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Circle of Competence: How to Escape Competition Through Authenticity

Nobody can beat you at being you.

Naval

What would you do if money wasn’t an issue? Do what you love rather than what’s profitable? Work less and play more? Quit the rat race and take more control of your life? The Circle of Competence and the philosophy to escape competition through authenticity are two ideas that suggest we don’t have to make that choice. Because we wouldn’t want to.

While the Circle of Competence was developed by investor legend Warren Buffett in the 1990s, legendary investor Naval Ravikant proposed the principle of escaping competition through authenticity almost thirty years later. Let’s bring the two philosophies together to figure out how we might transcend the rat race.

The Circle of Competence

We start with the Circle of Competence, invented by Buffett alongside his long-time partner Charlie Munger. Buffett explained the concept best in one of his shareholder letters from 1996:

What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.

Warren Buffett

Put differently, the idea is to never invest in a business we know we don’t understand. Or, framed positively, to only invest in a business we’re positive we do understand. What doesn’t matter so much is what we’re competent in. Arguably, this credo is part of what made his investment firm Berkshire Hathaway so successful.

Unsurprisingly, Buffett’s mental model has its origins in his very own Circle of Competence, the world of stock trading. Though, it can certainly be applied beyond his field of expertise, as the ‘Oracle of Omaha’ illustrates in an often-cited example.

Between Knowledge & Half-Knowledge

Meet Rose Blumkin, a Nebraskan retail legend who used to be one of Buffett’s business managers. In a lecture, Buffett recalls “Mrs B’s” immigrant success story as a case in point for the Circle of Competence model, an alternative framework of knowing and not knowing:

I couldn’t have given her $200 million worth of Berkshire Hathaway stock when I bought the business because she doesn’t understand stock. She understands cash. She understands furniture. She understands real estate. She doesn’t understand stocks, so she doesn’t have anything to do with them. If you deal with Mrs. B in what I would call her circle of competence… She is going to buy 5,000 end tables this afternoon (if the price is right). She is going to buy 20 different carpets in odd lots, and everything else like that [snaps fingers] because she understands carpet. She wouldn’t buy 100 shares of General Motors if it was at 50 cents a share.

Warren Buffett
Circle of Competence

Buffett attributes Mrs Blumkin’s success to her understanding of her field of expertise (What We Know). Coming to the United States, Mrs B specialised in what she had come to be most knowledgeable about. Furniture retail may lack prestige or be considered dull by some (or many). Though, that didn’t keep Madam Blumkin from building a successful business. There was no need for her to start from square one by becoming knowledgable in seemingly more profitable markets.

Essentially, we can define competence as not only understanding relevant facts or having experience. But knowing how to do something well and successfully so we achieve the desired outcome. We’re competent in many rather mundane fields, such as riding a bike. But we’ve also built a unique set of skills through our individual circumstances, experiences and personal choices. Whether it’s playing an instrument, a passion for martial arts or catching orbs.

Those choices seem to be where the wheat is separated from the chaff. Choosing to buy General Motors stocks would be an example of Mrs B acting on half-knowledge (What We Think We Know). She might have made a good deal once or twice by sheer luck, but it wouldn’t have been a sustainable long-term strategy for her.

The risk increases when we stray even further from our Circle of Competence. We end up in the territory of What We Don’t Know and rely more and more on mental shortcuts as opposed to slow yet deliberate decision-making. That’s why there’s an aspect of control to it, too. Being in our wheelhouse means we’re less surprised by how a decision might turn out. And if we are, our skills and experience enable us to problem-solve and get it under control.

Staying Within Our Circle of Competence

Knowing the boundaries is one thing, respecting them is another. Mrs B seemed to have the foresight and discipline not to concern herself with opportunities outside of her abilities. No matter how profitable they seemed. That is not to say we cannot expand our expertise to seize on opportunities, but we should do so gradually.

The Peter Principle, the semi-satirical idea that in a hierarchy everyone rises to their level of incompetence, illustrates this point quite clearly. Success inevitably tempts us outside of our competence circle, eventually compromising our careers. According to Laurence J. Peter, it requires a strong character and wit to not be promoted to a position for which we’re utterly unqualified.

The smart thing to do — so the author’s tongue-in-cheek suggestion — is to avoid this form of Mission Creep by clinging to what we’re good at while pretending we’ve already reached our full potential. In order to stay in our Circle of Competence, we must act against our impulses, resist outside pressure and game the system. What makes it so difficult then?

The Circle of Incompetence

There’s good reason to dismiss Buffet’s mental model as luxury. We often don’t seem to have a choice but to work in fields where we don’t really know what we’re doing. Perhaps we were looking for a challenge, or it was a necessity. Working for an organisation can be quite performative and require us to act against our very nature. (I’ve previously written about how some jobs can easily feel like a pointless game of Chmess.)

But playing outside our Circles of Competence inflates our choices. At the same time, we lack the necessary information to make good decisions. Decision fatigue sets in, which leads to even more bad calls. Plus, there’s a good chance we compete with people whose job has become their second nature. This brings us to the question of how exactly we get to know and understand our Circle of Competence.

