Circle of Knowledge

By Ramesh Akkineni

It is best to rely on what we really know. Most of the times we are forced to rely on guesses, hopes and insufficient data... Investors will do well when they bet on what they know. We have to define our circle of knowledge or competence. For that we have to divide this world into knowable and unknowable. We have to focus on things that are knowable and important. Not everything that counts can be counted and not everything that can be counted counts.

That means it is better to focus on things that we are familiar with. For example, a software engineer may be able to understand some software companies and be able to estimate their intrinsic value. Intrinsic value of a company is the present value of all future returns that the company can earn in its life. Similarly a scientist may be able to estimate intrinsic value of some of the high-tech companies. For most of us it is better to stick with what most people can estimate.

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