Warren Buffett is one of the most respected investors in the world. His success is not just about being lucky or investing early in big companies—it’s about having a clear understanding of what he knows and what he doesn’t. One of his most powerful ideas is the “Circle of Competence”. This rule is simple but powerful: Invest only in what you understand.
In India, where startup culture is booming and more and more people are trying their luck in the stock market, this idea is more important than ever. With new startups launching every week, many investors are jumping in without fully understanding the business models or the risks. Buffett’s rule is a reminder to slow down and think clearly.
Let’s understand how this idea can help Indian investors invest better and avoid losses.
What Does “Circle of Competence” Mean in Simple Words?
Warren Buffett says, “Risk comes from not knowing what you are doing.”
His idea is simple. Everyone has certain areas they know well. This may come from personal experience, professional background, education, or even hobbies. That area is your circle of competence.
For example:
- A farmer may understand agricultural businesses well.
- A software engineer may understand IT or tech-based companies.
- A teacher may understand education-related companies better.
The idea is not to become an expert in everything, but to clearly know what you understand deeply—and stick to it while making investment decisions.
Why Buffett Avoided Tech Stocks for Many Years
For a long time, Buffett stayed away from investing in tech companies. He openly said he didn’t understand how those companies made money or how they would grow in the future.
While others rushed to buy stocks in companies like Microsoft and Apple in the 1990s, Buffett waited. It was only when he felt he had enough understanding of Apple’s business that he finally invested—and made huge returns.
This patience and discipline is at the heart of his Circle of Competence rule.
Why Indian Investors Must Understand This Rule in Today’s Market
India is going through a startup wave. From food delivery apps like Zomato and Swiggy to fintech apps like Paytm and PhonePe, new ideas are coming up every day. Everyone wants to invest early and become rich quickly.
But here’s the truth: many of these companies are still not profitable. Their business models are complicated. Some are burning more money than they earn, just to grow faster. Without knowing how they’ll make profits in the long run, investing in such companies becomes risky.
Buffett would say—if you don’t understand how the company earns, don’t invest.
Real-Life Examples of Circle of Competence in India
Let’s look at some examples to understand how this rule works for Indian investors.
Example 1: A Farmer and Agritech Startups
A farmer knows about crop cycles, market rates, fertilizer needs, and weather patterns. This person may understand agritech startups like DeHaat or Ninjacart, which are solving real problems in farming.
So, when such an investor hears about these startups, they can judge better if the business idea makes sense and if it will survive long-term.
Example 2: An Engineer and IT Companies
A software engineer may understand companies like Infosys, TCS, or newer AI-based startups. They can judge which technology trends are promising, like cloud computing or AI.
But the same engineer may not understand how an electric vehicle startup works, how battery supply chains are managed, or how government policies affect them. So, investing in EV startups without deep understanding would be outside their circle.
Example 3: A Retail Worker and FMCG Companies
Someone who works in retail understands how products are sold to customers, how demand works, and what makes a brand successful.
That person can judge companies like HUL, ITC, or Colgate better. They know which products people buy regularly and why. This helps them make smart investment decisions in the FMCG sector.
The Danger of Ignoring This Rule: Crypto, Quick-Commerce, and Edtech Busts
We’ve already seen what happens when people invest in things they don’t understand.
Crypto Craze
In 2021, lakhs of Indians jumped into cryptocurrency. Many didn’t know how it worked or what gave it value. But they invested because they didn’t want to miss out.
When the market crashed in 2022, many lost a big part of their savings. Buffett had warned about crypto, calling it “rat poison squared” because he didn’t understand how it had real value.
Edtech Bubble
During COVID-19, edtech companies like Byju’s became super popular. Investors thought the future of education was online forever.
But when schools reopened and online learning demand dropped, these companies saw huge losses. Investors who didn’t study their business models properly faced big losses.
Quick-Commerce Struggle
Startups promising 10-minute grocery delivery grew fast—like Zepto or Blinkit. But their costs went up fast too. Paying delivery agents, maintaining warehouses, giving offers—all this burnt a lot of cash.
Now, many are struggling to make profits. Unless you understand how these companies plan to earn in the long run, investing in them is pure guesswork.
How to Find Your Own Circle of Competence in India
Warren Buffett didn’t become an expert overnight. He read books, company reports, newspapers, and learned continuously. You can do the same.
Here’s how you can start:
1. Look at Your Life Experience
Where do you have knowledge that others may not? It could be your job, your education, or even your local area.
- A shop owner may understand retail trends better.
- A logistics worker may understand how goods move across the country.
- A doctor may understand healthtech startups better.
2. Read Annual Reports
For companies listed on stock exchanges like BSE or NSE, annual reports are available publicly. Start reading them. They show how companies earn money, what their plans are, and what risks they face.
3. Follow Industry News
Read business news regularly. Websites like Moneycontrol, Economic Times, and Business Standard give updates on various industries.
4. Start Small
Don’t invest big amounts in areas you’re still learning about. Start with small, safe investments in companies you understand well.
5. Accept What You Don’t Know
It’s okay not to understand something. You don’t have to invest in every sector. Knowing your limits is a strength, not a weakness.
Buffett’s Approach to Startups: What He Would Say in the Indian Context
Buffett is not against startups. He is simply careful. He waits until he understands a company deeply.
In India, startups like Policybazaar, Nykaa, or Delhivery are now listed. Some are making profits, some are not.
Before investing, ask:
- How does the company make money?
- Are their expenses growing faster than income?
- Will this model work 5 or 10 years from now?
If these answers are not clear, take a step back.
What to Do if You’re New to Investing
If you are just starting, here are Buffett-style steps to follow:
- Start with what you know: Pick industries or companies you deal with in daily life.
- Avoid hype: Don’t invest because everyone else is doing it.
- Think long-term: Buffett never chases quick returns. He holds investments for years.
- Ignore noise: Markets will go up and down. Don’t panic.
- Learn every day: Read business books, follow investment podcasts, and attend webinars.
Buffett’s Best Quotes for Indian Investors to Remember
Here are some powerful lines from Buffett that Indian investors can follow:
- “Never invest in a business you cannot understand.”
- “It is far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
- “The stock market is designed to transfer money from the Active to the Patient.”
- “If you are in a hole, stop digging.”
These quotes are not just words—they are tools for smarter investing.
