If you’re down 50% on your investment in the first year, it’s not as simple as earning a 50% return the next. Instead of trying to make a highlight play, we would be better off sticking to the fundamentals. We are amateurs the moment we step outside our circle of competence, but most of us refuse to play like one. We must have permission to suck if we want to attempt anything new or get better at our craft.īut when it comes to high stakes decision making, we must never confuse ourselves. An approach like this would be soul-crushing. I don’t propose that we spend our entire lives avoiding mistakes. In the world of investing, it is the day trader who gets burned competing with seasoned professionals and complex algorithms. At work, the clueless employee flouts an unspoken rule and is subsequently passed over for promotion. It’s the amateur player who blunders and loses all his pieces in the game of chess. The phenomenon of the ‘loser’s game’ can be observed everywhere. The victor in this game of tennis gets a higher score than the opponent, but he gets that higher score because his opponent is losing even more points. The amateur duffer seldom beats his opponent, but he beats himself all the time. Mistakes are frequent. Double faults are nearly as common as faults. In contrast, amateur tennis is an entirely different game. It’s what you see on ESPN highlight reels. They rally back and forth until one player hits the ball just beyond the reach of their opponent. Each player, only fractionally better than their competitor, plays a nearly perfect ball game. Professionals at Wimbledon have to work to score points. Ramo believed that the game of tennis could be subdivided into two games: the professionals and the rest of us. He observed that while the rules of tennis remain the same, the way points are scored are radically different. Specifically to Simon Ramo’s book, titled Extraordinary Tennis for the Ordinary Player. Shane Parrish suggests that we turn to the game of tennis for answers here. You have to do something different if you’re going to score any points. But that’s not necessarily true. The assumption is that you have to be smarter and better than your peers. How can you succeed and move ahead if you’re not brilliant? “There must be some wisdom in the folk saying: it’s the strong swimmers who drown.” The Different Ways Of Winning It requires a great deal of self-awareness and humility to acknowledge your own limitations, especially if you’re holding a high office. It’s incredible that Munger has always been able to hold out even against the tide of popular opinion. Their track record suggests that they’ve done better than many of their critics. They’ve been heavily criticised for missing the rise of companies such as Google and Amazon, but many fail to realise that they’ve avoided the Dotcom Bubble as well. The economics of each business vary greatly.įor this reason, both Buffett and Munger have been averse to the technology sector when it comes to investing. For instance, we might have experience running a restaurant, but we should be careful to think that we could manage a biotech company effectively as well. Munger proposes that we stick to these competencies that we are truly adept at and exercise caution when asked to venture outside our circle. The idea is that each of us – through experience or study – has acquired useful knowledge in specific fields. The circle of competence is easy to understand.
It’s the same rule that Warren Buffet lives by, and is why Berkshire Hathaway has been consistently so successful. One of the ways Charlie Munger has tried to avoid making stupid decisions is by sticking to what he calls his ‘circle of competence’. Rather, Munger focuses on not making big mistakes. There’s no talk of how we should aim to change the world. Unlike many others who have studied at several elite institutions, it’s intriguing that Munger doesn’t encourage people to seek out brilliance. “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
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