Munger's core operating modelsPart I

Circle of competence

Know what you actually understand and stay inside that boundary.

Warren Buffett popularised this. His version: "I'd rather be approximately right about something I understand than precisely wrong about something I don't."

The circle isn't about being an expert in everything. It's about knowing the edge between what you actually understand and what you only think you understand. The edge is more important than the size of the circle. A small, well-defined circle beats a large, fuzzy one almost every time.

Most people overestimate their circle because:

• They've read about things (reading isn't understanding)
• They've made money on things (luck looks like skill, especially in bull markets)
• They're confident-sounding people who are used to having opinions
• They confuse understanding the vocabulary for understanding the substance

The discipline:

• Be honest about what you genuinely know versus what you've heard about
• When you don't know, say so. Out loud.
• Don't make important decisions outside your circle
• Expand the circle slowly and deliberately, when you have time to do the work

Buffett famously avoided tech stocks for decades because he didn't understand them. He missed Apple's first 30 years. But he didn't blow up on dot-com stocks either. The opportunity cost of staying inside his circle was less than the expected loss of stepping outside it. He eventually expanded the circle to include Apple, but on his own timeline.

How to expand your circle:

• Pick one new area at a time. Don't try to broaden in five directions at once.
• Go deep enough to actually understand, not just to have opinions
• Test your understanding by trying to make small decisions in it and seeing what happens
• Be willing to admit you still don't understand it after years of study

Connected to skin in the game (see [skin-in-the-game]): the person making the decision needs to be inside their circle. The person giving advice needs to be inside theirs. Most bad outcomes happen when people are decisive outside their circle.

Common mistakes:

• Pretending the circle is bigger than it is. This is the most common failure mode.
• Hiring people inside their circles but ignoring them on the things they actually know
• Confusing other people's circles for your own. You can hire experts, but the decision is still yours.
• Forgetting that the circle changes over time. Your competence in 2010 isn't your competence in 2025. Skills decay.

A useful self-check: before any meaningful decision, ask "am I making this from inside or outside my circle?" If outside, either bring it inside (do the work) or delegate it to someone who's inside theirs.

Examples in the wild