2014: How can someone figure out their circle of competence?

AUDIENCE MEMBER: Hello, Mr. Buffett, and hello, Mr. Munger. Thank you for being extremely generous with sharing your wisdom. My name is Chander Chawla, and I am visiting from San Francisco.

In the past, you have said that people should operate within their circle of competence. My question is, how does one figure out what one’s circle of competence is? (Laughter)

WARREN BUFFETT: Good question. (Laughs)

Some of the people in the audience are identifying with it, I can hear them.

The — it’s — you know, it is a question of being self-realistic, and that applies outside of business as well.

And, I think Charlie and I have been reasonably good at identifying what I would call the perimeter of that circle of competence, but obviously we’ve gone out of it.

I would say that in my own case, I’ve gone out of it more often in retail than in any other arena. I think it’s easy to sort of think you understand retail, and then subsequently find out you don’t, as we did with the department store in Baltimore.

You could say I was outside of my circle of competence when I bought Berkshire Hathaway, although I bought it, really, to resell as a stock, originally.

I probably was out of my circle of competence when I decided that I should go in and buy control of the company. That was a dumb decision — which worked out.

The — being realistic in appraising your own talents and shortcomings, I think — I don’t know whether that’s innate, but some people seem a whole lot better at it than the others. And I certainly know of a number of CEOs that I feel have no idea of where their circle of competence begins and ends.

But, we’ve got a number of managers who I think are just terrific at it. I mean, they really know when they’re playing in the game they’re going win in, and they don’t go outside of that game.

The ultimate was Mrs. B, at the Furniture Mart. She told me that she did not want stock, in terms of the Berkshire Hathaway deal. Now, that may sound like it was a bad decision. It was a splendid decision.

She did not know anything about stock, but she knew a lot about what to do with cash. She knew real estate, she knew retailing, and she knew exactly what she knew and what she didn’t know, and that took her a long, long, long, long way in business life.

And that — that ability to know when you’re playing the game in which you’re going to win, and playing outside of that game, is a huge asset.

I can’t tell you the best way to develop a great sense of that about yourself. You might get some of your friends that know you well to offer contributions. Charlie’s given me a few contributions occasionally, saying, “What the hell do you know about that?” That’s one way of putting it, of course. (Laughs)

But Charlie, do — can you help him out?

CHARLIE MUNGER: Well, I don’t think it’s as difficult to figure out competence as it may appear to you. If you’re five-foot-two, you don’t have much of a future in the National Basketball League. And if you’re 95 years of age, you probably shouldn’t try and act the romantic lead part in Hollywood. (Laughter)

And if you weigh 350 pounds, you probably shouldn’t try and dance the lead part in the Bolshoi Ballet. And if you can hardly count cards at all, you probably shouldn’t try and win chess tournaments playing blindfolded, and so on and so on.

WARREN BUFFETT: You’re ruling out everything I want to do. (Laughter)

CHARLIE MUNGER: But competency is a relative concept. And what a lot of us need, including the one speaking, is — what I needed to get ahead was to compete against idiots, and luckily there’s a large supply. (Laughter)

WARREN BUFFETT: OK, Carol. (Laughter)