How well do you know your limits?

The Circle of Competence is a mental model and superpower of Warren Buffet and right-hand man Charlie Munger. It’s an amazing tool for founders.

Here’s how it works, and how to start applying it TODAY:

A Circle of Competence is your existing knowledge base. It’s what you’ve studied, your work experience - anything you have above-average knowledge of.

Knowing your limits is the most important part.

We’re bad at realizing what we don’t know, especially when it’s at the outskirts of our knowledge base. We assume we understand it better than we really do.

Why does your Circle of Competence matter?

It’s what gives you an edge.

Buffet & Monger succeeded because they stayed in their Circle of Competence.

Buffet even has a “too-hard pile” on his desk, for businesses he can’t easily understand.

Understanding your competencies is the key.

As Charlie Munger says, “Knowing what you don’t know is much more useful in life and business than being brilliant.”

We see non-expert CEOs everywhere. They often fail.

Bob Nardelli did great as VP of GE but knew nothing about retail when he became CEO of Home Depot. Then he led Chrysler to file Chapter 11.

“Serial CEOs” are dangerous, but they have an important lesson to teach founders. Stay in your circle of competence.

Even seasoned execs can’t jump into industries they have no knowledge of.

That doesn’t mean you can’t ever expand your Circle. But the trick is chipping away at it.

Businessman Monish Pabrai says the best way to expand your Circle is “to start really small”.

(He recommends talking to experts & getting your hands dirty from day 1.)

One of the best Charlie Munger quotes: “God bless our stupid competitors. They make us rich.”

Don’t be one of those stupid competitors.

Be honest with yourself about your competencies, starting right now.

And plot your course accordingly.