Warren Buffet & the Circle of Competence
“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
When it comes to investing, Warren Buffet is adamant about sticking to companies that are within his “circle of competence” – meaning that it’s a business that he understands and can analyze. By having that deep knowledge of the business, he then can adequately forecast the company’s future performance. For as Buffett has said in the past, “risk comes from not knowing what you’re doing”, so by staying in his circle of competence, he eliminates any risk.
At Volaris, our circle of competence involves mission critical vertical market software companies. We purposefully have this singular focus because it allows us to really understand the ins and outs of businesses in these markets. Thus, we know how to run these companies efficiently and have an innate understanding of how to be a market leader.
But Why Vertical Markets?
Vertical markets are highly targeted and niche. Because they are so specific, a company’s solutions can focus on their customers’ pain points and give them products that are tailored to their needs. When a company has a horizontal focus, they try to be all things to all people and they spread themselves too thin. This results is having to retrofit solutions and making do with products that only partially solve the customer’s problem. As well, due to the specificity of vertical markets, companies that operate in this space often fly under the radar, yet are still extremely successful.
So now you know why our circle of competence revolves around vertical market software firms, but have you stopped to think about what your circle of competence is? Are you consistently stepping outside that circle instead of focusing on what you know? I really encourage you to stay focused on what is in your circle of competence and drill down on those areas. Get back to the basics and you will see your business thrive.