The share price of ASX-listed small-cap stock Eroad Ltd (ASX: ERD) fell 33% last Friday after the company announced a strategic retreat from the North American market, changes to its management team with its Co-CEO stepping down, and downgraded its FY2026 guidance.
Big share price drops like that are never fun to go through (unless you are a short seller, of course), and so it's normal to feel down about it. But moments like this are when clarity of thought is so important for investors.
Here's how I think smart investors would be responding to a situation like this.
Hear it from the horse's mouth
Rather than panicking or relying solely on news headlines, smart investors go straight to the source to read the announcement carefully and listen to the conference call.
That's where you can pick up all the details and full context for what has gone wrong and what management plans to do about it. Independent thinking is such an important skill for investors, and it starts with getting the right information, then objectively evaluating it.
It's OK to sell and move on
If material new information come to light that significantly diminishes the investment opportunity (i.e. you no longer believe this investment will outperform the market going forward), then I think you must be prepared to cut your losses and move on.
This is not a decision to take lightly, of course, and it's possible that you might be selling at exactly the worst time. However, investors have to make decisions looking forward, and they are not always easy decisions.
Conversely, there are moments where holding (or even buying) is the right decision, and you have to learn how to make that distinction.
I think it's helpful to have a process that you test and refine over time that can guide you in times where you are more vulnerable, making an emotionally charged decision.
Don't rush to buy
Just because a stock is down 33% doesn't mean it can't go down even more. A $100 stock that drops 90% to $10 can still decline another 90% to $1.
That's why I think it's helpful to have a healthy amount of respect for big market moves, especially to the downside. Markets can overshoot, of course, but giving it time to do your research and understand your variant perception (why you might be right whilst the market is wrong) is important.
Reflect on your process and position sizing
Smart investors use big stock moves as an opportunity to reflect on their investment process and approach to position sizing.
It's important to have an honest self-reflection to diagnose what went wrong and what the key learnings are. We are all learning along the way, and no one has a perfect process. Continuous improvement to your investment process can yield significant long-term results.
And whilst there is no one-size-fits-all approach to position sizing, typically a full position size is large enough to make a material impact on a portfolio when things go well and not so large that it destroys the entire portfolio when things don't go well.
There is also an emotional side to this. Some investors can sleep perfectly at night with a 20% position size in one stock, but others would want to keep it lower.
The point is, it's hard to tell which investor you are until you are tested in a real-life scenario. When a stock you own drops 33% and it causes an unbearable amount of anguish, it's an indicator that perhaps the position size was too large.
Shift your focus to the best companies you can find
Investing is a constant search for the best opportunities available to you, and you can't get too hung up on your mistakes when things go wrong. A healthy dose of optimism is helpful, and your focus must be firmly on finding the best opportunities out there. You never know when you might come across the next big winner.
Foolish Bottomline
Big one-day drops can be scary, but you are likely to experience them at some point as an investor. When it happens, don't beat yourself up too hard. Instead, reflect on what you can learn, refine your process, and stay positive. You'll likely become a much better investor and one well prepared to take the next opportunity when it comes.
