Avoiding and reducing permanent losses is even more important than gains.
Risk management rules are developed to minimize possible losses from unpredictable market situation (which are out of investor's control) and poor investment decisions (which normally must not happen at all).
The following principles contribute to reduction of losses:
Every investment must be priorly well analyzed and researched with respect to required procedures of a particular strategy. At first focus must be put on downsides and what can go wrong and only then on upsides.
Research must result into a calculated fair price. Inability to determine a fair price is a reason to stop the research and decline the asset as a potential investment.
In some particular cases, a research may result into a price, at which asset is definitely attractive (e.g. NCAV of a profitable business).
It's possible that my calculations were not absolutely correct or some important details were missed.
To ensure that I do not overpay for an investment, it must be bought with a margin of safety.
Required margin of safety is 20-40% depending on a particular strategy.
Event if my research was correct and an asset was bought with margin of safety, there are still chances that something unpredictable and unforeseeable may happen.
I must not invest too much into a single stock asset, so in case of a loss, it must not be too hard to recover.
In particular: I MUST NOT invest more than 12% of a capital into single stock asset. This would result into minimum possibility of 9 stock positions opened.
At the same time I must not have too many open positions, because this would dilute my focus and damage quality of research. I MUST NOT invest less than 2% of a capital into a single stock. This results into maximum amount of 50 positions. It's expected most of positions will be larger than 2% because of averaging down.
Normally I would expect to have about 15-25 positions.
These are the basic rules, more precise rules for every particular strategy.
No more than 20% of a capital must be allocated into same industry.
Upper limits for investments into a single country:
No decision must be taken or transaction performed in a bad emotional state, in rush or under stress.