Charlie Munger (Trades, Portfolio) once remarked, "If Warren Buffett (Trades, Portfolio) had gone into ballet, no one would have heard of him." This seemingly simple statement offers some excellent advice for investors.
Munger was remarking on the Oracle of Omaha's focus on doing what he does best. He went into investing because that's what he excelled at. We don't know if Buffett tried ballet at any point, but based on the fact that he's not a dancer today, I think we can reasonably assume that it isn't his area of expertise. If he was, he might have tried to make a career out of dancing rather than trying to make money in the stock market.
Focus on what you're good at
Focusing on what you are good at is simultaneously the most demanding and easiest way to get ahead in life.
It's hard because it is difficult to realize what you are good at and focus on refining that one skill. Schools and colleges teach students to try and be good at lots of different things, but this isn't necessarily the best way to go about life.
Specializing in one topic or subject is a much better use of development time. Even away from school and college, there is an encouragement to build knowledge on multiple different topics. Indeed, Munger has advocated this approach himself. He has said that reading on different topics is the best way to build a multidisciplinary understanding of the world.
This may have worked for Munger because he is a highly intelligent individual. However, I think it is unlikely that we average investors could copy the same approach with similar results. Although, you could argue that Munger is more of a philosopher than an investor. That would justify his desire to have an understanding of multiple different models.
It can be hard to focus on just one topic or subject. However, once you have defined your circle of competence, it is relatively easy to stay within it and not take on anything you don't understand.
The trick is defining what you do and don't know in the first place. There's no set guide or template investors can use to arrive at a conclusion here, but there is a simple trick that can provide some guidance. Specifically, if you have to ask if a topic or subject falls inside your circle of competence, it probably doesn't.
Winner takes all
Some investors might be reading this article thinking they can move into different sectors and industries that they currently know nothing about. I don't doubt that there are people out there who are intelligent enough to do just that. Some people made do it and be extremely lucky and successful.
However, it is essential to remember that there are always losers as well as winners. Staying away from the losing side is critical for long-term investment success. That's what we are trying to do as investors virtually all of the time - stay away from significant losses to improve our long-term returns.
One of the easiest ways to do this is to stay away from things you don't understand. It is that simple. For all the time, effort and expenditure to find good investment ideas, avoiding the bad ideas is substantially more straightforward and is likely to result in better returns.
So, the next time you are considering a potential investment idea and have to ask yourself if you understand the company and the sector, you could ask yourself something like, "why am I not a ballet dancer?"
The answer to this question may be the same. This could be an easy roadmap to help investors stay away from problems they don't understand.
Disclosure: The author owns no share mentioned.
Read more here:
- Copying Charlie Munger and Warren Buffett's Key Traits
- Warren Buffett: Most Investors Will Do Well Without Borrowing Money
- Some Thoughts on How to Invest in the Current Market
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