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Warren Buffett speaks about the circle of competence

We are best at evaluating businesses where we can come to a judgment that they will look a lot like they do now in five years. The businesses will change, but the fundamentals won’t. Iscar will be better – maybe a lot bigger – in five years, but the fundamentals will be the same. [In contrast,] look at how much telecom has changed.

Charlie says we have three boxes: In, Out and Too Hard. You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put.

Tom Watson [the founder of IBM] said, “I’m no genius. I’m smart in spots and I stay around those spots.” We have a lot of managers who are the same. You don’t want to compete with Pete Liegl [the CEO of Forest River, Inc.] because he’ll kill you in the RV business. But he doesn’t try to tell us how to run the insurance business.

I was virtually there at the birth of Intel. I was on the board of Grinnell College with Bob Noyce [one of the founders of Intel] and Grinnell invested $300,000 into it at inception. [I easily could have as well, but] I had no idea then and still don’t now what Intel will look like in five years. Even people in the industry don’t. Some businesses are very, very hard to predict.

Charlie Munger: A foreign correspondent, after talking to me for a while, once said: “You don’t seem smart enough to be so good at what you’re doing. Do you have an explanation?” [Laughter]]

Buffett: Was he referring to me or you? [Laughter]

Charlie Munger: I said, “We know the edge of our competency better than most.” That’s a very worthwhile thing. It’s not a competency if you don’t know the edge of it.

Source: Berkshire Hathaway Annual Meeting
Time: 2006

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