Stay Within Your Circle of Competence

If you are a property agent, your area of expertise is in the property industry. You are more likely to know how market sentiments affect property prices, where the best locations are for investments or how much a piece of land is really worth. For example, you could capitalize on information you know and invest in a company that owns multiple pieces of valuable real estate.

The stock market could have underpriced the company’s stock and may be selling it below its net tangible assets. With more knowledge and experience over others in your given area of expertise, you should focus and concentrate your efforts on it. Your odds of success will be higher!

2. It narrows down your stock selections

According to World Federation of Exchanges, there are over 46,332 companies listed worldwide. In Singapore alone, I’m spoilt for choice with over 700 stocks to choose from. If I took a month to deeply analyze each one, it would take me over 58 years just to finish the entire Singapore stock exchange!

I specialized in the aerospace engineering field and so I promptly looked at those publicly listed companies that fell within my area of expertise. I shortlisted two companies, SIA Engineering and ST Engineering and I was able to quickly analyze these businesses and get up to speed immediately.

3. You make less mistakes

One and a half years ago, a generous friend of mine shared with me an investment idea, Civmec Limited. Civmec is largely involved in the mining, oil and gas industry of which I know nothing about! Due to the hugely optimistic mining outlook in Australia, where Civmec largely operates, the management was confident of their business growth and that its share price would hit $2 and up.

At the time, the stock was trading at $1.20 which signified a potential upside of 66%. Unfortunately (or fortunately for me!), its stock is now trading at 75 cents – a massive 37.5% drop. Staying within my circle of competence helped my dodge that bullet. You make much less mistakes if you stay with something you understand and are familiar with.

Seek to expand your circle…

In closing, while you should always stay within your circle of competence, at the same time you should always seek to expand it.

As you become a better investor and gain competence in one area, you can start to push yourself a little further. There are undervalued investment opportunities everywhere and the larger your circle of competence grows, the more of them you have access to. Just one thing… remember where your boundaries are.

The following article was republished with permission from The Fifth Person.