Corrections are a regular part of life for stock market investors. They are essential for a healthy stock market because a one-sided move without any correction is often met with a massive crash! But all corrections are not equal. Many investors are familiar with the concept of correction as the time when stock price falls rapidly. However, there is another type of correction which can sometimes be even more insidious compared to price-wise correction.
What is time-wise correction?
Time-wise correction refers to the loss of value which investors face because of a stagnant price of the asset. The investor doesn’t lose any money, rather he/she loses time by staying in a stock which is in a range-bound consolidation. It is equivalent to keeping your cash losing value without the price going down because a Rs. 100 note doesn’t have the same purchasing power today which it did 10 years ago!
What’s the difference between price-wise & time-wise correction?
Unlike price-wise correction in which the price of the stock falls & can be clearly visualised as unrealized loss for the investor, time-wise correction refers to the price of the stock staying stagnant. The investor doesn’t lose any money but loses value. When the price of everything around you increases but your investments do not appreciate, you lose value! Consider the following example of a time-wise correction & price-wise correction for a stock called IRCTC.
The stock showed a price-wise correction in which the stock fell almost 40% which is being followed by a time-wise correction (at the time of writing). Any investor who invested in the stock post the price-wise correction is not making any returns on their investments due to the stagnant price of the stock.
What can long term investors infer from time-wise correction?
Even though time-wise corrections can be a difficult time for investors due to lack of appreciation of their investment, it can be an amazing opportunity for investors willing to become the shareholder of the company. Time-wise correction is a clear indication that the stock market is accepting the price of the stock as its ‘fair price’. If a stock corrects from Rs. 100 to Rs. 80 & consolidates at Rs. 85, it means that the market found the stock not worthy of Rs. 100. However, it also means that the market accepts the price of the stock as Rs. 85 to be the ‘fair price’ of the stock.
There is no guarantee that a stock which is in a time-wise correction will provide good returns in the future. In fact, sometimes stocks can start price-wise corrections after completing their time-wise correction. However, a growing company which is undergoing time-wise correction provides an amazing opportunity for long term investors to enter the stock. Growing companies tend to provide good up-moves after the completion of their time-wise correction. To learn more about what long term investors should do during a stock market correction, visit this article – Long term investor’s guide for a market correction!
Conclusion
Time-wise corrections are the periods in which a stock gets stuck in a range. This correction can continue for weeks, months or even years! However, these time-wise corrections provide valuable information to the long term investors that the market accepts the current price of the stock to be a ‘fair price’ of the stock. Long term investors can make use of these corrections as good opportunities to invest in growing companies. However, the final decision of investment depends entirely upon the reader!
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DISCLAIMER : I am not a financial advisor. I am not for or against any company which I have mentioned in this article. All the information provided here is for education purposes. Please consult a financial advisor before investing.
Contact me at investmentabshuru@gmail.com
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