Warren Buffett rightly known as the world’s top investor, has wealth greater than $130 billion. But he didn’t make his riches by knowing it all—his wealth comes from real life experiences and deep knowledge in a few areas. He calls it his “circle of competence,” a core principle behind every investment he makes.

Before we begin, please know that all the stocks named further, are only for driving a point and not a recommendation.

Now, for young investors in India swept up in the frenzy of the startup surge with giants like Zomato and emerging quick-commerce companies, this concept is super helpful. When navigating a space stuffed with chance and risks, getting your circle of competence straight could be the secret sauce to amassing long-term money.

What Is Buffett’s “Circle of Competence”?

Buffett’s approach is simple: stick to investments you understand. He was a strong believer of his quote, “Risk comes from not knowing what you’re doing.” In simple words, this means staying close to sectors and firms you can understand—where you can guess their long-term success. Buffett steered clear of tech shares for years since they weren’t his strong suit. He concentrated on areas within his expertise such as insurance and consumer products crafting his success story with names like Coca-Cola and American Express.

In India, most investors can’t resist running after the latest craze. And no blame there! After all the startup space is lively, hosting more than 100 unicorns with values hitting the billion-dollar mark or higher by 2025. People cannot wait to grab their share of whatever’s hot right now—like speedy shopping apps or fresh electric car businesses. But Buffett might throw a warning your way about all that. If the whole thing about a company flies over your head, you are not investing—you’re just rolling the dice.

India’s Mad Dash for Startups: Goldmine or a Pitfall?

The startup ecosystem in India is super exciting, no doubt. Big names like Swiggy, Paytm and Nykaa are grabbing investors’ attention and raking in the cash from investors. To give you an idea, in the year 2024 Indian startups got their hands on over $20 billion, and that’s straight from Tracxn’s numbers.

The young investors are all pumped to get in on the action and grab a piece of the pie. But hold up, it’s not all smooth sailing: a bunch of these new companies aren’t making money yet, and figuring out how they run their show can be a real head-scratcher. Like take these quick-commerce businesses—they swear they’ll get stuff to your door in 10 minutes flat, but the price they’re paying to pull that off? It is burning a hole in their wallet. The million-dollar question is, are they going make it in the long run? If that’s got you scratching your head, then it’s something you don’t get.

Buffett’s expertise lies in his art of asking the right questions: Do I get how this business earns cash? Is their future in a decade something I can guess? A no means he steps back even if the share looks thrilling. In India, that calls for fighting off the excitement urge and sticking to familiar territory.

Discovering Your Circle of Competence in India

Your expertise zone stems from personal history, learning, and things you like. It’s where you’re ahead knowing more than many. For the young in India, it might link to where you’re coming from or your job.

Think about a person from a farm somewhere in rural India. They’re familiar with the tough parts of farming stuff, like weird weather or wanting better seeds. This makes them get what companies, like DeHaat or Ninjacart, are doing to fix those issues with tech. Spotting the worth and chances for these businesses to grow is right up their alley. But for ones who don’t get how things move around in big cities or what city people like to buy, a startup doing fast shopping like Zepto might be a bit confusing.

As a software engineer, your circle of competence could be IT companies such as Infosys or TCS. You’re up to speed with industry patterns knowing that things are moving to the cloud, and you have the skill to judge if a firm stands in a good spot. But peeking into a biotech startup slashing at gene editing? Now that could be a bit out of your wheelhouse, unless the science is something you’ve dived into.

Why It Matters: Steering Clear of Expensive Blunders

Keeping to your known territory is not about earning cash – it also helps reduce losses. Many Indian investors in 2021 chased after crypto cash tempted by tales of massive earnings. But when things went south in 2022, they saw billions vanish. Buffett, a long-time skeptic who has called crypto a “mirage,” kept his distance. Crypto was beyond his expertise so he steered clear of it.

In India, the same mistakes cropped up with startups. During the pandemic, heaps of investors threw money at edtech companies such as Byju’s, but then the values tanked when expansion hit the brakes. If you weren’t clued in about how edtech companies rely more on strong marketing than lasting earnings, you ended up in a soup probably. The wisdom from Buffett is very simple to understand stay away from putting your cash into companies that seem like a mystery to you, even if it seems super exciting.

Slapping the Circle on Modern Market Trends: A Real-World Example

Check out this actual case to spot the rule at work. Picture two stocks out there now: the first one is over 45% down from its all-time high, and the second is over 40%down from its all-time high. These lower prices might look like sweet deals, but Buffett would ask the question: Do you get how these companies operate?

Imagine the first company dabbles in high-tech stuff for farms, like automating things that take a lot of manual work. Now, if you’ve got roots in farming, you see the huge chance here—consider that India’s got this massive $400 billion agriculture industry, but it’s also got some serious problems, like not enough productivity. So, look and see if this business is fixing a legit issue. If it is, you might just have spotted a probable goldmine that’s right up your alley, kind of like what investing whiz Warren Buffett would find.

On the flip side, imagine the second company to be a fresh fintech venture that’s a bit tricky to get, you know, like it lets people buy things now and pay for it later. Figuring out where it’s headed might be tough. And if you don’t get your head around the potential messes it could run into—like government red tape or users not paying their debts—you’re probably better off not touching it with a ten-foot pole.

Buffett’s intelligence stands out here. He will not run after every bargain even when the prices fall. He stays in his zone making sure he knows what he’s doing with each dollar he puts down.

Building Your Own Circle of Competence

The thing you’re good at is not set in stone – you can get better at it if you put in the work. Take Buffett, for example. He reads like there is not tomorrow. He reads for hours daily to make his smarts even sharper.

You’ve got that option too. Kick off by choosing a couple of sectors that grab your attention. Dive into some articles about them. Keep tabs on the latest updates. Peek at business summaries over on the BSE site.

Say you’re all about consumer products, look at how companies like Colgate Palmolive or ITC run their show. How do they bring in the cash? What sort of obstacles are in their way? Stick with this, and before you know it, you’ll have a solid understanding.

Got an interest in green power? Strike up a conversation with an industry insider. Talk about the price of solar panels or the rules the government sets. The deeper your knowledge the bigger your circle gets. But keep it real about what you don’t know—just like Buffett does.

The Buffett Trick: Simple is Better

Buffett’s circle of competence suggests that mastering everything is not necessary for success. Like he himself has said, it’s not important how big the circle is. What’s more important is that it is well defined i.e you know where your competence ends.

During these times in India where startups are zooming ahead, that’s a big lesson to learn, isn’t it? No need to run after every shiny new startup or the latest hot industry. Stick to the things you get—like farm tech, computer stuff, or even the old-school world of money lending and saving. Become better at knowing a little bit and you’ll make choices that are way sharper and less risky when you put your money down.

To end, here is a quote from Buffett to keep in mind before your next Breakfast with Buffett

“The most important thing to do if you find yourself in a hole is to stop digging.”

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