[View point]Laughable analysesWarren Buffett is not just one of the richest people in the world, but is also a man of humor. When asked how he keeps up his sense of humor, he responded without hesitation that he reads Wall Street analyst reports when he feels he needs a good laugh.
The Oracle of Omaha is notorious for making fun of Wall Street reports and market forecasts. He dealt a harsh critique that analysts encourage bubbles by producing exaggerated earnings forecasts when a stock price goes up but change their views as soon as it falls. This was exactly what happened when Enron’s bankruptcy turned the U.S. financial market upside-down in 2001. Until right before Enron filed for bankruptcy, 17 out of 18 top analysts in Wall Street recommended buying Enron stock.
If you were a master investor like Buffet, you would have laughed off the analysts’ forecasts as a joke. However, many individual investors were dazzled by the Wall Street analysts and ended up with huge losses. Many Enron employees bought Enron stock and lost all their investment as well as their jobs.
Lately, many individual investors are struggling on the Korean stock market. When stock prices soared in May, analysts at securities companies recommended buying IT and automobile stocks. Their basis for this idea was the exchange rate. As the won to U.S. dollar exchange rate skyrocketed this year, IT and automobile companies would automatically enjoy good performance as the industries are export driven.
By June, IT and automobile companies competed to inflate earnings forecasts for the second quarter. And securities companies raised the forecast numbers. The analysts chose Samsung Electronics, LG Electronics and LG Display as the top three stocks expected to be boosted by improved earnings. The “exchange rate impact” completely overshadowed the concern that sales of Korean companies would decline as a result of a slump in the global economy.
However, foreign investors suddenly started to sell IT and automobile stocks from this point. Coincidentally, the most-sold stocks by foreign investors in June were Samsung Electronics, LG Electronics and LG Display. They even are shorting, borrowing and selling shares they don’t own.
Naturally, IT and automobile stocks plummeted. Stocks fell by 30 percent compared to the mid-May peak. However, many domestic securities companies repeated that things will improve in July. They argued that once the IT and automobile companies release their second quarter earnings reports, stock prices will bounce back.
However, when the reports were finally out, anticipation changed into disappointment. The performance of IT and automobile companies in the second quarter turned out to be far below the forecasts of the securities companies. They had generated rosy forecasts without taking the worldwide economic slump into consideration.
As a result, individual investors ended up as the prey of foreign investors once again. Even though they didn’t mean to, many Korean securities companies contributed to the crisis by encouraging individual investors to continue investing. They are not producing belated reports warning that it would take quite a while for automobile and IT stocks to rebound.
The Meteorological Administration is good for nothing if it issues a torrential rain warning after the downpour already caused a flood. Similarly, a report that warns of a sluggish market after stock prices have fallen is useless to investors and will only upset them.
Jumping on the opportunity, industry-leading securities company Mirae Asset Management declared that it will not make short-term market forecasts from now on. The company wants to refrain from making short-term investments that rely on the movement of the stock price index. Under the new principle, Mirae Asset has shut down its investment strategy team in charge of short-term forecasts. Considering the internal securities market, where individual investors make up a large portion, Mirae Asset’s change is refreshing.
However, something is missing in its decision. If it intended to discourage short-term investment on equity, the best timing to put on the brakes would have been last October, when reckless investment was booming. Mirae Asset is attracting unnecessary suspicion since it is slowing things down after stock prices already plunged. If the decision is not a tactic to avoid criticism from investors, Mirae Asset must not keep to its principle when stock prices rise again.
*The writer is a deputy business news editor of the JoongAng Ilbo.
by Jung Kyung-min