Investment rules never change

Kim Chang-gyu
The author is the economic news editor of the JoongAng Ilbo.

A masked man opens fire at a brokerage on Wall Street. The killing spree was carried out by an ordinary man who worked as an armored car driver. Strained by medical cost for his wife recovering from a brain tumor, he decided to cash in a pension he earned from serving in the military. He finds out little is left from the fund due to bad investment. The fund was a scam from the beginning. Still, the portfolio manager has instructed his employees to sell the product as he claims. “Our responsibility begins and ends with our partners and our shareholders and that’s it. Investors gamble, they lose, that’s the risk that they agreed to take. Why should they complain when they lose money on the market?” After losing his savings as well as his wife who commits suicide for causing the strain on her husband, the man decides to take down all those who had wronged him and ruined his life.

The 2013 film “Assault on Wall Street” was written after the financial crash and crisis of 2008. The scene of the movie will feel all too familiar today amid the stock and crypto fad. The investor in the film puts his life savings upon the advice of others. He chooses the fund recommended by the staff at the brokerage. He did not stop to examine how the fund is structured and its future value. Investors in digital coins are no different. Most of them joined the market because everyone else is doing it and because the prices are skyrocketing. They do not ask if the coins have value

Koreans in their 20s and 30s who cannot afford homes due to a spike in housing prices flocked to the stock and cryptocurrency markets. Novices usually jump in when the market is going strong. According to a survey, college students have been investing in cryptocurrencies for an average 3.7 months, suggesting they have jumped on the bandwagon when crypto fever was at its height earlier this year. The survey shows that 24 percent of college students and 40 percent of salaried workers have put money into digital coins.

But the market has not moving as they had hoped. Prices have been crashing after financial authorities around the world toughened regulations. The U.S. Treasury Department is requiring the report of any trade beyond $10,000. China has banned all activities related to cryptocurrency. Treasury Secretary Janet Yellen called Bitcoin an “extremely inefficient and highly speculative asset.” Bank of England Governor Andrew Bailey warned crypto investors to be “prepared to lose all the money.”

The value of bitcoin and others have halved in just two weeks. The prices go on a roller-coaster ride after every comment from influential figures. Authorities and investors wage a dangerous battle of nerves, putting mom-and-pop trade investors under stress.

Robert Shiller, a Noble laureate and professor at Yale University, warned of the formation of bubbles in the asset markets with investors consumed by a “Wild West” mentality. The economist who had foreseen a crisis from subprime mortgages in 2008 observed that “the ultimate source of value (of cryptocurrency) is so ambiguous that it has a lot to do with our narratives rather than reality,” pointing to the weak fundamentals supporting virtual coins.

Governments around the world have pumped out money to prop up the Covid-19-battered economies. M2 has grown 24.6 percent in the U.S., 11 percent in the euro zone, 10 percent in China, and 9.8 percent in Korea. The market is awash in liquidity has affected investment sentiment. Central banks are readying to taper down in fear of inflation and asset bubbles. The market now rattles at the slightest changes. Korean authorities still neglect the crypto coins they do not see as legitimate assets. The liability over losses would fall entirely on the investors.

Investment gurus advise us to adhere to basic principles. Apple is the top holding of Berkshire Hathaway under investor Warren Buffet, followed by the Bank of America, American Express, Coca Cola and Kraft Heinz. The investing company’s strategy runs on Buffet’s rule of staying away from assets that he does not fully understand. Most failures came from investment in the targets he did not master. “Be fearful when others are greedy, and be greedy when others are fearful,” he had said as he invested big during the 2008 financial crisis.