One of Warren Buffett´s ways to success is the enormous concentration on a special industry. Bill Gates a good friend of Warren always wanted him to buy Microsoft stocks in the 90´s. We all know that the investment in Microsoft stocks wasn´t a bad one in the year 1990 and although Bill Gates the CEO of this Microsoft was a good friend of Warren, he did´t want to have them.

The reason for that was because the stocks were not in Warren´s sphere of competence. In Warren Buffett´s view every good investor should have a personal sphere of competence. This sphere of competence includes the industries and types of securities the investor is quite good at. Warren Buffett for example is at home in the insurance sector the consumer industry and the food industry and he would never buy a stock of a industry he doesn´t know.

In Warren Buffett´s view it doesn´t depend on the size of the sphere of competence of an investor it depends on the knowing the borders of your sphere of competence. This proceeding has several advantages:

1. It´s much easier to predict the trend of the industry you invest in.

When you are at home in a special industries, you know the effects of external happening on it. For example when you are at home in the chemistry industry you know that a high oil price could affect that hole industry in this or that way. When you are at home in the auto industry you know that a high or weak dollar could have this or that effect on the industry.

2. It´s easier to compare companies witch each other and to say if a company is under or overvalued.

Nowadays it´s very hard to say what´s the worth of a company. Of course we could easily have a look into the balance sheet and calculate the net asset value of the company, but there are always stocks of industries which cost a multiple of what they really earn and what their real net asset value is. Stocks of the IT industry for example usually cost a multiple of what stocks of the food industry cost. The reason is because people belive that the growth opportunities are the best there. So, when you are at home in a special industry you can compare companies which each other and you can say weather the company is cheap or not.