Buffett and Munger initially developed the Circle of Competence to limit where to make financial investments (based on their own understanding and experience). But I've found the model to be useful in all areas of life. The idea is to understand where you're naturally strong and stay within that area.
Think of it like this:
Your circle of competence is the subject area that matches your skills and expertise. And understanding your own helps you concentrate on the areas where you have the greatest familiarity. It also helps you align a subjective assessment of your own competence with your actual competence.
And it's not the size of the circle that matters, but how well you stick within it.
As Warren Buffett has said: "Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital."
Andrew Carnegie, potentially the originator of the idea, went so far as to encourage his mentees to not only concentrate all of their time and attention within one's own circle of competence, but to invest every dollar of their own wealth into it. This explains Carnegie's hawk-like focus on the iron and steel industries.
Keeping strictly to their own circles is what makes Buffett and Munger among the most successful investors in history. They stick to what they know. Their firm, Berkshire Hathaway, currently boasts more than $700 billion in assets.
The Circle of Competence is a model countless entrepreneurs have used, whether they know it or not. Here are a few ways I've used this model -- and some advice:
Focus on a shift in the world and go from there.
When starting a company, I don't necessarily start with an idea. I start with that shift and then the idea follows. With Drift, for example, my co-founder Elias Torres and I saw a massive change happening around messaging. Of course, the technology had been around for a while, but with the rise of smartphones, messaging blew up.
We noticed this and knew that the market needed to get much bigger to match the demand -- and that the paradigm shift would impact the B2B space as well. So, we set out to understand how this growth around messaging solutions could be used in the B2B market and then created a product based on our findings.
Find an area you're passionate about and go with it.
I've recognized that I can provide value in the B2B tech space (particularly sales and marketing) -- so all of my companies Compete, Lookery, Ghostery, Performable and now Drift, have all stayed in that category. While I'm sure there are other founders who have shifted categories entirely, I'm hugely passionate about this area and I think that's part of the reason I've seen success.
Business is hard enough -- and if you're not truly an expert and passionate about something that you're going to be working on day in and day out, it's going to be even harder.
Ideas aren't the only thing that can be in your circle of competence -- people can be too.
As I mentioned, I've stuck with creating companies in the B2B tech space -- so clearly that is part of my circle of competence. But this is also the fourth time I've worked with Elias, and the second company we've started together. Because we've spent so much time with each other (over 10 years) we're in sync with our vision and where we want our company to go.
It is also hugely helpful when you have shared experiences with someone, because your learnings are their learnings as well. And, like any successful relationship, we have a partnership based on trust -- and one where our strengths and weaknesses complement each other. For example, while I have always gravitated more towards product, design and marketing, he's more technical and can guide that part of the company.
Because it's not necessarily what you know, but how you use what you know to power the decisions you make.