“The game of investing is a process of discovering who you are, what you’re interested in, what you’re good at, what you love to do, then magnifying that until you gain a sizable edge over all the other people.”

Li Lu – Himalaya Capital Fund.

One of the most essential things in investing is to develop a circle of competence. 
What does it mean? The investing world is so vast and sometimes complex (often because Wall Street wants to make it look so, together we learn not to be afraid), the better way to master the game is to start by defining our boundaries.

Choose your battlefield!

There are a lot of financial instruments which it is possible to put our money. This blog is already limited to earning assets  (ELI5 – investments that deliver stable returns) tied to real business, namely stocks. Other opportunities in the field of investing are real estate, real estate investment trusts (REITs), bonds, derivative instruments (e.g.stock options), commodities (like gold), currencies (USD, CHF,..), cryptocurrency (I know a lot of you waited this moment :D) and so on. If you want to dig about those other opportunities, I invite you to do your research, in other words: Ask Google. In my opinion, some of the instruments I cited aren’t investments but rather speculations. 
So why did I choose stocks? Simply because products of entrepreneur decisions are often things that we need, and sometimes we use. It is simpler for me to understand those things. Some products are simply needful, then it’s likely they deliver returns over the long run. Do you remember? I’m looking for investment opportunities to grow my wealth in the long haul (article 6. The eighth marvel of the world). Think about Coke, Gillette, McDonald’s, Walmart. Moreover, I like to be part of a project, in other words, to be the owner of a business.

Understand yourself and make it fun.

There are other steps to defining our field of competence. That can be fun, because, as said by Li Lu, we have to understand what we like. A good starting point can be our work.

You will make history.

Whatever your choice, like owners, you will participate in the development of new projects and products. Personally, in this Digital Age, I find this opportunity stimulating. The stock market is like a gigantic crowdfunding system where democratically, you will decide what project you want to finance and what project to be part of. But don’t get caught by the hottest topic of the moment, I mentioned the Digital Age, but there are other industries around. You have to pick your personal niche. It’s possible that because of your job, you have a specific niche yet. 
If you are a fireman, maybe you use a specific tool regularly. If you use firsthand this tool and you know it works well it’s a good starting point. Perhaps you even know that firefighters of other countries use the same product or maybe the entire range of products of this specific company, and this company is well known by the fire departments of the whole nation for the quality of its products. Well, congratulations, you have a circle of competence. Or perhaps you are an employee that uses a specific software, or a housewife who uses a specific tool to do housework, the same idea is applicable to all the professions, hobbies or entertainments.
Then you must learn about the business behind it.
I promise you, we will learn this throughout this blog.

Be part of a business for the long haul.

This is the beauty of capitalism, be part of what we use or of what we like. I want to share an example with you about this point. 
Warren Buffett, one of the greatest investors of all time, owes some of his fortunes to Coke (KO). He invests a lot of money in it, and he becomes rich even thanks to this soft drink brand. The interesting side of this story is that he started his love story with the brand when he was young. When he was a child he collected a refund from recycled Coke bottles. Over time he never lost his passion about the brand. He bought his first share in 1988. Then he never sold, instead he bought more over time, when Mr. Market (article 8. Mr. Market) gives him opportunities to buy at a low price.

“Of a certainty, it was in 1936 that I started buying Cokes at the rate of six for 25 cents from Buffett & Son, the family grocery store, to sell around the neighborhood for 5 cents each. In this excursion into high-margin retailing, I duly observed the extraordinary consumer attractiveness and commercial possibilities of the product. I continued to note these qualities for the next 52 years as Coke blanketed the world. Only in the summer of 1988 did my brain finally establish contact with my eyes…What was already the world’s most ubiquitous product gained new momentum, with sales overseas virtually exploding. Of course, we should have started buying Coke much earlier, soon after Roberto and Don began running things. In fact, if I had been thinking straight, I would have persuaded my grandfather to sell the grocery store back in 1936 and put all of the proceeds into Coca-Cola stock. I’ve learned my lesson: My response time to the next glaringly attractive idea will be slashed to well under 50 years.”

Warren Buffett – 1989 Berkshire Hathaway shareholders letter.

As you can see, the trend of Coke (KO) over time remains positive. Moreover, the company rewards him with a growing dividend (article 7. How companies reward us).

Sometimes the best ideas are under our eyes.

For example, thanks to a friend of mine, I recently discovered that Facebook created a specific tool used by a company he worked for (Workplace by Facebook). This type of information is very insightful when it comes to analyzing a business.
But remember:

“Buying stocks without studying the companies is the same as playing poker — and never looking at your cards.”

Peter Lynch

In the next article, I will dig deeper into this point. Stay tuned.

Following chapter 11. Stories and numbers

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