If you can’t find businesses within your circle of competence, don’t hurriedly step outside that circle because of the fear of missing out, which is often the case in a bull market. Instead, spend time studying industries and companies outside your circle before crossing the boundaries. The biggest advantage of developing one’s circle of competence over time is that different industries and types of companies are in favor at different stages of the market cycle. Having an expanded opportunity set at one’s disposal to choose from can prove to be highly profitable at such times.
Again, it’s not important how big your circle of competence is. What is critical is to clearly know where the edges are.
It’s not a competency if you don’t know the edge of it.
—Charlie Munger
Now you may well ask, “But how do I expand those edges so that I can enlarge my circle of competence?” There is a simple way to do it.
It’s simple but not easy.
Read. A lot. That is the only way you can expand your circle of competence.
For example, read a book called Analyzing and Investing in Community Bank Stocks and then read the annual reports of a few community banks. These are relatively easier to understand and value. Or pick an industry in which you have some expertise and begin reading the annual reports of the companies in that industry.
I learned early in my career that if you read the annual reports, you’ve done more than 90 percent of the people on Wall Street. If you read the notes to the annual report, you’ve done more than 95 percent of the people on Wall Street.
—Jim Rogers
In investing, the person that turns over the most rocks wins the game. There is no alternative to hard work. In life, relationships, business, or investing, nothing will work unless you do. And there is no intelligent reason for an investor to settle for an inferior track record in a marketplace filled with companies with outstanding fundamentals.
I’ve always said that if you look at ten companies you’ll find one that’s interesting. If you look at 20, you’ll find, two; if you look at 100, you’ll find ten. The person that turns over the most rocks wins the game…. It’s about keeping an open mind and doing a lot of work. The more industries you look at, the more companies you look at, the more opportunity you have of finding something that’s mispriced [emphasis added].
—Peter Lynch
Buffett once remarked:
Back in 1951 Moody’s published thick handbooks by industry of every stock in circulation. I went through all of them, thousands of pages, motivated by the hope that a great idea was just on the next page. I found companies like National American Insurance and Western Insurance Securities Company that nobody was paying attention to that were trading for far less than their intrinsic values. Last year we found a steel company on the Korean Stock Exchange that had no analyst coverage, no research, but was the most profitable steel company in the world.11
Buffett’s story reminds me of a few of my experiences. Every day, I diligently review all of the corporate announcements on the Bombay Stock Exchange (BSE) website. It is a painstaking exercise for many, but for me, it is like an intellectual treasure hunt wherein I may strike gold at any time. Every day, I create numerous opportunities for serendipity to find me.
My personal investment opportunity set has significantly expanded over the years, with time and experience in the markets. Initially, it was restricted only to secular growth stocks at reasonable to expensive valuations. But now it covers multiple areas of the investment universe, including commodities, cyclicals, deep value, and spinoffs, as well as loss-making companies that are turning around, as reflected in slow, gradual changes (low contrast) in their improving balance sheet, working capital, margins, or a significant positive change in their industry dynamics. Instead of being restricted by my personal, biased views to a small opportunity set, as was the case during my early years, I am now able to invest in a variety of industries and situations, wherever I find mispricing of value and a highly favorable risk-and-return trade-off.
Markets continually change. It also reminds me to look for investment opportunities in different markets, rather than keep going back to a well that is dry.
—Robert Kiyosaki
No single strategy works all of the time and in every kind of market. That’s why it’s essential to build up one’s investing arsenal to be able to hunt for value from within different areas.
Over the years, I have come to realize and appreciate just why this is critically important: a bull market is always going on, at all times, in some specific sectors of the stock market. For instance, even during the 2009–2013 bear market in India, consumer discretionary, pharmaceutical, and information technology companies created a lot of wealth for investors. New trends always emerge during a bear market—that’s the period during which most investors are either waiting for their purchase price or are busy committing fresh sins by averaging the winning leader stocks bought during the previous bull market. (The number of retail investors in a sector tends to go up during its bullish phase, so, during the subsequent bear market for the sector, relentless selling usually occurs at every higher level, as old investors try their best to exit and rid themselves of bad memories.)
Where should we devote our limited time in life to achieve maximum success? Munger gives us the answer: “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.”12
The takeaway from Buffett and Munger is clear. If you want to improve your odds of success in life, business, and investing, then clearly define the perimeter of your circle of competence and operate only inside it. Over time, work to expand that circle, but never fool yourself about its current boundaries. As Feynman says, “The first principle is that you must not fool yourself—and you are the easiest person to fool.”
The following hypothetical conversation captures the essence of the dawning of wisdom.
Philosopher: What are the three wisest words in investing?
Value investor: “Margin of safety.”
Philosopher: Wrong.
Value Investor: Then…?
Philosopher: “I don’t know.”
THE VIRTUES OF PHILANTHROPY AND GOOD KARMA
If you are in the luckiest 1 percent of humanity, you owe it to the rest of humanity to think about the other 99 percent.
—Warren Buffett
One of the important teachings of the Bhagavad Gita is to develop a trusteeship attitude toward material wealth. This keeps us humble and inculcates a sense of detachment in us. The process of creating wealth should motivate us to give our best, but the results should be surrendered for the betterment of humanity, after we have taken care of our needs. We are able to create wealth only with the help of others, so giving back also needs to be part of our planning.
If you are fortunate to have earned or inherited more than you need to live out your personal definition of a good life, you will have the opportunity and the responsibility to decide where and how to direct the surplus funds. Most individuals in this situation focus on two kinds of beneficiaries, both of which can be deeply meaningful: family members and philanthropic organizations, such as schools, colleges, hospitals, and religious organizations. The latter, giving back to society, is a highly