7 Safety Net Moves for Value Investors to Shield Against Capital Erosion

Value investing, while rooted in the principle of acquiring undervalued assets, carries the latent risk of value traps—a pitfall where seemingly cheap stocks continue to decline. Behavioral finance underscores the asymmetry of loss aversion: the psychological toll of capital depletion far outweighs the gratification from gains. This framework distills seven systematic rules to transmute capital preservation from abstract theory into a measurable defense mechanism.

The strategies merge fundamental scrutiny with mathematical rigor. Position sizing must adhere to the 2% rule, limiting exposure to any single asset. Economic moats—durable competitive advantages—serve as qualitative filters. Earnings quality audits expose accounting gimmicks, while stop-loss thresholds enforce discipline. A conservative capital allocation floor ensures liquidity, and identifiable catalysts distinguish true value from value traps. Finally, principal protection instruments hedge against tail risks.