How has Warren Buffett's 'circle of competence' expanded over time? From textile mills to Apple, is he breaking his own rules or redefining them?

Evolution of Warren Buffett's Circle of Competence

The concept of Warren Buffett’s "Circle of Competence" stems from the core of his investment philosophy: investing only in areas he thoroughly understands while avoiding risks beyond his cognitive grasp. This idea was heavily influenced by Benjamin Graham, but Buffett continuously expanded it through practice. From his early ventures in the textile industry to later investments in Apple, Buffett’s journey did not simply break rules; instead, he redefined the boundaries of his circle through learning, accumulated experience, and philosophical adjustments—all while steadfastly adhering to the core principles of value investing.

Early Stage: Textile Beginnings and Foundation-Building

• Starting in Textiles (1960s): Buffett initially entered the textile industry by acquiring Berkshire Hathaway, a struggling textile company. He purchased it using a "cigar butt" investing approach (buying cheap "stubs"), reflecting Graham’s strategy of investing in undervalued assets. His circle of competence at this stage was limited to traditional manufacturing and low-valuation assets, with his understanding of textiles rooted in financial analysis and industry cycle knowledge.
• Initial Expansion: After the acquisition, Buffett recognized the bleak outlook for textiles and transformed Berkshire into a holding company. This marked the beginning of his expansion beyond manufacturing into sectors like insurance (e.g., acquiring GEICO) and media. He emphasized, "I don’t invest in things I don’t understand," but under Charlie Munger’s influence, he began focusing on high-quality businesses rather than solely cheap assets.

Mid-Stage: Shift to Quality Enterprises and Deepening Competence

• Munger’s Influence (1970s–1990s): Charlie Munger encouraged Buffett to shift from "buying bargains" to "buying wonderful businesses at fair prices." Landmark investments included Coca-Cola, Gillette, and The Washington Post. These companies possessed strong "economic moats" (e.g., brand loyalty and pricing power). Through in-depth study of consumer behavior and competitive advantages, Buffett expanded his circle to consumer goods and media.
• Adherence and Adjustment: During this phase, Buffett avoided tech stocks (e.g., during the 1990s dot-com bubble) because he felt he didn’t understand their rapidly evolving technological foundations. This was not rigidity but self-awareness within his circle. In shareholder letters, he repeatedly stressed that expanding the circle requires time and learning—not blind trend-chasing.

Later Stage: Apple Investment and Significant Expansion

• Investing in Apple (2016–Present): Buffett initially avoided tech stocks, viewing them as "outside his circle." But in 2016, he began aggressively buying Apple stock (now ~40% of Berkshire’s portfolio). The rationale: Apple had evolved from a pure tech company into a consumer brand giant. Its iPhone ecosystem boasted strong user loyalty, ecosystem barriers, and cash flow—akin to Coca-Cola’s "moat." Buffett understood Apple’s business model (not its technical details) through research by his assistant Todd Combs and his own observations.
• Expansion Mechanism: This was not abrupt but a result of gradual learning. In his 2018 shareholder letter, Buffett acknowledged that certain tech companies had become predictable. He expanded his cognitive boundaries through reading, observation, and team support. Apple’s returns validated this expansion (Berkshire has earned tens of billions in profits).

Breaking Rules or Redefining Them?

• Not Rule-Breaking: Buffett never violated his core principle of "staying within the circle." When investing in Apple, he had spent years understanding its essence (e.g., brand strength and cash generation), not its technology. This aligned with his earlier avoidance of the dot-com bubble, preventing reckless risk-taking.
• Redefining Rules: Through expansion, Buffett redefined the circle as dynamic. He emphasized it is not static but can grow via continuous learning (e.g., studying annual reports, industry analysis). In a shareholder letter, he wrote: "The size of the circle isn’t important; knowing its boundaries is." From textiles to Apple, he demonstrated value investing’s adaptability: upholding low-risk, high-certainty principles while allowing philosophy to evolve and capture new-era opportunities. This teaches investors that rules are not rigid dogma but frameworks adjustable through wisdom.
• Key Insight: Buffett’s path proves that expanding one’s circle relies on humility, self-reflection, and a long-term perspective. Investors should emulate his approach: start small, learn incrementally, and avoid reckless boundary-crossing.

Through this evolution, Buffett not only transformed Berkshire from a small textile mill into a trillion-dollar empire but also reinvigorated value investing, proving the enduring relevance of "timeless principles" in a changing world.