Put faith in your circle of competence

Life/Investing Mantra

  • While assessing your circle of competence is itself a form of modesty, it is not helpful to be immodest about having your circle of competence.

    • The market is both efficient and inefficient, and you are trying to find the inefficiencies (and inadequacies).

    • Too much modesty will discourage you from acting on private information and doing what you know is right.

  • It is not arrogant to believe in your circle of competence.

    • Do not reduce this question into one about status.

    • Just because you think you have a better answer to this particular puzzle doesn’t mean you think you’re smarter than everyone else.

  • The point is to avoid over-confidence, not to be under-confident.

    • Overconfidence and underconfidence are symmetric mistakes.

    • Overconfidence and underconfidence will both cost you.

    • Modesty and immodesty can both be bad heuristics if you are prone to overreacting.

    • In investing, overconfidence is certainly more deadly than underconfidence, but underconfidence also gets you nowhere.

    • Remember: when you see it, bet big.

  • Modest people end up believing that they live in a world that is inexploitable.

    • These people avoid acting like an arrogant person and end up exploiting nothing.

  • Decide for yourself whether you trust yourself more than a particular person, or a particular field, at this particular time, in this particular place.

    • It is okay to think about particular areas where the market is inefficient or inadequate, and it’s okay to end up believing that you know better.

    • Just make sure that you check against observation whenever and wherever you can, and that you update in either direction.

    • As long as you check your results and are building up skill, you are on the right path.

  • In short, when you’ve done enough work, the answer to “Do you really think you’re smarter than professional experts on this?” is “Yes.”


“Modesty—the part of this process where you go into an agonizing fit of self-doubt—isn’t actually helpful for figuring out when you might outperform some aspect of the equilibrium.”

— Eliezer Yudkowsky, Inadequate Equilibria

“Great investors have confidence in their own convictions and stick with them, even when facing criticism. Buffett never got into the dot-com mania though he was being criticized publicly for ignoring technology stocks. He stuck to his guns when everyone else was abandoning the value investing ship and Barron’s was publishing a picture of him on the cover with the headline ‘What’s Wrong, Warren?’ Of course, it worked out brilliantly for him and made Barron’s look like a perfect contrary indicator. Personally, I’m amazed at how little conviction most investors have in the stocks they buy. Instead of putting 20% of their portfolio into a stock, as the Kelly Formula might say to do, they’ll put 2% into it. Mathematically, using the Kelly Formula, it can be shown that a 2% position is the equivalent of betting on a stock has only a 51% chance of going up, and a 49% chance of going down. Why would you waste your time even making that bet? These guys are getting paid $1 million a year to identify stocks with a 51% chance of going up? It’s insane.”

— Mark Sellers

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