Investors Focus on Price... But Time Is Just as Important

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 stock. It's also what you sell it at... and, therefore, the deciding factor on whether you make money on the trade.

But when thinking about how stocks trade, it's critically important to understand the role of time.

While we often frame the question as "where" – meaning at what price – would you buy or sell a stock, market participants' buying and selling actions are often driven by the passage of time rather than specific prices.

Think of it like this...

Let's say you have a significant position in a stock. It's one of your most prominent positions.

One day, the stock trades down 15%, a big move lower. But you hold off on selling because if you liked it where it was when you first bought shares, you should want it even more now at a cheaper price. Then, 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.

Now 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 you were in the first example... but how do you feel about the stock now?

There must be something wrong since the stock has gone down for so many days, right? The chances of 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 (the time) of that feedback.

In the past, we have discussed sector "rotations." This is when too many investors have crowded into certain positions, leaving them vulnerable to being forced out of those positions.

We've also used the example of a crowded raft. With too many people on one side, the raft is vulnerable to a tiny rapid sending it everywhere.

The thing about people moving from one side of the raft to the other, though, is that it seldom happens quickly... Especially the longer it takes for the raft to get crowded in the first place.

Think back to what happened in 2021 with the COVID-19 "winners" – both high-growth ones like Zoom Video Communications (NASDAQ: ZM) and defensive ones like Procter & Gamble (NYSE: PG) – benefitted for the better part of nine months in 2020. Still, it took almost a year for that to unwind.

While the defensive stocks have mostly recovered, the higher-growth and higher-valuation ones like Zoom and Peloton (NASDAQ: PTON) have never returned.

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

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

This most recent correction in the tech-heavy Nasdaq Composite Index began in late March, so it is not even 30 days old.

Again, go back to the earlier example, if you lose a bunch of money quickly on 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 convince you to turn them into money-making opportunities.

Also, picking the right stocks during these periods – as we've done here at HX Research – can also be highly profitable.

For the 10th episode of the HX Podcast we caught up with our former colleague Ram from Octahedron Capital. He is probably the best connected investor we know in the technology world and our conversation BLEW US AWAY! It is a MUST WATCH. His advice on investing is powerful!

Check out Enrique Abeyta’s conversation with Ram P from Octahedron Capital on the HX Podcast.