Circle of Competence Investing

A framework for making investment decisions based on understanding where you have true expertise versus areas outside your domain knowledge. The concept emphasizes knowing your limitations and staying within areas you deeply understand.

Core Philosophy of Circle of Competence

• Only invest heavily when you have deep domain expertise
• Having conviction requires genuine understanding of the space
• Most people only have 1-2 areas of true competence in their lifetime
• Being honest about what you don't know is critical

Key Elements for Finding Your Circle of Competence

• Look for areas where you've done extensive work/research
• Need to feel confident explaining complex aspects to others
• Should have strong conviction even when others disagree
• Must be willing to make large bets when opportunities arise
• Requires both technical knowledge and market understanding

Real World Example: Bitcoin Investment

• Pomp identified Bitcoin as his circle of competence
• Had such strong conviction he issued $1M bet challenge
• Went on national TV defending position during crash
• Was willing to "back up the truck" during market downturn
• This level of conviction only comes from deep expertise

Warning Signs You're Outside Your Circle

• Can't fully explain the underlying mechanics
• Following others' recommendations without understanding
• Not having conviction during market volatility
• Unable to identify why others might be wrong
• Feeling uncertain about making large position sizes

How to Expand Your Circle

• Start with intensive research in one area
• Build expertise gradually over time
• Focus on fundamentals before expanding
• Learn from both successes and failures
• Recognize it takes years to develop true competence

Key Takeaway

The framework suggests that exceptional returns come from:

1. Identifying your true areas of expertise
2. Waiting patiently for opportunities within that domain
3. Acting with strong conviction when opportunities arise
4. Staying disciplined about avoiding areas outside your circle