Circle of competence
Your circle of competence is the set of businesses you genuinely understand — where you can say what the company sells, why customers keep choosing it, and what could kill it, without reaching for someone else’s opinion. Warren Buffett’s point about the circle has never been that it should be large. It’s that you must know precisely where its edge is, because the expensive mistakes happen just outside it.
Buffett famously keeps a “too hard” pile, and most ideas land there. That’s not a failure of nerve — it’s the discipline that makes the remaining decisions good ones. Passing on what you don’t understand costs you nothing; pretending to understand it can cost you years of compounding.
How the Moat Index applies this
The Index draws its own circle explicitly. Operating businesses whose economics show up in margins and returns on capital use the Moat Score. Covered banks and insurers use a separate financial-sector model built for balance-sheet businesses; its score is not comparable with the operating one. Other financial businesses remain not covered rather than being squeezed through the wrong lens. And when a company’s filings don’t contain the inputs a sub-score needs, the coverage gate refuses to guess. Both are the same idea from the Playbook, applied to a model instead of a person: know your edges, and say “too hard” out loud.