Charlie Munger, Warren Buffett’s right hand man, has shared his irreverent wit and wisdom over the years - covering a breadth and depth of knowledge from investing to operating businesses and general life advice. 

My favorite of all his teachings is that on mental models; as Munger said back in the 90s, 

“Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience both vicarious and direct on this latticework of models.”

From my perspective, the elementary and most critical mental model is the Circle of Competence, so often touted by both Munger and Buffett. As Tom Watson Sr., Founder of IBM said, 

“I’m no genius. I’m smart in spots—but I stay around those spots.”

This captures the essence of the Circle of Competence - understanding and sticking to your areas of knowledge and expertise, whether that be in business, investing or otherwise.

Early in one’s career, some individuals may enter the workforce with highly specialized degrees and a very clear Circle of Competence, though for most recent graduates their Circle is very limited as they spend the initial years of their career finding the industry and function which suits them best, then building a deep skill set in that area. As individuals advance in their career they may layer onto their functional expertise with management and leadership capabilities. 

Some people are polymaths, with a broader Circle of Competence across multiple disciplines - with his recent acquisition of Twitter, Elon Musk is clearly signaling that he believes his Circle of Competence to be limitless (I’m not going to bet against him). 

When it comes to both running and investing in startups, understanding one’s Circle of Competence is critical. More on that next time…

Shoutout to the Farnam Street blog, which has so eloquently captured the lessons of Munger, Buffett and others.