For Buffett, investing skill is less about the breadth of what you know than about the honesty to map its edges. He returns again and again to a simple discipline: evaluate only the businesses you genuinely understand, recognize when you are nearing the perimeter, and refuse to let restlessness or market applause push you past it. Knowing the boundary, not expanding the circle, is what keeps rationality intact.
Therefore, we will look at any category of investment, so long as we understand the business we're buying into and believe that price and value may differ significantly.
Charlie and I decided long ago that in an investment lifetime it's just too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times. Indeed, we'll now settle for one good idea a year.
We continue to think that it is usually foolish to part with an interest in a business that is both understandable and durably wonderful. Business interests of that kind are simply too hard to replace.
You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.
If we have a strength, it is in recognizing when we are operating well within our circle of competence and when we are approaching the perimeter.
They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant factors including remote loss scenarios, carry the expectancy of profit.
Buffett in his own words on camera. Transcribed from the interview; click through to watch the moment.
It's what I call knowing your circle of competence, and my circle of competence doesn't include the ability to predict interest rates a day from now or a year from now.
What's in my circle of competence and then what makes the most sense within that circle. But the important thing is know where the perimeter of the circle is. I mean, that's way more important than how big the circle is or a whole bunch of other factors. So I think Apple's within my circle of competence.
I don't have any ability to predict what stocks will do next week or next month. And I will buy them if they're cheap. I'll buy a whole lot of them if they're cheap and I think I really understand the business.