Our Definition of TRADING versus INVESTING

Readers familiar with HX Research know that we divide our strategies into two categories – TRADING and INVESTING.

You could probably use dozens of other categories for investment strategies, but we like to simplify things. 

This isn't just out of convenience. One of the biggest challenges for investors is not having a well-defined plan for going out and buying stocks. A distinct definition of your strategy is vital to having a well-thought-out plan and, even more importantly, sticking to it.

At HX Research, we currently have three paid strategies – HX Trader, HX Income, and HX Legacy.

Those first two – Trader and Income – are TRADING strategies.

So, what do we mean when we say “TRADING” strategy?

For us, a trading strategy is one where you are focused on a relatively shorter time frame and focused as much on price and technical as you are on fundamentals. 

Think of surfing the waves that are on the surface of the ocean.

The fundamentals of a company (earnings, valuation, etc.) may play a role. Still, we are looking at the chart and the price. 

Our strategies identify something that has happened recently that puts us in a position to make a high-probability bet of what will happen next.

"Next," in this case, for our strategies, means within 30 to 90 days, although it can go longer.

Our trading strategy is a hybrid of technical and fundamental analysis. We are looking for specific technical setups, but we are looking for them on particular types of companies with a specific set of fundamentals.

Many trading strategies out there only look at price. Many of these are much shorter-term than our strategy, and many of them are great.

With a shorter time frame, expectations for return should also be smaller. Not many stocks or assets go up double digits in a day or triple digits in a week.

Trading strategies typically look for smaller returns. Our equity trading strategy, HX Trader, usually gets between a +5% to +15% return, with the average right in the middle.

Many of the shorter-term trading strategies are looking at even smaller returns. Sometimes even less than 1%.

The key is "hit rate," or the percentage of occasions when the strategy is correct.

If you hold stocks for a short period and churn out single-digit returns, it becomes essential that you have high hit rates.

HX Trader has over a 75% success rate over time, and we think (with some tweaks we have made) that it can be even higher in the future.

In summary, TRADING strategies are shorter-term, more focused on price and technical analysis, smaller returns, and high rates.

INVESTING strategies?

Remember our ocean analogy and how trading is like surfing the waves on the surface of the ocean?

Investing is taking advantage of the tides and currents to go thousands of miles!

The time frame here should be much longer. 

For our INVESTING strategy, HX Legacy, we look at a minimum holding period of two or three years. Our preference would be to own a stock for decades!

This holding period is also then reflected in our return goals. 

Through time, stocks can double, triple, or even increase tenfold. This never happens in a few months but can occur in a few years.

We can not emphasize enough how transformative a ten-bagger is to your portfolio and wealth. Just ONE of these successes can change everything.

That is why we are not as focused on as high a hit rate in our investing strategies.

Of course, we want to make money in EVERY position, but we don't focus on as high a hit rate with our investing ideas.

Instead, we are looking at the risk versus reward. 

Our strategy, HX Legacy, seeks a minimum +100% return but with a three-to-one risk/reward ratio.

If we are wrong (without anything crazy happening), we could lose 35% of our money versus the +100% return. 

Sounds like a great risk/reward, right?

It is! That is why we are super selective in our ideas. Remember that 99% of stocks are "do nothing" situations…

One last aspect of investing is that it is much more fundamentally based.

Earnings growth is the most potent driver of stock performance across the long term. It may start with revenue growth, but eventually, it has evolved into earnings growth.

Find a company that will grow EPS ("earnings per share") from $1 per year to $10 per year, and you will find a stock that will go up a lot.

Charts and technical analysis can still play a role in investing. Still, it is best used to confirm what you are looking at fundamentally.

Do you do more trading or investing? Or both? Tell us in the comments section at bottom of post.

We will go back to our ocean analogy here.

Surfing the waves is fun! It takes a few minutes; you can catch many of them and add them all up, and you have a really good time. That is trading…

The ocean's tides and currents can take you thousands of miles away and transport you to faraway lands. Good investing can transform your portfolio and deliver you wealth. That is investing…

Check out Enrique Abeyta’s conversation with Whitney Tilson on the HX Podcast.