Would you do surgery you don't understand?
You're a physician. Would you do surgery you don't understand? Then why buy a business whose economics you don't understand?
Want to beat the market? First question: why do you deserve the excess returns?
Find your lane: your street, a brand you know cold, a product you love. Understand what the business will earn and how durable that is, not what the chip does. If it's outside your circle, pass.
"The size of that circle is not very important; knowing its boundaries, however, is vital." Warren Buffett, 1996 letter.
Companies named are examples, not recommendations. Education, not advice. Not a recommendation to buy or sell anything.
Transcript
You're a physician. Would you do surgery that you do not understand? No, right?
Then why are you buying businesses whose economics you do not understand? So you want to invest your money and beat the market. You want to play that game.
First question. Why do you deserve the excess returns? Let's talk about circle of competence.
The idea is that if you do not understand the business you're looking at, the stock you're looking at, you will do very poorly. It should not be that easy. And it is not that easy.
So if you're buying CoreWeave or Nvidia stocks, it is OK. But you need to understand the economic power of those businesses. I don't mean what the chip does.
I mean: what what the business going to be earning in the competitive marketplace? And how durable are the earnings going to be? And if you want to play this game of investing yourself, you need to figure out what your lane is and stick in it and dominate that.
It could be a street if you want to invest in houses. Or it could be a clothing company if you think you know fashion very deeply. It could be a tech company like Meta or Apple where you love the products and you feel like you know something that the market does not.
So before trying to do the DIY stock picking or finding your own businesses, you have to be honest with yourself and ask yourself, is this within your circle of competence? If not, you should just say no and pass on.
Sources
- Buffett, 1996 Berkshire Hathaway letter (index funds; "Intelligent investing is not complex..."; circle of competence): https://www.berkshirehathaway.com/letters/1996.html