xiv Introduction:TheQCulture
people will have the ability to understand them quite well and be
able to make informed judgments about their future prospects.
As with the classics, some vintage companies will turn out to be
warriors and others wimps. For example, take the personal computer
business. From 1990 to 1999 the erstwhile start-up Dell built a
hugely profitable direct-sales PC business, growing its sales and prof-
its at astonishing rates, with Compaq following respectably, Tandy
and Apple lagging, and plenty of staggering wimps suffering erosion
during the period, including AST, Digital, Atari, Tulip, Commodore,
and Kaypro.*
A third group of companies are “rookies,” brand-new companies,
perhaps in brand-new industries, whose entire context has virtually
no trac krecord. These are frontier businesses, li ke steel in its day,
automobiles in theirs, plastics a bit later, and the Internet at the
turn of the twenty-first century. Apart from the first movers in such
groups—say, Yahoo! and America Online (AOL) among the 1990s
Internet companies—these have virtually no economic histories to
spea kof.
Even so, there will be investors who have the present-day tools
to make intelligent estimates of where the rookies will be in the
future. By mating with AOL in 2000, senior managers of Time-
Warner expressed just such confidence in their ability to do so.
Whether their judgment will be vindicated remains to be seen. But
certainly although some of these companies will turn out to be fly-
by-nights, others are true up-and-comers that will proceed up the
ranks from vintage warriors to stalwart classics. After all, every com-
pany started out as a rookie.
The central feature of the circle of competence, then, is that it
must be tailored to the individual. It is not the case that intelligent
investors avoid businesses that are hard to understand or subject to
rapid change. On the contrary, those investors equipped with the
ability and fortitude to understand what is hard for others to under-
stand and to gauge better than others how a business and its industry
are evolving have a decided advantage. But it remains important for
each investor to come to grips with what is and what is not within
his circle of competence to make the informed judgments that in-
telligent investing requires.
*Kara Scannell, Anatomy of a Bull Run: “New Economy” Stocks Lead Charge:
Blast From the Past—A Loo kat Yesterday’s Tech Investments—A Few Thrive,
Others Merely Survive, Some Fail,The Wall Street Journal, January 18, 2000.