4. The circle of competence, and the doctor’s edge

Part 8 of 19 in The Patient Owner: Charlie Munger’s Ideas, as Rakesh Jhunjhunwala Might Have Taught Them to an Indian Investor← Part 7Part 9 →

This chapter discusses the concept of the circle of competence and how it applies to investing, especially for professionals like doctors. It explores the importance of understanding one's limits and the value of real-world experience over theoretical knowledge.

Aniruddha. He said you have to know what you know and what you do not know, and that the boundary matters more than the size of the circle. My circle, professionally, is reproductive medicine. My temptation, as an investor, is to pretend the circle is larger because I can read.

Rakesh. Reading is not competence. Competence is having seen the thing break. I was a chartered accountant who sat in the market until the market stopped being a puzzle and became a place. That took years of being wrong in public. Your edge is not that you are a doctor who invests. Your edge is that you have watched incentives in a hospital, which is one of the most honest classrooms in India. You know what a referral fee does to a judgement. You know the difference between a test ordered for the patient and a test ordered for the machine. Bring that eye to a business. Do not bring a white coat to a steel plant and call it insight.

Aniruddha. So the circle expands only by scars, not by subscriptions.

Rakesh. By scars and by apprenticeship. Charlie was happy to have a small circle and a very clear fence. I was greedier about India, because I thought the country itself was inside my circle: households, brands, a young population, the slow death of the unorganised shop. That was a real circle. It was not a licence to buy a telecom spectrum story, a infrastructure BOT with political air, or a bank whose loan book I could not read. When I stepped outside, the market charged tuition. I paid. The people who blow up are the ones who refuse the receipt.

What an Indian angel is allowed to know

He turned the question onto the kind of investing an angel table actually does.

Rakesh. An angel’s circle is even smaller, and the storytelling is better, which is a bad combination. You are allowed to know a customer. You are allowed to know a regulation you have lived under. You are allowed to know a hiring market. You are allowed to know unit economics you have calculated yourself, on a napkin, without the founder’s slide. You are not allowed to know ‘India’s AI moment’ as a category. That is a slogan. Slogans feel like competence because they are repeated by competent people.

Aniruddha. In clinic I ask a fellow to say the diagnosis in one sentence a grandmother could dispute. If he needs a paragraph, he is hiding. I have started asking founders the same thing. What is the job, who pays, why do they not leave, what kills you? Four sentences. The deck is usually forty.

Rakesh. Keep the four. Charlie’s circle is an ego technology. Its purpose is to make ‘I don’t know’ feel like a skill rather than a wound. In India, ‘I don’t know’ is socially expensive. At a dinner it marks you as the man who missed the IPO. Pay that social cost. It is the cheapest insurance you will ever buy.

He mentioned businesses he had been willing to own for a long time precisely because they sat inside a circle a diligent Indian could actually draw: a rating agency whose customers needed to be believed, a jewellery brand that had to be trusted with a family’s gold, a lender whose culture of saying no was the product. He contrasted those with businesses where the edge belonged to someone else — a commodity cycle, a policy whim, a technology whose economics changed every eighteen months and whose managers spoke in imported metaphors.

Aniruddha. There is a medical version of the fence. I do not operate outside what I have learnt to do safely, however famous the patient, however large the fee. The market’s version of the famous patient is the stock everyone will ask you about on Monday. The fee is the feeling of being in the room.

Rakesh. The feeling of being in the room is not a dividend. Write that down too.

Evening question. Draw your circle in ink: industries where you have seen the cash collected, the customer complain, and the regulation bite. Everything outside the ink is a speculation, even if the spreadsheet is beautiful.