Knowing where your knowledge ends matters more than how much you know.
Stay inside what you understand.
It is July 2020. Three firms you can explain, three you can’t. You have €10,000 in ten chips.
Own what you could explain to a friend. A story you can’t check is a bet.
← Red LinesRed Line 33 of 48 The idea The scene Try it Where it bends This game’s numbersHow strong the proof isCMixed proof Where it comes from
Everyone understands some businesses well: from work, from a hobby, from years of being a customer. Inside that circle you can judge. Outside it you are guessing against people who know more.
Ten years in a supermarket chain teaches you its customers, costs and rivals. A drug trial result or a friend’s coin tip, you can’t judge better than the person selling to you.
Write down three businesses you could explain to a friend: how they make money and who could beat them. That is the start of your circle.
The circle can grow, slowly, by learning. Until then, a broad index fund needs no circle at all.
Yahoo Finance, historical pricesdigrin, monthly price history (second check)
Studies split: people who invest in what feels familiar often take on needless risk, yet investors did better on companies near home.
- Familiarity Breeds Investment Gur Huberman, Review of Financial Studies 14(3), 659-680, 2001
- Local Does as Local Is: Information Content of the Geography of Individual Investors’ Common Stock Investments Zoran Ivković & Scott Weisbenner, The Journal of Finance 60(1), 267-306, 2005
Checked 2 Nov 2026 · How we grade
- A Strong proof: Many good studies or long official data, from different teams or countries, point the same way.
- B Good proof, with limits: Solid studies agree on the direction, but the size varies, or the data covers few places or few kinds of people.
- C Mixed proof: Some good studies for, some against, or the evidence covers only part of the line.
- D Thin proof: Mostly one book’s argument, one survey or stories. It may be wise, but it has not been tested well.
- = True by the sums: It follows from arithmetic, so no study can overturn it. We still show what real data says.
Warren E. Buffett, Berkshire Hathaway shareholder letter (1996). In our words, not quoted.
See it in numbers: Moats (From Zero)
Next · Red Line 34Quality is worth a fair price.Red Line read