In one sentence: Danielle asks how the circle of competence works in real life when the gurus (and Phil) buy all sorts of companies; Phil explains that your circle expands naturally through connected industries, and the danger is the edge, where you think you know something you don't.
Key ideas
- The puzzle. Beginners are told to stay in their circle (Danielle began with yoga and organic food), yet experienced investors own a wide mix. How does that fit? [02:00–05:00]
- Start narrow on purpose. The workshop's "three circles" homework turns what you already know into a first list of companies; see 001. [05:00–07:00]
- Circles grow by connection. Researching Harley-Davidson leads to recreational vehicles, then Polaris and Indian. Studying one company bleeds into neighbouring industries. [07:00–09:00]
- The bumblebee problem. It's easy to fly from flower to flower, and your feeling of competence grows faster than your real knowledge. [08:00–11:00]
- Two things kill you at the edge. Not knowing what you don't know, and "knowing" something that isn't true because you have only a surface understanding. Phil knows motorcycles well but nothing about ATVs, so owning Harley knowledge doesn't make Polaris understood. [11:00–13:00]
- Finish what you start. Every research project should end in one of three outcomes: a no (not a wonderful business), a yes (onto the watchlist with a buy price), or the too-hard box, with the file shelved. Phil makes his analysts stay on one company until then. [10:00–14:00]
- Ideas arrive through reading. Phil read that Buffett was selling puts on Burlington Northern and decided he could analyse a railroad because its moat is obvious and he had 30 years of practice. Then he read the 10-Ks and books on the industry. [15:00–20:00]
- A lower bar for obvious moats. Companies with a clear durable advantage are easier to judge; the question is just whether they will be bigger in 10 years. Hard ones are those where you can't see the moat. [18:00–20:00]
- Time-sensitive tips. Learning that Buffett is buying is perishable: others pile in and the price can run before you finish your homework. Phil says that's a real cost of slow research. [16:00–18:00]
- Discipline is harder with experience. More money and wider confidence mean more ideas to chase. Phil asks analysts to stop him, and keeps a folder of "to do later" items (for example Canadian oil sands pricing). In his first five years he was far more focused. [21:00–25:00]
- Beginners have an edge. Danielle realises same-store sales in Whole Foods carry over to Chipotle: knowledge compounds, so her circle widens without her trying. Guard against it widening too fast. [25:00–27:30]
How it maps to RuleOne
- The "too hard" and "watchlist" outcomes mirror what you do with names on /stocks/: shelve it, or add it with a target price.
- The screen already filters by numbers, so it won't tell you whether a business is inside your circle. Only your own notes on /stock/TICKER/ do.
- Phil's folder of things to look at later is a good model for a simple backlog for Radar.
Buffett, Munger and Graham links
- Buffett's 1996 Berkshire letter: the size of the circle matters less than knowing where its edge is (see 001).
- Buffett's Burlington Northern purchase (announced November 2009) is the case Phil refers to. He mentions seeing earlier option trading in the news.
- Munger's "too hard pile" idea: many businesses go there, and that is fine.
Words to know
- Circle of competence: the set of businesses you can really understand.
- Too-hard box: a file for companies you can't value with confidence; you can come back later.
- Same-store sales: sales growth for stores open at least a year, a measure used by retailers and restaurants.
Try this
Take one company you looked at recently and finish it: write "no", "yes at $X", or "too hard" at the top of a note and file it. Then open /stocks/ and /holdings/ and mark every name you can't explain in two sentences.
Check yourself
- Name the three allowed endings for a research project.
Answer
A no, a yes with a buy price (watchlist), or the too-hard box. - Why is the edge of the circle dangerous?
Answer
Your confidence outruns your knowledge: you don't know what you don't know, or you hold beliefs that are wrong. - How does a circle legitimately grow?
Answer
Through connected industries and shared mechanics, like same-store sales in grocery and restaurants.
Short quotes
"Those are the two things that'll kill you as an investor." (Phil, ~11:30, auto-transcribed)