105Chapter7. Your Circle of Competence
I
nvestors avoi dstocks outsi de their circle of competence; those
who buy stocks outside their circle of competence are gamblers,
speculators, or fools. If you lack the grounds for understanding a
business—grounds ultimately for estimating a gap between value
an dprice—but make a purchase anyway, you may as well be at a
Las Vegas or Atlantic City blackjack table or a local poker party. All
you are really doing is guessing, hoping, maybe even praying that
things work out your way. Yet there is little reason, other than dumb
luck, to think they will.
The first thing you must do before investing in any business is
make sure you have a basic understanding of that business. This
requires some familiarity with its products, customers, selling envi-
ronment, an dso on—in short, its operating climate.
It is quite a different proposition to understand businesses, such
as Procter & Gamble, that make an dsell a wi de variety of familiar
consumer products such as peanut butter, soap, and toothpaste than
it is to understand businesses, such as Applied Materials, that make
an dsell a wi de variety of highly technical materials for the semicon-
ductor industry such as expitaxial and polysilicon deposition, etch,
ion, implantation, and metrology (understand?).
Getting the information necessary to determine whether a busi-
ness is within your circle of competence before making an invest-
ment decision is easy. Check out the SEC-maintained Free-
Edgar.com Web site or contact the SEC at its Washington, D.C., or
various regional offices. Or check out each company’s Web site di-
rectly. You can even search the SEC Edgar database on lots of other
Web sites, including 10kwizard.com, Edgarspace, and Edgaronline.
Fin dthe section in the company’s annual report calle dmanage-
ment’s discussion and analysis of the business. This is a narrative
assessment of the business that shoul dhelp an dtest your un der-Copyright 2001 The McGraw-Hill Companies, Inc. Click Here for Terms of Use