YourCircleofCompetence 109uation like? Its employee relations? Does it operate in regions subject
to ordinary or extraordinary risks of political or economic instability?
Grappling with these questions shoul dbe enough to test whether
a company is within your circle of competence. Again, if you can
answer these questions, the company probably qualifies; if you can’t,
try one you are more familiar with.
Graham advised: “The field of choice is wide; the selection
should depend not only on the individual’s competence and equip-
ment but perhaps equally well upon his interests an dpreferences.”^1
Buffett echoes the point: “You don’t have to be an expert on every
company, or even many. You only have to be able to evaluate com-
panies within your circle of competence. The size of that circle is
not very important; knowing its boundaries, however, is vital.”^2 If
you have to choose between a large circle an da thick boun dary,
choose the latter. But a bigger circle will give you more opportuni-
ties, so work on enlarging it.
THE NURTURED CIRCLE
The boundaries of your circle must change over time. If you leave
them the same, some companies will simply disappear. If you are a
master of the fashion industry today—say you work in New York
City’s garment industry or are a buyer for a large retail chain such
as Sak’s Fifth Avenue—you know that to remain a master five years
from now you will need to learn new things over that period. Indeed,
particularly in the fashion industry, you need to keep up daily, since
fashion is (by its very name) a business that swiftly an dconstantly
evolves. Colors, hemlines, cuts, an dwho’s in an dwho’s out change
by the season. To stay on top, you must change.
If you simply took what you knew about an industry you worked
in ten years ago an duse dthat knowle dge to evaluate a company
in that industry today, you would be at a severe disadvantage. Take
the business of book publishing, which has change drapi dly in that
period. In the distribution channels, for example, first the rise of
chain booksellers such as Barnes & Noble an dBor ders eclipse d
much of the power of the old-fashioned independent booksellers;
then the rise of on-line booksellers such as Amazon.com altere dthe
dynamic again. And the entire book publishing industry has consol-
idated substantially and become part of a broader entertainment in-
dustry.
Anyone in the publishing industry during that period needed to