Investing term

What is Circle of competence?

The set of industries, business models, and types of companies you actually understand well enough to evaluate.

Your circle of competence is the set of industries and business models you genuinely understand well enough to judge. The point isn't how big the circle is — it's knowing where its edge lies and staying inside it. Most serious investing mistakes happen when people venture into businesses they can't really evaluate, lured by a hot story.

For example

A software engineer may confidently assess a cloud company but should be humble about a biotech drug trial — the second sits outside the circle.

Circle of competence is taught hands-on in Stage 13 — Active Investing: Should You Even Bother?.

See the lesson →

Related terms

Active investingPicking individual stocks (or actively-managed funds) instead of just buying the index.CatalystThe event or condition that will close the valuation gap — and an estimated timeline.ConvictionHow strong your evidence is for a thesis — and therefore how much capital it earns.Decision journalA pre-trade written record of your thesis, sizing, and what would change your mind.
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