Leveraging Authenticity With Naval

Compared to Buffett, Naval’s approach seems very similar. Although with his thoughts on competition and authenticity, Ravikant takes a more general approach to life and dives deeper into the question of how we might find out who we’re supposed to be. It complements the Circle of Competence, taking it into the 21st century.

Escaping Competition

The philosopher starts with the premise that we tend to become what people around us do for a living. We emulate others. Our parents, our peers, or any successful role model for that matter. (If Mrs B was so successful with furniture, maybe I should try that, too?) The result is similar to where we end up when operating outside our Circle of Competence. Our chances of winning competitive games diminish. Here’s what Naval suggests instead:

The best way to escape competition — to get away from the specter of competition, which is not just stressful and nerve-wracking but also will drive you to the wrong answer — is to be authentic to yourself.

If you are building and marketing something that’s an extension of who you are, no one can compete with you.

Naval

According to Naval, a prime example of this dynamic is Joe Rogan. The comic and podcaster has transcended any competition by building his personal brand. Everyone can create a podcast, but no one can recreate The Joe Rogan Experience. The rise of the internet is what has turned this previously “useless advice” into a viable career option for many. The web has massively expanded the potential audience and made products more scalable. In sum, the angel investor argues that one of the keys to creating wealth is to refrain from copying others and turn our unique authentic selves into the product.

How to Be Authentic

Admittedly, authenticity is a bit of a nebulous concept. We all seem to strive for it, but it’s hard to grasp what it actually is. Philosophers such as Alan Watts have long pointed out its self-contradictory nature. The whole of Zen, for example, is built around the idea of being in an authentic state by acting as if we and the environment were one being. This can be the case when two people are dancing and it’s impossible to tell who leads and who follows.

Paradoxically, so the Zen way goes, mastering life in such a way can only be achieved by showing that the real you is a mere abstraction. This is demonstrated by asking self-conscious students who they were before their mother and father conceived them or by simply telling them to be themselves. Usually, the request has the effect of alienating them from the group rather than making them more at ease.

Interestingly enough, the scientific study of authenticity has arrived at a similar point. In his article Authenticity under Fire, humanistic psychologist Scott Barry Kaufman explains the importance of social integration for feeling true to ourselves. It’s not when we feel uniquely different that we think we’re most authentic. It’s when others see us the way we want to be seen and our reputation aligns with the one we aspire to.

Obviously, authenticity is not something others can decide for us. But the difficulty of measuring authenticity scientifically through self-reporting also suggests that being authentic is not something we can decide all by ourselves either. We just don’t know ourselves that well, which ties in nicely with how Naval suggests we can find our true selves.

Identifying and Calibrating Our Niche

According to the investor, there are two aspects worth paying attention to:

As you go through your career, you’ll find you gravitate towards the things you’re good at, which by definition are the things you enjoy doing. Otherwise, you wouldn’t be good at them. You wouldn’t have put in the time.

Other people will push you towards the things you’re good at, too. Because your smart bosses, co-workers and investors will realize you’re world-class in this one thing. And you can recruit people to help you with other things.

Naval

Naval’s first point has to do with ourselves. While who we are is not readily available knowledge, we have to start somewhere. Initially, this somewhere may very well be the wrong place. But we can keep track of life’s error messages and the things our minds keep circling back to. This fits in with the immigrant story of Mrs Blumkin who ended up building on her knowledge about cash and retail.

There’s also a collaborative aspect to it. Remember how Buffett describes recognising Mrs B’s skills, talent and potential. He didn’t try to force his own Circle of Competence on her or otherwise put her on the spot. Instead, both seemed to have an understanding of what she knows best. It’s worth listening to family, friends and teachers to clue in on where we should be heading. From an outside perspective, they can often better recognise what we’re drawn to.

Authenticity is an escape route towards the familiar.

On a final note, Naval makes clear that we all have more than one set of skills and proclivities. The goal is to identify those we gravitate towards and then calibrate them to find a viable product-market fit. We might also specialise even further within a field of expertise, finding that niche within our niche. The closer we come to the core of our Circle of Competence, the higher resolution the picture of our authentic selves becomes.

Closing Thoughts

What part of your job would you still do if you weren’t paid? If only money wasn’t an issue, we might think, we could finally be ourselves and find our Circle of Competence. However, consolidating the Circle of Competence with Naval’s philosophy suggests that authenticity is not a fixed state, but the pursuit of a long-term goal.

This is reminiscent of the Ship of Theseus paradox and the idea that our identities are more akin to a transformative spirit. The more we gravitate towards authenticity as the core of our Circle of Competence, the less we have to choose between doing what we love and what’s profitable. Granted, there’s no guarantee for success. But it can make success more likely.

So in a sense, authenticity is an escape route toward the familiar. Even though I don’t think we can escape competition entirely. We need some form of competitive struggle. But with the two philosophies in mind, the only person who can beat you at being you is yourself.