Lesson 05 — Circle of Competence
Week 02 · Lesson 5 of 7 · Week 02 — Foundations: Thinking Like a Long-term Investor
"Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital." — Warren Buf...
The Warren Buffett principle
"Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital." — Warren Buffett
🗣️
"Apni samajh ke andar rehna — yeh size se zyada zaroori hai."
What is your circle of competence?
It's the set of businesses and industries you genuinely understand:
- How the company makes money (revenue model)
- Who the customers are
- What gives the company an edge (competitive moat)
- What could go wrong (key risks)
How to find your circle
Think about:
| Area | Potential circle |
|---|---|
| Your profession | IT professional → understands TCS, Infosys business model |
| Daily life | Buy groceries → understands FMCG companies (HUL, ITC) |
| Banking customer | Use HDFC/ICICI services → understand retail banking |
| Ride auto/cab | Use Ola/Uber → understand platform businesses |
Start small
You don't need to understand 5,000 stocks. Understanding 10-15 well is more than enough.
The danger of leaving your circle
When you invest outside your circle:
- You can't tell good news from bad news
- You rely on others' opinions (herd mentality)
- You panic at the first sign of trouble
- You don't know when to buy more vs when to exit
How to expand your circle (slowly)
- Pick one new sector per quarter
- Read the annual report of the market leader in that sector
- Understand the business model, revenue drivers, and risks
- Paper-track (watch without investing) for 6 months
- Only invest when you're confident you understand it
Key takeaway
Invest in what you understand. Expand slowly. Saying "I don't know" is a superpower.
Apply it
Write down 3 companies you genuinely understand (can explain their business to a friend). That's your starting circle.