Successful investing requires much more than a superficial grasp of what a business does. To make informed and profitable investment decisions, an investor must deeply understand the business’s economics, competitive position, operational processes, and the sustainability of its long-term advantages. Understanding the economics of a business goes beyond just its products and day-to-day operations. Investors must evaluate the company’s position within its industry and relative to its competitors. What gives this business an edge in the market? What makes its position difficult to challenge? These are vital questions for determining whether a company has the potential for sustained profitability.

For example, a common mistake that many investors make in the process of attempting to understand a business is assuming that new technology or innovations will automatically lead to higher profits. While increased productivity or a better value proposition can be appealing, competition plays a significant role in profitability. If competitors can quickly adopt the same technology or strategy, it leads to commoditisation, which often results in price wars and shrinking margins. Therefore, investors need to assess not just what a business is doing now, but how well it can differentiate itself and protect its competitive position in the future. In rapidly evolving sectors like technology or pharmaceuticals, it's easy to assume a breakthrough product will bring immediate profits. However, without strong protective measures—such as patents, brand recognition, or specialised expertise—these innovations can quickly be replicated, eroding profitability. Thus, understanding how a business safeguards its innovations and how robust its competitive moat is becomes critical for investment analysis.

Anticipating where a business or industry will be in the future is just as important as understanding its current state. However, predicting the future is extremely difficult. Industries evolve, competitors adapt, and technological advancements often shift the landscape in unforeseen ways. Investors must have the humility and honesty to admit when the future is uncertain. Often, this means acknowledging that you simply do not know with enough certainty to make an informed decision. In such cases, it may be wiser to leave certain investments alone rather than taking unnecessary risks. Long-term thinking is crucial, but so is recognising when to refrain from making a move when the outlook is unclear.

Another essential principle of successful investing is recognising the limits of your knowledge, often referred to as the "circle of competence." This concept encourages investors to stick to industries and companies they fully understand. Venturing beyond your expertise increases the likelihood of making poor decisions, as your analysis may lack the nuance required for accurate predictions. Without awareness of your circle of competence, overconfidence can cloud judgement, leading to poor long-term results. Staying within your knowledge base ensures a more disciplined approach and reduces the likelihood of costly mistakes.

There is a strong connection between being a successful businessperson and becoming an informed investor. As Warren Buffett once noted, "I am a better investor because I am a businessman, and a better businessman because I am an investor." A businessperson’s insight provides a deeper understanding of the inner workings of a company and its competitive environment. Success in business goes beyond creating a great product—it requires managing resources effectively, staying ahead of competitors, and ensuring long-term sustainability. This knowledge is invaluable for investors when evaluating a company’s business model and its ability to maintain a competitive edge over time.

Understanding a business before investing requires more than just surface-level knowledge. It involves a comprehensive understanding of its economics, competitive landscape, and the unique advantages that set it apart from rivals. Additionally, investors must remain aware of their own limitations and avoid straying beyond their circle of competence. By focusing on long-term potential and recognising the risks posed by competition, investors can steer clear of common pitfalls and increase their chances of success. Ultimately, successful investing is not just about understanding what a business does, but about recognising the entire ecosystem in which it operates and positioning yourself to capitalise on long-term value creation.