[VIEWPOINT]Let’s get the Kosdaq rally right

The Kosdaq market has continued to surge ever since the government announced its plan to activate venture businesses. The Kosdaq composite index rose suddenly from 375 on Dec. 24 last year to 417 on Tuesday. The Kosdaq market was in a slump for a prolonged period. Now, it looks as if Korea’s secondary market has gained new energy.
The reactivated Kosdaq market represents the dreams and hopes of venture businesses. Venture capitalists and innovative businesses are the main growth engines for Korea’s development in the next generation. Therefore, activating the Kosdaq market is not only necessary for the sake of the market itself, but also for the development of the Korean economy.
But there is one thing to keep in mind: We should keep in mind the burst bubbles in the Kosdaq market a few years ago.
We have experienced the bitter consequences of blind investment in shares, following what others do without making thorough analyses and evaluations of our own. A pot that heats quickly also cools down just as quickly. If the Kosdaq market repeatedly fluctuates, investors will flee.
For the Kosdaq market to continue to rise as a market leading the way for Korea’s economic growth, investors who make their investments based on intrinsic value analyses of companies should form the mainstream in the market. We should not allow “blind investors,” who don’t bother to collect and analyze information themselves, but rely on the market’s average expectations, to become leaders of the market. The market should not be one that leaps about with changing trends, but one that sticks to sound principles.
The phenomenon of investors going with the flow of the market can be compared to beauty pageants, according to that master economist John Maynard Keynes.
Let us suppose a bet is being made on who will win a beauty pageant. I think that girl A is the prettiest. However, if I say that girl A will come first, will I win? No. If most of the judges think that girl B is the prettiest, girl B will be the winner. So in this case, I would have to pick “the girl that I think most other people will think is pretty” instead of “the girl I think is pretty.” The logic is that I have to go with the average opinion of the market regardless of my information analysis. Yet, the reason a market is efficient is because variety and individuality exist within it.
It is when different investors invest in the market individually, according to their own information, methods of analysis and judgment, that a meaningful stock price is arrived at. If investors evaluate the intrinsic value of a company and then frantically work on getting an idea of what the market’s average opinion might be, the expectations of investors strongly lean towards one side. Such strongly unbalanced expectations can become bubbles in a second, and these bubbles can burst with the smallest stimulation.
The Kosdaq market is an extremely unbalanced market in terms of information, due to the characteristics of its listed companies. Or, to put it another way, it is difficult for outside investors to gain clear information on the companies. That is why it is tempting to give up one’s own ideas and go with the flow. However, in this kind of market, publication of a variety of information and transparent distribution are critical.
In order to allow investors to work on producing information and analyzing company values, the market has to prioritize transparency above all else.
If unfair transactions and manipulations of stock prices using inside information become rampant as they were during the venture and Kosdaq boom a few years ago, who would go through the trouble of working to accumulate information about companies and analyze their values?
Unfair transactions and manipulation of stock prices using inside information need to be strongly penalized for the Kosdaq market’s continued firm growth. The degree of punishment cannot be too much, no matter how strong it may be. The stronger the punishment, the higher the Kosdaq composite index will rise.
The degree of punishment in the market is stronger in countries with highly developed stock markets. An influential American financial executive, Michael Milken, nicknamed the “junk bond king,” was permanently banned from the securities industry for using inside information to commit securities fraud. Mr. Milken has become a chief executive officer again and manages a company successfully, but this time it is not a securities company, it is a toy company.
There is an important lesson here for the Kosdaq market.

* The writer is the Vice President of the Korea Securities Research Institute. Translation by the JoongAng Daily staff.

by Kim Hyoung-tae