Analysis on “The Rules of investing”

Recently, the follwing image is posted in our share group. I will analyse what are the Pros. & Cons. in this image. What should we understand and to what extent we should follow this, I will point out.

I request all our “Share Group” members, follow our “info-stock-market” website and post your comments/ opinions on it. So that it will encourage me to post some more valuable posts.- Velmula Krishna Rao.

Let us think whether the above said policy/ method is correct ?

The method shown in the image is not a universally correct rule. It is only a simple averaging and profit-booking strategy shared for beginners. It may work in some situations, but it can also become dangerous if followed blindly.

Here is the practical reality:

What is GOOD in this method

1. Encourages discipline. 

• Many beginners panic during falls and sell at bottom.
• This method teaches patience.

2.Partial profit booking is sensible:

• Selling some quantity after big rises (50%, 100%, etc.) is actually a good risk-management practice.

3. Useful for strong businesses: 

• If applied only to fundamentally strong companies, averaging on dips can reduce average cost.

What is DANGEROUS in this method.

The biggest risk is this line:

“Price drops 40% → Add 50% more”

This is very risky because:

●Sometimes stocks fall 40% because the business itself is weak.

●Many stocks fall:

40% → then 70% → then 90%

●Averaging blindly can trap all capital.

Examples from Indian market history:

●Yes Bank. ●Vodafone Idea. ●Suzlon (old period) ●DHFL ●Reliance Power

People kept averaging and lost heavily.

Correct Way to Use Such Strategy

Suitable ONLY IF:

✅ Company fundamentals are strong. ✅ Debt is manageable. ✅ Sales/profit growth exists. ✅ Promoters are credible. ✅ Sector future is good. ✅ Fall is due to market panic, not fraud/business collapse

Then averaging may work.

Better Practical Version

During FALLS, Instead of fixed averaging:

Never average only because price fell.

This part is relatively reasonable:

During PROFITS.   

Most Important Rule Missing in the Image

The image never discusses:

• Asset allocation
• Stop loss
• Fundamentals
• Debt
• Valuation
• Sector risk
• Position sizing

Without these, the strategy is incomplete.

For that of Situation :

• When you hold many stocks or 
• If you want funds for re-investing/ re-investing,.
• Only a few stocks are performing strongly, then do not go for falling stocks.

Blindly averaging of falling stocks may not be suitable now. Preserving capital for your investment / re-investment may be more important than aggressive averaging.

A better approach for in such cases for any one may be:

 👌Keep high-conviction quality stocks.

👌Exit weak/no-growth stocks gradually.

👌Avoid averaging in weak companies.

👌Use profits to strengthen your upcoming business.

Final Verdict

My Conclusion: So the method is partially correct but incomplete and risky if used mechanically.