Play Within Your Circle of Competence

Earlier this year, the top athletes in the world put their physical skills on display at the Rio Olympics, and now it’s the intellectuals’ moment in the spotlight. The World Chess Championship Match 2016 pits reigning champion Magnus Carlsen of Norway against Sergey Karjakin of Russia. The match started on November 11th and runs until November 30th, consisting of 12 games. One point is awarded for a win and half a point is awarded to each player for a tie, with the champion being crowned once he reaches 6.5 points.

As often happens, I find myself comparing events like these to the investment world. I am not alone in this endeavour. Warren Buffett himself alluded to parallels between investing and chess when he referenced Bobby Fischer, one of the greatest chess players of our time:

“As you go along, you learn what things you’re not going to understand. Knowing what to leave out is just as important as knowing what to focus on. Somebody said how to beat Bobby Fischer; you play him any game except chess. And so I don’t play Bobby Fischer at chess.

The concept Buffett refers to is the circle of competence. Buffett would never challenge Fischer, Carlsen or Karjakin to a game of chess because he knows they have a significant advantage over him in this area. They reached this level of mastery precisely because they focused on this one game and left out the rest.

Similarly, Burgundy’s Investment Team makes investing within our circle of competence a strategic priority. We choose to focus on extensive research to increase our depth of knowledge in a few areas of the investable universe, rather than have a broad and limited understanding of everything. It’s this strategic approach that enables us to preserve and build our clients’ investment portfolios over the long term.

This is not a new idea. In fact, we talked about our circle of competence in a 2007 issue of The View from Burgundy, “Reflections from the Funhouse”:

“No investor can be all things to all people, nor is anyone capable of valuing all securities. Investing money without investing adequate time to truly get to know the inherent risks will often lead to permanent capital losses. Staying within a circle of competence forces focus on a limited number of investments and leads to the steady accumulation of knowledge about a business and its inherent risks.”

Successful long-term investors will intuitively understand the words of Tom Watson, the founder of IBM, when he said, “I’m no genius, but I’m smart in spots, and I stay around those spots.”

This post is presented for illustrative and discussion purposes only. It is not intended to provide investment advice and does not consider unique objectives, constraints or financial needs. Under no circumstances does this post suggest that you should time the market in any way or make investment decisions based on the content. Select securities may be used as examples to illustrate Burgundy’s investment philosophy. Burgundy funds or portfolios may or may not hold such securities for the whole demonstrated period. Investors are advised that their investments are not guaranteed, their values change frequently and past performance may not be repeated. This post is not intended as an offer to invest in any investment strategy presented by Burgundy. The information contained in this post is the opinion of Burgundy Asset Management and/or its employees as of the date of the post and is subject to change without notice. Please refer to the Legal section of this website for additional information.