Circle of Competence

From a 1994 talk at USC Business School on what Munger called “worldly wisdom”. The talk survives as a transcript reprinted across the web (Farnam Street, Barry Ritholtz’s blog) rather than as an official USC publication; the two reprints agree word for word on the quoted text. Munger had just told his audience why Berkshire Hathaway, the company he ran with Warren Buffett, avoided the high-tech sector: they “feel like we’re at a big disadvantage in trying to understand the nature of technical developments”, so they stay out “based on our personal inadequacies”. The ellipsis in the quote trims two sentences: “And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge.”

The example Munger builds the passage around is a plumbing contractor in Bemidji, a small city in northern Minnesota. Try to become the best tennis player in the world and the outcome is “hopeless”: “other people blow right by you”. Becoming “the best plumbing contractor in Bemidji” is, he estimated, “probably doable by two-thirds of you”. “It takes a will. It takes intelligence.” And time enough to master the trade.

Both people in the example are trying to be the best at something, so this is not advice to want less. What separates them is the contest each entered: world-class tennis is a game “where other people have the aptitudes and you don’t”, the Bemidji plumbing crown a game where will and intelligence are enough. Munger added that the circle isn’t fixed (“some edges can be acquired”) and that he meant the example as more than investing advice: “the game of life to some extent for most of us is trying to be something like a good plumbing contractor in Bemidji.”