Taking stock of the bourse
There is a pattern at the Korean bourse. After a long uneventful period, share prices finally show some movement. Trade picks up. Then, before you know it, share prices are sharply higher. Big-cap stocks lead the pack. The ripple effect trickles down to smaller stocks. Suddenly, the market turns all rosy. Analysts cheer, saying stocks were undervalued. The media trumpets the arrival of a bull.
The hype finally reaches individual investors, who join the buying spree. In haste not to miss the bandwagon, they buy stocks on rumors without checking out the companies. While individuals are busy buying, others sell. The sellers are, of course, the clever big institutional and foreign investors who are happy to dump the stocks after making initial gains. Prices go higher while shares busily change hands in a seemingly buoyant market. By now, investors turn bolder. Some borrow to buy more stocks. Trade volume swells. News headlines read that the Kospi has surpassed a certain threshold. From then on, stock prices change direction.
Institutional and foreign players are already out of the game by then. It is individual investors who are left nervously gnawing their fingernails. The media runs the typical aftermath stories about individuals hit by heavy losses. There is little trace of optimism. The same analysts snap that stock prices gained too much in spite of a poor underlying economy. Authorities then slowly move in for traffic control and announce they have discovered cases of manipulation.
All stock prices do not come down at once. There are still opportunities to sell them and exit. But individual players cannot leave because of the money they had put in. They hold on until their shares hit the bottom. When share prices improve after several months or years of an painful waiting, they finally sell. But as soon as they do, stock prices start a run toward a new peak.
This has been repeated for decades. When the economy is good, stock gains are bigger and the fall less dramatic. As long as one does not turn greedy, most can make a good profit. But the risk becomes big when the overall economy is not that good and the stock gains are mostly propelled by ample liquidity that does not have elsewhere to park as it is these days. Since there is nothing to tout about the underlying performance, stocks are artificially packaged to sell. Schemers go to work to illegally boost certain stock prices.
One can make profits in stocks by doing the opposite of what others do. In other words, the rule of the thumb would be to sell when others buy and buy when others sell. It is best to sell when a stock hits the ceiling and buy when it reaches the bottom. But it is not easy for individual players to play by the book. Most are not armed with deep insight, comprehensive knowledge or mental or physical strength. It is why they are advised to invest in funds run by institutions.
The government has been promoting stock investment via indirect funds. But individuals were 60 percent of trade at the main Kospi bourse last year. The share had been 60 percent in the 1990s as well. Individuals make up around 90 percent of the technology-laden Kosdaq market.
The playing field is entirely run by amateurish individuals. Loan-based stock investment ballooned to 7 trillion won ($6.4 billion), including 3.8 trillion at the Kosdaq market, from 1.8 trillion won over the past 20 years.
The Korean economy is in uncharted waters. Floating funds that have no place to go with bank savings rates hovering at 1 percent are estimated at 800 trillion won. There are plentiful riches that still cannot decide whether to park in the stock market. Speculative funds seek quick returns. Many stash their money away in home or bank safes. Most of the 50,000-won notes released do not return to banks. Japan has experienced the same phenomenon for 20 years.
The stock market must play the role of bridging ample liquidity and strengthening the economy. If some of the floating funds flow into the stock market and make companies richer, companies will be able to share the profits with employees. Then salary workers with increased income will be able to afford to spend. The stock market also must finance promising venture companies with competitive technology and innovation.
Unfortunately, the local bourse has not progressed at all. It remains as a playing field for amateurish individuals betting with debt-financed funds. They are gambling rather than investing. Brokerage houses that rely on commissions for revenue encourage short-term investment. Authorities merely follow the market trend. In such an environment, we cannot expect to discover and groom hidden corporate champions.
JoongAng Ilbo, May 18, Page 32
*The author is the acting editor-in-chief of the JoongAng Ilbo.
by Koh Hyun-kohn