Stop comforting yourself with value investing: "Buy more as it drops" might not be suitable for you!

Ask AI · The “Buy More When Falling” Strategy, What Key Conditions Do Ordinary Investors Lack?

Today’s Market Brief

On April 7th, all three major A-share indices closed higher. The Shanghai Composite rose 0.26% to 3,890 points, the Shenzhen Component and ChiNext both increased by 0.36%, with the STAR 50 leading the main indices, up 1.42%. The total market turnover was 1.62 trillion yuan, shrinking by 45.3 billion yuan from the previous trading day, with nearly 4,000 stocks rising.

In the sector performance, basic chemicals led with a 3.66% increase, oil and petrochemicals rose 2.85%, coal gained 2.44%, and nitrogen fertilizers, chemical raw materials, and organosilicon stocks surged to limit up; meanwhile, banking, insurance, automotive, and food and beverage sectors declined. Geopolitical conflicts fueled resource commodity markets, hopes for a ceasefire between Iran and the U.S. faded, semiconductor stocks strengthened simultaneously, with SMIC up 4.18% and Cambrian soaring 9.10%.

The Essence of Fund Management: Reduce Losses, Increase Profits

In the world of trading, most people imagine fund management as a complex set of mathematical formulas—Kelly criterion, risk value models, position percentage algorithms—sounding profound and inscrutable. But in reality, the core principle of proper fund management can be simplified into a straightforward statement: When you incur a loss in trading, you should reduce your position size; when you make a profit, you should increase your position size.

However, this statement, if taken out of context, can lead to the dilemma of “personal interpretation.” Because value investors believe the opposite—buy more when falling, sell more when rising. Both approaches have their merits, but they leave ordinary investors confused. The key issue isn’t the principle itself but which type of investor you are.

Value investing’s “buy more when falling” requires deep research into a company’s intrinsic value, the ability to distinguish whether “the stock price drops because of deteriorating fundamentals” or “the decline is due to market sentiment misjudgment.” It also demands infinite patience and psychological resilience to short-term fluctuations. Frankly, most ordinary investors lack these conditions—they don’t research deeply enough, easily mistake “falling traps” for “value dips,” and often sell at the worst moment before dawn.

Therefore, for most individual investors relying on technical analysis, trend-following, or simple fundamental judgment, “reduce losses and increase profits” is a more pragmatic and executable approach. But before applying this fund management rule, there’s a more fundamental step: stock selection. If you pick stocks impulsively based on news, hot topics, or short-term gains, no matter how clever your stop-loss strategy, it will just become a “bleeding stop” in frequent trading. Each stop-loss consumes capital, and stocks without solid fundamentals tend to trap investors in a vicious cycle of “buy—stop-loss—buy again—stop again.”

So, before discussing position management, spend enough time doing homework. Prioritize companies with clear business models, healthy finances, and stable industry positions—such as those with three consecutive years of profit, positive operating cash flow, reasonable debt ratios, and an upward industry trend. You don’t need to be a professional analyst, but at least understand what business you’re investing in, who your main competitors are, and whether the industry will be disrupted in the next two or three years. Solid foundational research ensures that your stop-loss isn’t a “cut-the-seedling” act but rather avoiding planting a seed that shouldn’t have been sown in the first place.

With this screening premise in place, return to the practical aspect of fund management. When you buy a stock filtered through fundamental analysis, and the price falls instead of rising, showing a paper loss, it’s an objective signal: either your judgment was wrong, the market environment has changed, or the timing isn’t right. Regardless of the reason, losses remind you that “the current hypothesis may be invalid.” The most rational response isn’t to add to your position “to average down,” but to actively reduce your holdings and keep losses within a tolerable range. After trimming your position, your mindset shifts from “betting to recover” to calmly observing—this is the first line of defense to preserve capital.

So, how to set triggers for reducing positions? A more practical method is to combine technical levels and account capacity for dynamic judgment. For example, when the stock price falls below your identified key support levels (such as important moving averages, lows of consolidation zones, or trendlines), and volume increases indicating persistent selling pressure, you should decisively cut your position by at least half. If you don’t have clear technical levels, set a “psychological bottom”—when the loss reaches your maximum tolerable limit for a single trade (say 3%-5% of total capital), reduce your position by half and observe, rather than waiting for losses to become unmanageable. If the price continues to deteriorate, consider exiting completely. This approach isn’t about pinpointing exact stop-loss points but about using “cutting half” to break the hope of “waiting and seeing.”

Conversely, when your holdings start generating profits, and the price moves in your expected direction, it indicates the market is validating your judgment. At this point, you can moderately increase your position within risk control limits to let profits run. Adding to positions should also be disciplined: for example, when the stock breaks through key resistance and confirms support on pullback, add 20%-30% of the initial position; or, as the stock rises by 15%-20%, add in stages, while gradually moving your stop-loss up to your cost basis or halfway to your current profit. Even if the trend reverses, you won’t lose your principal.

This “lose when falling, gain when rising” rule fundamentally manages uncertainty. Losses mean increased uncertainty, so you should shrink risk exposure; profits mean increased certainty, so you can modestly expand risk. It doesn’t require predicting the future, only adjusting your position dynamically based on real-time feedback from your account.

A useful baseline is: regardless of market volatility, a single stock’s loss should not exceed 5%-7% of your total capital. When reaching this limit, exit unconditionally, rather than repeatedly adding. This strict discipline is more important than any technical analysis because it protects your right to stay in the game. With solid fundamental screening beforehand, you can distinguish whether losses are due to temporary market sentiment or company-specific issues. The former tolerates larger fluctuations; the latter requires decisive exit.

It’s important to emphasize that no fund management method can eliminate losses; its goal is to keep losses manageable and profits substantial. For most investors, instead of wavering between “buy more when falling” and “exit at stop-loss,” it’s better to choose a path suited to your skill set: research before buying, discipline instead of prediction, reduce losses with stop-loss, and embrace trends with adding positions. This path may not be glamorous, but long-term persistence will allow you to survive in the market.

Investment Message

Investing is a marathon, not a sprint. Controlling losses and letting profits run is more important than guessing the correct direction ten times. Use discipline to restrain emotions, and time to compound gains—slow is fast.