106 ShowMetheMoney
standing of it. Another useful source to consult is the chairman’s or
CEO’s letter, as much for what it says as for what it does not say
about the business. You will learn an enormous amount by reading
just a few of these reports, an dthe more you rea d, the better able
you will be to evaluate them.
THE INITIAL CIRCLE
Circles of competence should be drawn according to your ability and
willingness to understand a business and its operating climate. Your
circle’s boundaries are defined by your knowledge and aptitude; its
contents are companies about which you can make an intelligent
investment decision in light of those boundaries. Omit from your
circle businesses that are too har dfor you to un derstan dor that
change too rapidly for you to keep up with.
To define your circle of competence, start with your own indus-
try. Retail store managers probably have a head start in understand-
ing CVS, Walgreen’s, Gap, an dHome Depot; restaurant employees,
in understanding McDonald’s. People in the energy business tend
to know that business an dwill have a leg up on Exxon-Mobil, Enron,
an dTexaco. Engineers an dscientists will have a better shot at un-
derstanding Dow Chemical and DuPont, and telecommunications
devotees have a goo dshot at MCI, AT&T, an dLucent. Doctors
shoul dcertainly have an e dge in evaluating pharmaceutical concerns
such as Eli Lilly an dPfizer. Farmers may be able to evaluate John
Deere better than the average Wall Street banker can.
Think also about the things you buy an duse an dhow you do
so. You may know more about companies such as American Home
Products, BMW, Federal Express, and Sony than you think, or at
least you may be able to understand them better than you think. Try
Hershey’s an dNestle ́ if you are a chocolate lover, Anheuser-Busch
or Heineken if you drink a lot of beer, and Tiffany’s if diamonds are
your best friend.
Do the same with regional companies in your area. Public util-
ities such as ConE din New York an dBlack Hills in the Rocky Moun-
tains (South Dakota, Wyoming, an dMontana) an dregional banks
such as First Oaks in Chicago, Wilshire in Los Angeles, an dAlabama
National in the Southeast (Alabama, Georgia, an dFlori da) shoul d
be easy an dinteresting to examine for people living in those areas.
So too are similarly locate dlarger companies, say, Boeing in Seattle,