The Three-Circle Test: Why You Don't Need to Be the CEO to Pick Winning Stocks

A five-question plain-English test determines whether a stock fits within a circle of competence. The test asks whether the company can be explained in 60 seconds, who pays it, how finances and expenses work, what moat protects it, and what could kill it overnight. If those answers cannot be given clearly, the investment sits outside competence and increases the chance of buying based on someone else’s story. Without a framework, decisions about holding, adding, or selling become reactive, raising the risk of permanent capital loss. A three-circle structure separates business understanding from brand recognition, and position size scales the required depth of knowledge. Smaller positions require less certainty, while larger conviction positions demand Buffett-level familiarity.

"“Can I explain the company in 60 seconds? Can I explain who pays them? Can I explain their finances, their expenses? Can I explain their moat? Can I explain what will kill them overnight as a company?” If you cannot answer those five questions cleanly, the investment falls outside your circle of competence."

"Buying a stock you cannot explain in plain English means paying retail for someone else's story. When the story breaks, you have no framework for deciding whether to hold, add, or sell. And that is when permanent capital loss happens."

"Morris' three-circle test is sound advice and the cleanest plain-English version of Warren Buffett's circle of competence. The inner circle covers the five business questions. The middle ring covers industry economics and product knowledge. Anything past the second ring is the danger zone, where you either commit to deeper research or pass. The framework forces you to separate brand recognition from business understanding."

"“If we're talking about, you know, I'm buying 100 companies, you probably don't need to know those companies very well. If you're putting a quarter of your portfolio in a company, hopefully you know it as well as Warren Buffett knows Coca-Cola.”"

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