CIRCLE OF COMPETENCE PRINCIPLE ****

CIRCLE OF COMPETENCE PRINCIPLE ****

Value investors make hard-headed assessments of their competencies. If they doubt their skill in stock selection, they steer clear.

Value investors know their limits, thickly drawing the boundaries of their circle of competence.

They avoid investment prospects beyond those boundaries as well as anything even close to the boundaries.

This rules out broad segments of industry, enhancing prospects and economizing on time and resources devoted to studying business.

Those who cannot even identify a circle of competence should avoid stock picking altogether.

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For those who feel a need to allocate a portion of their wealth to stocks, choose vehicles other than individual stocks, such as mutual funds, index funds, or do so through a diversified retirement account.

However, these operate as subparts of the broader market, and therefore can be over- or underpriced.

This means applying the same ten principles of disciplined investing, but perhaps less rigorously so.

Also read: 10 TENETS OF VALUE INVESTING

1. MR. MARKET PRINCIPLE
2. BUSINESS ANALYST PRINCIPLE
3. REASONABLE PRICE PRINCIPLE
4. PATSY PRINCIPLE
5. CIRCLE OF COMPETENCE PRINCIPLE ****
6. MOAT PRINCIPLE
7. MARGIN OF SAFETY PRINCIPLE ****
8. IN-LAW PRINCIPLE
9. ELITISM PRINCIPLE
10. OWNER PRINCIPLE