Honest investment is the answer

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

New riches have surged last year from asset appreciation in apartments, stocks and cryptocurrencies. Many felt left out and apprehensive of falling behind.

The new year has started on an unsettling note. The ongoing Covid-19 pandemic, supply bottlenecks and inflationary concerns loom over the new year. Central banks of major economies are expected to shift to monetary tightening to contain runaway prices. The U.S. Federal Reserve has hinted at lifting the benchmark rates after the consumer price index hit near 40-year high in November.

The volatile environment worries individuals with interest in investment. They are unsure if they should move to buy homes, stocks or digital coins. Experts are mixed. It is a disturbing period for individual investors.

Higher interest rates cost economic players heavily. Corporate investment should be affected due to higher financing costs. Retail investment in properties as well as stocks and digital coins also could be damaged if borrowing costs goes up higher. Market prospects will differ by the pace of increases in interest rates and supply and demand.

Whether the real estate market has reached an inflection point is being disputed. Some believe it has hit the inflection point and predict a gradual decrease in prices, as property trade has stagnated amid rising interest rates. Others do not agree as they do not believe the pace of interest hikes will be steep because of the negative impact on the economy. They also point to few signs of easing in rent shortages. They argue that the fall of 40 percent in apartment trade in Seoul owed much to the government’s loan restrictions and not from reduced demand. Despite sluggish trade, housing prices in the capital region soared 20 percent last year.

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Outlook for the stock market is also mixed. Some think the Kospi will hit new highs above 3,000 while others see it being range bound. They generally agree that shares will neither gain nor lose too much this year. The Kospi may fluctuate from 2,800 to 3,300 depending on the developments in Covid-19, inflation and interest rates.

There crypto frenzy last year. The fever has been worrisome.

Bitcoin, which traded at 32 million won ($26,736) in January last year, shot up to 82.7 million won in November. It dropped to 30 million won in between. Prospects for the crypto market are also mixed. Some believe the rally of last year won’t repeat as investments were backed by cheap liquidity at the time. Leveraged investment will be difficult this year due to rising interest rates. Some think digital coins will be favored by more people as an investment option this year amid greater stability in the market system.

All the mixed forecasts confuse individual investors. They cannot easily move to invest through loans, as they cannot afford losses amid higher interest rates.

Investment guru Warrant Buffet has explained the dynamic using the metaphor of hamburger meat. In a letter to his shareholders in 1977, he posed a quiz, “If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?”

But now for the final exam: If you expect to be a net saver during the next five years, should you hope for higher or lower stock prices during that period? Many investors get this one wrong. Even though they are going to be net buyers of stocks for many years to come, they are elated when stock prices rise and depressed when they fall.

In effect, they rejoice because prices have risen for the “hamburgers” they will soon be buying. This reaction makes no sense. Only those who will be sellers of equities in the near future should be happy at seeing stocks rise. Prospective purchasers should prefer sinking prices.

Buffett is advising not to be swept up in the present and put money where you can trust for lifetime. Buffett has held many stocks for 20 to 30 years.

“Calling someone who trades actively in the market an investor is like calling someone who repeatedly engages in one-night stands a romantic,” he said.

During unstable times, honest investment is the answer.