work. I have also started a Gratitude journey to celebrate all my little life milestones. Financials Investment wise ...
Post a Comment
Read more

The best credit card for my house reno & prep

As updated in my previous post, I have finally bought my own place solo. For the past few months I have been busy coordinating with various contractors and vendors for my house renovation. As I am still on flexi work schedule, I decided to be my own ID. With only a simple renovation in mind, I set my reno budget as 20k (aircon & fixtures inclusive). The renovation process and acting as my own ID were not as easy as I thought. It took me about a month to gather and compare quotations from different contractors and another few weeks to finalize all the things that I need my chosen contractor to do. I eventually settled for a main contractor who specializes in carpentry work but also provides painting, tiling and electrical services. I have grossly underestimated the amount of defects that need fixing for this resale flat. Fortunately, the floor tiles and some of the existing built-ins are still in good condition so I kept them, otherwise I would have burst my budget. The first issue ...
Post a Comment
Read more

Shit happens and I lost my low-hanging fruits

My POSB SAYE account just hit its 25th month —the much-anticipated “month of maturity.” I was all ready to enjoy the 3.5% bonus interest I’d patiently saved for… only to receive a measly $17+ cash gift instead of a few hundred dollars. I was about to send a message to query the bank what caused this interest drop versus what I have gotten on the 13th month. Confused, I double checked my account history and— gasp! —found a single $50 transfer I’d made to a joint account in one of the past months. I hadn’t even realized that I’d chosen the SAYE account as the fund transfer source. For those unfamiliar with the T&Cs of POSB SAYE: “To receive the additional 3.5% p.a. Cash Gift Interest, ensure that you do not make any withdrawal from your POSB SAYE account.”   “If a withdrawal is made in the month, this will result in the previously accumulated additional 3.5% p.a. interest to be forfeited.” Yes, one tiny transfer = months of bonus interest gone . Even depositing it back the...
Post a Comment
Read more