October 3, 2025
Let’s begin with a basic between the ears function common to us all. The fight or flight response. As you read through, think about how this may be impacting your judgement thought process.
The response is how your body naturally reacts to stressful situations. Its formation goes back tens of thousands of years, bred into us all. Our ancestors may have activated it suddenly facing a saber tooth tiger, we may experience it with a sudden drop in the stock we own. Interestingly enough, however, this response can be triggered by an imaginary threat. You can think yourself into it.
It is governed by your autonomic nervous system. Hormones like adrenaline and cortisol are activated to ready your response. Your heart rate increases, you begin to tunnel focus your vision, you feel energized. In short, you’re ready to fight! Or, to flee!
In investment parlance, a simple way in which we respond to this. You own XYZ. And you own a lot of it. It is your ‘take me home’ position that’s going to make your year. You’ve invested a lot of your time researching the company and you love its future prospects. New products that really solve problems, a rosy vibe all around them.
An aside. I am being careful here not to indicate which industry or sector. They’re all stocks and I want to avoid triggering your own response by perhaps discussing something in an industry or sector that distracts you.
And then you read in the pre-market (trading in equities that occur before the usual 9:30AM open) that it is called down 35% because they’ve announced a surprise shortfall in their current quarter’s sales and they want to pre-announce that.
Can you feel the stress building? OK, what do you do? If you decide to fight, you’re not going to sell, and you might even buy more. And if you decide to flee, you sell.
How do you decide? You read through the news release. If the stock is down 35% it must be the death knell and it is time to go. But the news seems to indicate that the shortfall is not so much a question of the business going bad but rather, investors are disappointed in what overly bullish expectations were. It seems there was difficulty getting parts for their flagship product, and they were unable to deliver product. They’re working on it but can’t make any guarantees.
It appears from the reaction that investors had rose colored glasses on and now, they’re ripping them off for clear vision.
And it is quite probable that most is due to computer algorithms programmed to automatically sell either because of various price points being hit, or, perhaps AI driven Large Language Models have analyzed the wording of the announcement and have subsequently triggered the sale. The news came across the tape at 8am, do you think that investors as a group, were immediately active, having meetings and reaching instant decisions?
You don’t think the news warrants the reaction. It feels like a one-time and you have confidence in management. But they didn’t hold your hand with a guarantee of solution.
And the price! The loss! And so, overwhelmed with fear, you begin to imagine worse. This won’t be the end of it. It’s going to go on and on, you think. I own too much! I’m getting killed!
You turn on the TV and you catch an analyst on your favorite cable news channel. He has been a big bull on the stock, but he is now clearly disappointed. Of course, he has his own problems he’s dealing with. He’s been pounding the table, he’s in the stock, his clients are in, and his phone is ringing. I can mostly guarantee that he is not going to tell you to sell the stock. He will more probably fall back into on-this-hand-on-the-other-hand language, offer some general platitudes and might not even give you a conclusion.
Worse and worse.
The market opens, XYZ opens down 35% and then falls another 5%. Closed at $100, opened at $65, now trading at $60.
You sell. You have fled. And then of course, it’s the buttered toast dropping to the floor thing. The stock steadies and slowly rallies through the day to close down a modest 5%. It’s a rule…if you sell, it will go up and if you buy, it will go down. Right?
We can easily analyze what went wrong here. First, you entered the position as an investor, setting it up as a long-term basic holding in your portfolio. But then, you became a trader, letting your emotions tunnel vision you from the long term to what was lying right in front of you. Of course, circumstances can change the outlook permanently, but that was not the case here.
It appears they had a temporary glitch in their supply chain and of course the lawyers are not going to allow the company to make any guarantees. But it is reasonable to assume that a corporate management team that made it a great company is also capable of working out the problem. Companies tend to do that.
Next, it appears you had too large a position. That your love affair with the company blinded you to the potential risks. Most probably, you never thought about what kind of decline you could handle without having to bail out and so, when hit with the reality, were ill-equipped to deal with it. All those hormones racing around. Put another way, if the stock comprised 1% of your portfolio, that is if the risk was quite small, you might have still sold, but that would have been more in the nature of ‘I don’t want to deal with this. It’s a distraction’ than cogent analysis.
So, fear generated by outsized risk drove your decision.
Then, you began surfing around for opinion to replace what you felt was your own lack of knowledge. You caught an analyst on TV but given that most stocks of any size are covered by as many as 50 or more, that was serendipitous. What if they picked a bearish analyst, or a super bull who reiterated a buy on the stock? That is, you put investment decision in the hands of a random knowledge-seeking effort. What you got would be pure luck if it led you to the right place, and bad luck if not.
You allowed the pre-opening price to set your entire tone. This despite the fact that pre-markets are rife with computerized trading algorithms which often have goals or conclusions that can be independent of the actual security. So, once the ‘real’ market opened, emotions immediately worked out after the open, and then through the day, calm reasoning had time to work and investors concluded that while not a positive, it certainly didn’t warrant the fire drill.
In summary, you didn’t really think through, calmly, what to do. Your emotions, your fears triggered by reality but then, buttressed by imagining more pain ahead actually governed your decision. What was between your ears was overwhelmed.
Also worth noting that persistent triggering of the flight or fight response can lead to chronic stress. Which of course does nothing to help you reason properly and so contributes to a group of additional difficulties to overcome.
We’re scratching the surface here on this subject and will do more in the weeks ahead. But at least a start to help you perhaps identify some errors you tend to make.
Investing is hard. It appears easy at times, but in reality, it becomes a real test of your thought processes and emotional control.
And like most skills, they are improved with practice but with thoughtful practice. Perhaps you can go back over some recent sell decisions, see what resonates. Also, do you have a plan?
Overwhelmingly, investors do not.
Thoughts, questions, or reflections? I’d love to hear them. You can reach me anytime at anthony@workingprofit.com
