Chapter 02 · Risk and the decision to stay
One loss limit, written down
A loss limit is a number you write before the position is open, in rupees, for a reason you can point at. This chapter shows how to set one that matches the surplus, and how the usual versions fail.
Start from the month, not from the chart
Take the household that can spare ₹30,000 a month. They decide, in a calm week, that one idea may lose at most one month of surplus, ₹30,000, and that all open ideas together may lose at most three months, ₹90,000, before they stop and review. These numbers are a policy, not a market view. They do not become larger because a particular share ‘looks certain’.
They want to buy a share at ₹500. The policy says the idea may lose ₹30,000. If they decide they will be wrong if the price falls to ₹450, the loss per share is ₹50. The maximum quantity is 30,000 / 50 = 600 shares, which costs ₹3,00,000. If they buy 1,000 shares because the broker will allow it, the same ₹50 fall costs ₹50,000, which is no longer the policy. The position size is the loss limit divided by the distance to the point where the idea is wrong. It is not a feeling about how much you want to make.
The point where the idea is wrong has to be an idea
‘₹450’ is legitimate if it means something: below the price at which the new plant is already in the valuation, or below a level where the reason you bought has visibly failed. ‘₹450 because it is a round 10%’ is a costume. A percentage stop that ignores the company’s own ordinary swings will throw you out of a holding that has not yet done anything unusual, and then the limit has cost you the position without having described a broken thesis. Write one sentence: ‘I am wrong if…’. If the sentence is only ‘I am wrong if I am down 10%’, you have written a comfort, not a reason.
What a written limit looks like in a notebook
| Field | Example |
|---|---|
| Instrument | 600 shares, bought at ₹500. |
| I am wrong if | The quarterly volume of the new product is below the company’s own stated target, or the price closes below ₹450 after that report. |
| Rupee loss if I exit near ₹450 | About ₹30,000, plus charges. |
| Account-level stop | If realised and open losses together cross ₹90,000, no new positions until I have written a review. |
The ways people erase the sentence
- Moving the exit further away because the price approached it. The limit was supposed to be the thing you do not renegotiate with a falling price.
- Adding more shares at a lower price so the average ‘looks better’, which makes the rupee loss larger at the same exit.
- Removing the stop because ‘it is a long-term investment’ after it was bought as a short-term idea. Long-term is a label you apply at the start, with money that has no date on it, not a label you apply to a loss.
- Counting only realised losses and ignoring the open one that is already through the limit.
What to remember
- Write the rupee limit from the surplus, in a week when nothing is flashing.
- Quantity equals the rupee limit divided by the distance to the price where the idea is wrong.
- The exit sentence names a broken reason, not a round percentage borrowed from a stranger.
- Adding to a loser increases the rupee loss. It does not reset the policy.
- An account-level limit stops a bad month from becoming a bad year while you are still composed.