A few familiar traps

The traps in this chapter are not obscure. They are the ones that survive because each, in the moment, feels like diligence. Naming them is useful only if you also name the artefact that would prove you are not in one.

Averaging down without a new fact

You bought at ₹500, it is ₹430, and buying more lowers the average to ₹465. The average is a cosmetic. Your rupee exposure has increased in a position that has already moved against the reason you held it. Averaging down is allowed when you wrote, at the start, that you would add if a specific fact arrived — a price, a result, a capacity number — and that fact has arrived. It is a trap when the only new fact is the pain of the red line. The artefact that clears you is the original note, dated before the fall, that mentions the add.

Confusing a company you know with a price you should pay

You use the product every day. The product can be excellent and the share can still be priced for a perfection the company will not deliver. Familiarity removes the feeling of risk. It does not change the cash flows. The artefact is a price note: the earnings or the cash you are paying for, written as a multiple, next to a peer. If you will not write the multiple because it feels disloyal to a brand you like, you are in the trap.

Trading the last outcome

After a winning week you raise size because you are ‘in sync’. After a losing week you raise size to get it back, or you abandon a method that was built to have losing weeks. Both are the same error: letting a small sample edit a policy. Ten trades are not a verdict on a method that was designed over years. The artefact is a fixed size, written as a fraction of capital or as a rupee loss, that you do not edit on a Friday.

The urgent tip

A tip compresses someone else’s work, or someone else’s incentive, into a verb: buy, sell, hold. You do not receive the time horizon, the exit, the size, or the fact that would make them wrong. You also do not receive their portfolio, which may already be full of the risk they are handing you. The artefact is a ban on acting the same day. If the idea is real on Tuesday it is real on Thursday, by which time you can read the filing yourself. Urgency is a feature of the seller of the tip, not of the opportunity.

Watching a number you will not act on

Refreshing the price every few minutes feels like work and produces the urge to act, because attention dislikes being idle. If your written review is weekly, the intra-week price is entertainment. Entertainment is an expensive data feed when it causes an order. The artefact is a review time, in the calendar, and an empty screen the rest of the day.

What to remember

• Averaging down requires a pre-written fact, not a lower price alone.
• Familiarity with a product is not a valuation.
• A short streak is not permission to change size.
• A tip without an exit and a time horizon is not a recommendation you can use.
• Price-watching between scheduled reviews is not research.