My Circle of Competence
~Success is more a function of consistent common sense than it is of genius~
1920-1989, Chinese-born American Physicist, Founder of Wang Laboratories.
From time to time I’ve often thought about more diversification in my portfolio. Why? While I’m not grossly exposed in any one market sector I am heavy in financials, almost 50% of my unregistered portfolio resides in this sector. I own great companies but this weighting is admittedly a bit riskier than I’d like. I also believe what casts of thousands including all the talking heads and experts have advocated for decades many times over: diversification is essential for any investor because it mitigates risk.
In this big country of ours, let alone in foreign markets, there are tons of companies out there producing and selling everything from A to Z.
Some of these companies I understand, most I do not. I know what Canadian banks do. I know what Canadian utility companies do. I know what Canadian telecommunication companies do. Not everything about these organizations mind you, I don’t understand every product or service they deliver but I understand their business model and raison d’être.
To be a successful investor I believe knowing what you know is just as important as knowing what you don’t know.
Diversification for my portfolio is a long-term need but in the same light I know I can’t invest in too many businesses because a) I won’t ever have the money for it and b) investing in companies that I don’t understand is just plain guesswork and foolish.
If you’re an expert in an industry I suggest you leverage that expertise to your investing advantage, but don’t go overboard – you’re throwing out the prospects of diversification. I work in healthcare and I think I have a pretty good idea how healthcare companies operate, with experience in both public and private sectors. In reviewing my portfolio, I don’t own tons of healthcare companies but I own a couple because I understand this sector quite well. I know how healthcare, pharmaceutical, biological, and medical device companies run better than most. I only own a few companies from this sector because I’m also trying to be diversified.
Even though I stay within my body of knowledge more often than not, I’ve made mistakes – click here to read more. I know I’ll make more in the future. Everybody does. You don’t accelerate your learning if you don’t make a few. Just keep them as small and as infrequent as possible
By continuously reviewing my experiences, applying what I understand and not taking risks with companies that I don’t, my circle of competence will become forged over time. I think I can become a successful investor if I remain objective with my investment choices, stay patient and buy businesses I understand. I’ll try to always avoid the ones I don’t as shiny or as sexy as they may appear. Investing directly in companies can be challenging but like An Wang mentioned, I think the process can be made easier by consistently making sensible choices. Businesses I own will always have highs and lows and many cycles of each. I expect this. I’ve taken time to understand these companies and how they behave, especially when times are rough. There are more companies to learn about. I’m looking forward to that.
Like rings on a tree I hope to grow my circle of competence year by year, patiently and steadily. This approach should make me a better dividend investor. Time will certainly tell. The beauty of this blog is, you’ll get to read that journey all the way
Are you developing your own circle of competence? Are you already “there” as an investor?
Share your thoughts!