circle of competence

CONITNUED FROM YESTARDAY......
We also know Buffett’s discipline of operating only within his “circle
of competence.” Think of this circle of competence as the cumulative
history of your experience. If someone had successfully operated a certain
business within a certain industry for a decade or more, we would say
that person had achieved a high level of competence for the task at hand.
However, if someone else had only a few years’ experience operating a
new business, we could reasonably question that person’s level of competence.

So perhaps Buffett faces a dilemma. Within his circle of competence,
the types of stocks he likes to purchase are not currently selling at
discounted prices. At the same time, outside his circle of competence,
faster-growing businesses are being born in new industries that have yet
to achieve the high level of economic certainty Buffett requires. If this
analysis is correct, it explains why there have been no new large buys of
common stocks in the past few years

We would be foolish indeed to assume that because the menu of
stocks available for purchase has been reduced, Warren Buffett is left
without investment options. Certainly he has been active in the fixedincome
market, including taking a significant position in high-yield
bonds in 2002. He is alert for the periodic arbitrage opportunity as well,
but considering the amount of capital Buffett needs to deploy to make
meaningful returns, the arbitrage markets are perhaps not as fruitful as
they once were.

The basic ideas of investing are to look at stocks as businesses,
use market f luctuations to your advantage, and seek a margin
of safety. That’s what Ben Graham taught us. A hundred years
from now they will still be the cornerstones of investing.4
WARREN BUFFETT

TO BE CONTINUED TOMORROW.......

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