Own what you know.
“I’m no genius, but I’m smart in spots, and I stay around those spots.” Tom Watson [IBM founder]
Warren Buffett and Charlie Munger said it best when they recommended that investors stay within their “Circle of Competence”. Your circle of competence is the knowledge base you have developed, over and above the average investor, for example in a certain part of the market or investment type. Having an informational and analytical edge means you are in your comfort zone and unlikely to be put off from investing, even when a sector or situation seems complex to others. The ability to quickly assess the key fundamental driving factors of a given investment opportunity can tip the odds in the favour of the prepared investor, which can result in uncovering unique opportunities and being in a smaller pool of investors, both of which have their own advantages.
Rather than timing the market, we value individual businesses and securities that we believe we understand well enough to give us an investment edge, and then we act when stock prices are attractive relative to our fair value estimates…During periods of market volatility, ideas that have been tracked on our watchlist and that fall in our circle of competence can be snapped up at a “discount” to our estimated fair value estimate.
We look at inefficient, unloved parts of the market that are currently over-looked. Here we find businesses that are unfollowed, misunderstood and temporarily mispriced by the market, but which fit into our “circle of competence”. We are independently minded and trust in our analytical process to generate our own “best ideas” instead of allowing the “street”, the “hype” or the “flows” to drive investment decisions.
We’re marking the holidays with the 12 Days of Investing the Pender Way. Short posts in which we share some of the key tenets of our investment process.