Smash profit warning paralysis with this three-step guide

It’s a morning like any other. You awaken gently, throw open the curtains, stick the kettle on and settle in to catch up on the morning news.  

But this peaceful routine is just the calm before the storm. Just a few clicks away it lurks, ready to pounce. When it hits you – and hit you it will – you freeze as your retirement drifts further into the future. 

I’m talking, of course, about profit warning paralysis. I’m being more than a little dramatic too, but I’m sure every investor out there has felt uncertain in the face of bad news. Deciding whether or not to sell, or perhaps even buy, more shares can feel like an insurmountable task. 

If you find yourself panicking after a profit warning, fear not. We’ve designed a pragmatic methodology to help you separate the irrelevant from the irreversible. The next time you find your critical faculties overwhelmed by sudden negative news (and it happens to the best of us) simply work through this three-step survival guide. 

1. Is the investment thesis still intact? 

Every time I make an investment, I create an investment thesis – a small paragraph that explains exactly why I’m buying the share. For example:

“I bought company x because I believe its superior product can prosper overseas.” 

If you’re investing for the long term, having a thesis for each stock you buy is incredibly important, because it helps you focus on what is important. If the reasons behind the profit warning scupper your investment thesis, it is probably time to move on and sell the shares. 

If you haven’t already, perhaps you should clarify the investment thesis behind each of your investments.

2. Quantify a worst-case scenario

If step one didn’t help, I’d advise you try to quantify the profit warning. If the announcement uses vague terminology such as “significantly behind expectations” you should try to put a number on what a worst-case scenario might look like. 

For example, a company I follow recently warned on profits because one of its major clients had declared bankruptcy. After sifting through the annual report, it seemed clear that no single client accounted for more than 10% of revenues, so that became my worst-case scenario. As a result, I’m considering buying up some of the shares. 

Putting a number on the downside will remove that fear of the unknown and help you make a considered decision.

3. Go for a walk. 

If step one and two haven’t banished the nerves, I’d recommend getting away from the computer screen. Go outside, play some sport or read a book. Just get your mind away from the news for a while. Perhaps sleep on it. Decisions made in a panic are almost always poor, so ensure you regain control of your critical faculties before doing anything at all.