Get the schemers out of your way

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

A small manufacturer based in Paju, Gyeonggi became a target by a scheming group in October 2006. The company produced bearings that go into cars and industrial machinery. It generated a quarterly revenue of slightly above 5 billion won ($3.8 million) and operating losses. Despite few factors that could elevate the outlook for the Kosdaq-trading company, LuBo Industries, its stock price rose 2 to 6 percent every day.

LuBo’s gains were different from the usual extraordinary movement of stocks under pump-and-dump schemes where stocks hit the daily ceiling on fake news. Retail investors began to flock to the LuBo stock extending gains despite the company’s announcement that there was few factors that could affect the stock price.

The stock gain accelerated under the retail fad. More individual investors jumped in when schemers began to dump their holdings. The stock price zoomed from a little over 1,000 won to over 50,000 won in just six months with market cap expanding to a whopping 500 billion won. The scam came to an end when prosecutors began to investigate the affair. The stock shriveled to 2,000 won per share in a month.

The LuBo fraud was orchestrated by multi-level marketing schemer JU which drew 150 billion won from individual investors and created 700 accounts under borrowed names to manipulate stock price. JU members were brainwashed through IR seminars and mobilized to recruit individual investors. A number of investors lured to buy LuBo shares were all burned.

At Berkshire Hathaway’s annual shareholder meeting in Omaha, Nebraska, Chairman Warren Buffett advises stock investors, “You should never have a night when you’re worried about investing.” [REUTERS/YONHAP]

The pump-and-dump stock scheme triggered by the unloading of nine stock holdings by Societe Generale Securities, which was carefully organized for three years, quite resemble the LuBo scandal of 17 years ago. An extraordinary group of people methodically bought the stocks after recruiting enormous amount of funds. Also, the stock prices were elevated over a lengthy period to avoid attention by authorities. That’s not all. The stocks were manipulated through a matching scheme — matching orders of a trade under pseudo names to make the trade look normal. Such practices are being repeated in the stock market.

Although the Bank of Korea has raised the base rate for more than a year to tame inflation, the market is still lush with liquidity. Money supply that declined in January for the first time in nearly 10 years increased again in February. The average balance of M2 — the total money supply — added 12.7 trillion won from the previous month to reach 3.8 quadrillion won in February. In January, the balance had lost 3.3 trillion won. The funds increased as the money parked in accounts of fixed rates amid tightening in the U.S. migrated back to the stock and bond markets.

Securities companies have been receiving calls and visits inquiring when would be the best time to make investment in securities. Many offered to put their money in high-risk and high-yield products. Greed is bred from the shortage of investment targets despite lush liquidity. The CNN Business Fear & Greed Index — which measures seven indicators to gauge the extremity of investor sentiment on the Wall Street through the scope of stock volatility — shows signs of greed.

When the market is volatile, some make or lose big money. But people pay heed mostly to the success stories of the few. They are drawn into the market with the temptation to make quick and big cash without thorough examination and analysis. Schemers flourish although they can be eventually caught. The Capital Market Act stipulates the seizure of the fortune gained through unfair practices such as stock manipulation. But it does not specifically define how to calculate the unjust profit. As a result, individual investors make an easy prey to them.

Legendary investor Warren Buffett who shares his investment wisdom and outlook during the annual shareholders’ meeting of Berkshire Hathaway offered advises against making “major mistakes” in investments. “You should write your obituary and figure out how to live up to it … You just want to make sure you don’t make any mistakes that will take you out of the game or come close to taking you out of your game … You should never have a night when you’re worried about investing,” advised the 92-year-old investment guru.

His 99-year-old Berkshire Hathaway partner Charlie Munger advised investors to “spend less than you earn, and invest shrewdly, and avoid toxic people and activities and try to keep learning all your life” and to get “the toxic people, who try to fool you or lie to you, the hell out of your life.” The cautions from the investment giants is to stick to fundamentals when investing.