The Anatomy of Market Losses: Where Panic Ends & Self-Delusion Begins
Oct 08, 2025
Most stock market losses are not bad luck. They are bad decisions wearing excuses. Selling into a plunge feels safe, yet it is often the costliest move you can make. In October 1987, the market fell 22.6 per cent in one day. Warren Buffett did not liquidate; he bought. That is not bravado; it is a process that overrides panic. If you want a clean answer to the question above, here it is: do not sell because you are scared, sell because your rules tell you the thesis broke or your risk budget was breached. Everything else is noise.
Dalbar’s study is the autopsy. From 2001 to 2020, the S&P 500 returned approximately 7.5 per cent per year, while the average equity investor earned roughly 5.0 per cent. The gap is behaviour, not fate. In October 2008, investors yanked about $92 billion from equity funds in a single month. In March 2020, more than $300 billion left mutual funds and ETFs while the bottom formed. Seneca said Luck is what happens when preparation meets opportunity. Most arrive unprepared and call it luck when they lose.
A. Losses rooted in a lack of preparation
People enter positions with no plan, no exit, no time frame, and no position size logic. They know the ticker, not the thesis. Hope takes the place of rules. That is how investors convert drawdowns into permanent damage.
Preparation is four decisions made in advance. Why this asset? What breaks the idea? You are wrong on the price. How much can you bleed without poisoning the account? Write the exit before you enter. If you cannot state the invalidation in one sentence, you do not have a trade; you have a wish. Seneca would call the pain that follows self-inflicted.
B. Losses fueled by emotional drift
FOMO entries, panic exits, revenge trades. Emotional reactivity is the most expensive habit in markets. Nietzsche warned that suffering often begins with the refusal to think for oneself. In markets that refuse to sound like this: everyone is saying sell, the news is terrible, I can no longer take the red.
Fix the loop. Replace feeling with precommitment. Use alerts tied to price, volume, and time, not headlines. Decide now what would make you buy more, hold, or cut. If a red candle can force a decision you did not plan, the tape owns you. Your job is to remain calm and execute effectively in chaotic situations.
C. Overconfidence masquerading as conviction
A short streak turns into swagger. Small wins are misread as skill. Position sizes bloat. Then one trade introduces you to gravity. Soros called it reflexivity. We bend reality to fit our positions and call it conviction. That is not conviction. That is attachment.
Real conviction is purchased with evidence and protected by mechanics. Evidence means cash flows that cover claims, balance sheets that endure, and moats that matter. Mechanics mean preset exits, staggered entries, max position limits, and hedges that trigger without debate. Nietzsche again: convictions are more dangerous enemies of truth than lies. In markets, they are also expensive.
D. Mistaking volatility for risk, and risk for volatility
Volatility is movement. Risk is ruin. One you endure. The other you avoid. Most investors shy away from normal market fluctuations, then freeze during real stress events. fMRI work shows financial loss lights up pain centres. A 2019 study found investors react about 2.5 times more to losses than gains. Schopenhauer taught that misplaced hope produces suffering. In markets, the twin to hope is fear of discomfort. That fear makes you sell lows and buy highs.
Treat volatility as a signal, not a sentence. When the VIX blows out, you do not need courage; you need a plan. Weekly RSI below 30 on quality names, capitulation volume, insider buying, these are not fortune cookies. They are told that emotion has outrun reality. Since 1990, buying the S&P 500 when VIX exceeded 40 has produced strong forward returns on average. In March 2020, the VIX printed above 80, and the next year, it paid those who acted rather than flinched.
E. The cost of not learning
A losing trade is data. A repeated loss is denial. Many investors relive the same loss with new tickers because they never write the rule that would have stopped it. If you chased green, write the entry filter that bans it. If you averaged down into a broken balance sheet, write the prohibition. If you freeze during a crash, install circuit breakers that allow for small cuts to occur early. If you lose and do not learn, you are not unlucky; you are undisciplined.
Understanding the panic: data without the drama
Behaviour explains the carnage. Dalbar’s behaviour gap. The outflows in 2008 and 2020. 401(k) participants who tinkered during 2008 earned about 20 per cent less over the next decade than those who stayed put. Templeton during WWII is the counterpoint. He bought a basket of hated sub one-dollar names. Thirty-four went to zero. The seventy that survived paid for the lot. Total return of nearly 300 per cent in four years. The point is not heroics. It is process over hysteria and portfolio math over headlines.
Technical analysis that earns its keep
Use technicals to time decisions, not to outsource thinking. Paul Tudor Jones puts it. Tops live in excessive optimism. Bottoms live in raw pessimism. Indicators can help you see what you already suspect.
Concrete tells. The death cross showed up months before the steepest leg of 2008. In 2020, many major indices printed RSI below 30 for the first time in years. In 2022 deepening MACD negatives preceded the NASDAQ’s slide. Across decades, a weekly RSI under 30 has been associated with positive six-month returns on average. Moving average crossovers have caught major trend changes most of the time. Volume spikes far above average have framed reversal days repeatedly. Fibonacci zones have contained retracements a large share of the time during big corrections. None of this replaces fundamentals. It synchronises action with sentiment.
Contrarian results stem from patience and adherence to rules.
Charlie Munger said the big money is in waiting. The 2008 sellers at the bottom learned that in the harshest way. The S&P 500 is up more than four hundred per cent from those lows. That was not magic. It was survival through the trough and continued buying when fear-priced assets were at a discount.
Contrarian does not mean reckless. It means rules that allow you to act when others refuse. Position size between two and five per cent per name is not cowardice. It is about living long enough to harvest compounding. LTCM had brains and models and still died from size. Banks in 2008 with swollen risk books paid the same price. Funds that limit exposure per line keep the privilege of showing up tomorrow.
A clean decision tree for sell or hold
You do not need a speech when the screen bleeds. You need a rubric.
- Thesis broken, sell—accounting fraud, secular moat erosion, competitive displacement, covenant stress. Price is not the reason; the business is.
- Risk budget breached, cut. If a position or a cluster pushes your portfolio beyond your drawdown guardrail, reduce to the line. Survival is the job.
- Liquidity needs to reduce risk. If you will need cash in months, do not gamble on a rebound. Raise cash with rules and stop pretending you are an investor with a three-week horizon.
- Panic only, hold or add. If the business is intact and the sale is driven by emotion and forced flows, follow your plan. Monthly oversold, insider buys, fat volume, and VIX extremes are your green lights. Add in tranches. Never all at once.
- No plan, stop and write one. Entries, exits, size, hedges, rebalancing cadence, emergency cash, opportunity cash. Could you please condense it to one page? If you cannot trade your plan under stress, you do not have a plan.
Risk management that survives real tapes
Diversify with intent across assets, sectors, regions, caps, and styles. Rebalance on a schedule so you sell strength and buy weakness without asking permission from your nerves. Keep an emergency fund so you are not a forced seller. Maintain an opportunity fund to enable rational buying. Use hedges like insurance, not decoration. Protective puts when stress rises. Inverse exposure when correlations go to one. Pay the premium in quiet times so you do not pay with principal in loud times.
Conclusion
Do not sell because the headlines are loud. Sell because your thesis failed or your rules fired. Do not hold because you are scared to admit error. Hold because the business is sound and the selling is emotional. Soros admits errors fast because he respects reality more than ego. Do the same.
Stop calling it volatility. Most of the time, it is just your bad decision in motion. Cut what is broken. Keep what is sound. Add when fear has done your pricing for you. Nietzsche would call that owning your will. Seneca would call that avoiding needless pain. Schopenhauer would call that refusing to suffer in the hope of something better. Your future self will call it survival that compounded.
