Time Is More Important Than Price

When looking at stocks, the first thing we always talk about here at HX Research is the price.

That makes a lot of sense.

The price is what you pay for a share of stock. It is also what you sell it for. The price defines whether you made money or not on the trade.

THAT is the most important part of TRADING.

However, it is essential to understand the role of time when thinking about how stocks trade.

We often frame the question as "where" – meaning at what price – would you buy or sell a stock? However, the passage of time often drives market participants' buying and selling actions rather than specific prices.

Here is an example…

Let's say you have a BIG position in a stock. It's one of your largest positions.

One day, the stock trades down 15%, a big move lower. You hold off on selling because if you liked it at the price where it was when you first bought shares, you should like it even more now at a cheaper price. The next day, the stock stabilizes and proceeds to go up slowly after that.

You're unlikely to sell this stock even though you're down 10% or more. It is a painful loss, but it happened quickly and feels like it is over.

Consider the same stock, but say it goes down 1% in one day. The next day, it goes down another 1%. It proceeds to do this for a week.

Overall, you'd be down less than in the first example (one week of -1% daily returns versus the big drop), but how do you feel about the stock now?

There must be something wrong since the stock has gone down so many days in a row. Right?

The chances that you find yourself selling at least some of your position are much higher, as you've had multiple incidences of negative feedback.

It's often not the magnitude (the price) of the negative feedback that influences our actions on a stock as much as the quantity of the negative feedback data points – the time.

We often talk about stock market corrections using an example of a crowded raft. With too many people on one side, the raft is vulnerable to even a tiny rapid sending it all over the place.

Though, the thing about people moving from one side of the raft to the other is that it seldom happens quickly.

At the start of this week, we entered a correction period. While the stock indices only decreased slightly, most stocks have been going down all month. The price action is deceptive as many more investors are feeling pain than is apparent.

When entering one of these correction periods, focus less on the price than on the time.

The significant corrections will almost always take several months (45 to 90 days is my easy rule) to run their course.

Is this the start of a big correction?

Given the impacts of seasonality, we doubt it, especially in a big "up" year for the stock market like 2024.

We do think that we could see one begin sometime in early 2025.

Again, go back to the earlier example... If you lose a bunch of money quickly in a position but then it recovers, the drop doesn't feel so bad.

When you lose money for a longer stretch, you begin to lose your conviction.

Understanding the bigger picture and time's role in these corrections can teach you to turn them into money-making opportunities.