Buffett's Circle of Competence: Don't Swing at Every Pitch

The Ted Williams Problem

Ted Williams was one of the greatest hitters who ever lived, and he was great because he understood something most hitters never fully accepted: not every strike is worth swinging at. In his book The Science of Hitting, Williams divided the strike zone into 77 baseball-sized cells and calculated his expected batting average on pitches in each location. The difference was staggering. A pitch in his favorite zone — right where he was strongest — gave him a shot at hitting .400. A pitch low and outside, technically still a strike, dropped his expected average to around .230.

Same hitter. Same bat. Same pitcher. Same strike zone. But simply changing where the ball was located changed the quality of the outcome dramatically. Williams did not ask whether a pitch was technically hittable. He asked whether it was a pitch he could crush. He waited for his pitch. When it came, he swung hard.

Warren Buffett read that book and built his entire investment philosophy around it. In Berkshire Hathaway's 2025 shareholder letter, published in early 2026, he revisited the Williams analogy explicitly — describing the 77-zone approach, Williams' .344 career average and .406 season, and connecting it directly to how Berkshire evaluates capital allocation decisions. This was not a throwaway analogy. It is how Buffett has thought about investing for 6 decades.

Buffett's Enormous Advantage Over Williams

Here is where the analogy gets even more powerful. Ted Williams eventually had to swing. If he watched 3 strikes go by, he was out. Investors have no such constraint.

"Unlike Ted, we can't be called out if we resist three pitches that are barely in the strike zone."

An investor can watch NVIDIA go by. Tesla go by. A biotech stock go by. 10 IPOs go by. 50 expensive companies go by. There is no penalty for doing nothing. You can wait until a business arrives that you understand deeply, whose competitive position is clear, whose future economics are reasonably predictable, and whose price offers an attractive return. Only then do you swing. And when you do swing you swing hard.

Buffett described this in his 1997 Berkshire letter directly:

"Waiting for the fat pitch would mean a trip to the Hall of Fame; swinging indiscriminately would mean a ticket to the minors."

This is one of the most powerful structural advantages individual investors have. There are no called strikes. Patience is not just a virtue in investing — it is a genuine edge.

What Circle of Competence Actually Means

Buffett defined it clearly in Berkshire's 1996 shareholder letter:

"You don't have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital."

That second sentence is the entire philosophy. Circle of competence is not about how much you know. It is about how accurately you know what you know — and what you do not. An investor with a small but precisely understood circle will consistently outperform one with a large but fuzzy one, because the fuzzy-circle investor will occasionally mistake the edge of their knowledge for the center of it. That is where the most dangerous investments live.

There is also a common misconception worth addressing directly. Circle of competence does not mean buy products you use. Using an iPhone does not mean you understand Apple's competitive moat, its capital allocation, or its pricing power in 10 years. A genuine circle of competence requires being able to answer questions like: how does this company actually make money? Why do customers choose it over competitors? What would it take to permanently damage this business? What could the competitive landscape look like a decade from now? If you cannot answer those questions with reasonable confidence, the company may not be inside your circle at all.

The Most Dangerous Investments Are at the Edge

Businesses obviously outside your competence are easy to pass on. If you know nothing about drug development, you are unlikely to build a position in a pre-revenue biotech. The dangerous situations are the ones that feel familiar enough to create confidence without actually being understood. That is the edge of the strike zone — the pitch that looks hittable but is not quite where you want it.

Buffett has said that Berkshire's strength is recognizing when it is operating comfortably inside its circle versus approaching the perimeter. The perimeter is where investment risk tends to increase gradually and invisibly. You move from knowing a business extremely well, to mostly understanding it, to thinking you understand it, to the story making sense. Those feel similar psychologically. Financially they can be completely different.

He also warned about the reverse mistake — letting the circle become an excuse for never acting. Missing opportunities outside your competence is not a sin. But failing to act decisively when a great business at an attractive price lands in the center of your circle is. The complete philosophy is: happily pass outside your circle, demand caution at the edges, and swing hard at the center when the price is right.

A Simple Test Before You Buy

Before investing in any business, ask yourself these questions honestly. Can you explain how the company makes money without looking at its filings? Can you identify the 2 or 3 variables that determine its economics? Do you understand why customers choose it instead of competitors? Can you describe what could permanently impair its competitive position? Can you estimate what the industry looks like 5 to 10 years from now without relying on heroic assumptions? Can you explain the bear case as convincingly as the bull case?

Then ask the most important question of all: if the stock market closed for 5 years, would you still feel comfortable owning this business? If the answer is yes, you may be holding a fat pitch. If there is hesitation, you might be closer to the edge than you think.

Buffett built one of the greatest investment records in history not just by being the smartest person in the room and not by analyzing the most companies. He did it by knowing exactly where his happy zone was, waiting patiently for the right pitch, and swinging hard when it arrived. That is a discipline any investor can build — regardless of how large or small their circle starts. Tag me in the community and let's talk about what is currently sitting in your happy zone.