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Expand Your Circle of Competence (and Become a Better Investor)

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Over the lockdowns in Victoria this year I’ve been figuring out how to cook properly for the first time in my life, and gee, it’s a skill set in itself! To move from bland over-salted dishes into the food that exceeds Uber Eats does take some degree of practice and finesse. 

Once you master a new skill in the kitchen, you can slowly expand into more complex dishes using that technique or skill. And then maybe one day in the not-so-distant future, I’ll have enough delicious dishes up my sleeve to host a dinner party.

It’s funny how overwhelming it felt at first, trying to get the timings right between steps, figuring out the best amounts of herbs and spices, knowing when you can wing it (and when you most definitely can’t)…

But slowly my confidence has grown through knowledge, experience and time. And now I’m at the point where if someone throws a new frittata recipe at me, I’ve got it in the bag (as long as you throw in a half dozen eggs with it).

So what do my sad and sorry tales of learning to cook in my 20s have to do with making you a better investor?

Circle of Competence

It all comes back to your circle of competence (aka everything in your current orbit of knowledge and understanding).

To begin with, your circle will be small, and as you move through different life experiences, it slowly starts to expand.

So why do you need to know what your circle of competence currently looks like?

It’s critical to be able to honestly evaluate your current skill set, to figure out if you have the capacity to understand something unfamiliar, particularly if you’re looking at investing in something new. Plus, it helps you spot your weaknesses and blind spots that may hold you back from being a good investor. 

Knowing what’s outside your circle gives you a starting point to slowly expanding it.

Sure you could try to pick the most complex recipe in the book, but if you knew you had to cook something before your parents came over for dinner that night, you’d probably have better success cooking something you’re familiar with. There’s no doubt you could figure out the difficult recipe eventually…but you’d have to put in the hard work to figure out and practice the dish.

Let’s say you’ve got your eye on this biotechnology company that’s pretty darn technical. You haven’t studied science, engineering or chemistry, and are struggling to really figure out what the company actually does.

How do you go about expanding your knowledge, so you can figure out if it’s actually a good company to invest in?

Expanding Your Circle of Competence

When I asked for people’s ideas on Twitter the other week (@RaskAustralia), I was flooded with different suggestions on the ways people go about learning new things. I’ve included some of the highlights below:

  • Read the Annual Report of a US-listed giant in an area of interest; these tend to be packed with information. Interested in learning about payments? Read the annual report of Visa, MasterCard, and PayPal. (@7amahanti)
  • Follow reputable investors who share a philosophy but express it differently. (@OwenRask)
  • Talking to different people of the industry I’m looking at. (@8uttersBen)
  • Try to read widely on industries of interest and specific announcements. A lot of different viewpoints from lots of different sources. (@rask_leif)
  • Attending company presentations for customers rather than investors. Get to see the product/service hands on and how its helping solve the issue. Customers ask very different questions to analysts. (@lachlanbjensen)
  • Lots of reading/listening/watching. It’s great when a podcast or other source that I already like occasionally  branches out with someone from a slightly different area from normal but sometimes it’s a case of actively finding a contrarian view on something just to think about it. (@DrLyndonalker)

For me, like cooking, real-world experience has been a massive part of expanding my own circle of competence when it comes to investing. Everything I watch, read, hear and experience helps add a few more pieces to the puzzle. 

Becoming a so-called “good investor” isn’t something that happens overnight after you buy your first share. Rather, it’s a mish-mash of trial and error, as you figure it all out. And hey, that’s all part of the fun!

Kate Campbell

Kate Campbell

Kate Campbell is the founder of How To Money (HTM), a personal finance platform for young Australians. Kate created HTM from a passion to help young Australians start talking about money, and share the resources she finds along her financial education journey. This led Kate to start her own journey to financial independence a few years back and she now works in the Australian financial services industry.

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