By Peter S. Kim
Another painful lesson in stock investing was observed last month when Korean retail investors learned a bitter lesson in momentum trading after a group of stocks dropped more than 50 percent in just a few days. According to the local press, the stocks had risen multiple times over the past year through price manipulation by a small group of traders using highly leveraged derivatives.
The price rally ended abruptly when the recent price declines forced margin calls leading to panic selling that snowballed into a collapse, similar to the spectacular demise of Luna cryptocurrency just last year. So far, the investigation led to a group of wealthy individuals who entrusted their trading accounts to a ringleader who then executed what the industry insiders call a "pump and dump" scheme. So far, it is estimated that over 70,000 retail investors were hurt, amounting to 700 billion won ($527 million) losses.
For the broader observer, the collusive scheme amounts to a classic pyramid scheme. The Korean retail investors' irresistible penchant for momentum trading is revealed in this case and registers as another painful lesson on the way to developed economy status. Until the recent correction, KOSDAQ had seen the highest year-to-date returns among major world indexes.
Traditionally, Korean retail investors aww the stock market as an arena for trading and speculation rather than for long-term investing and steady income. This trading culture is also a key reason for the lack of appreciation for dividends, which is considered one of the reasons Korean stocks sell for massive valuation discounts to regional peers.
The speculative investment culture stems from Korea's history of striving for ultra-aggressive growth through cyclical industries. From the early years of industrialization, Korean Inc. had little choice but to enter industries that were highly cyclical and capital-intensive. Backed by government support, Korean companies made bold bets on industries that were highly competitive and severely volatile. But the huge rewards of weathering the cyclical troughs have sown a speculative culture demanding oversized investment returns. The growth that drove the aggressive investment culture is now quickly running out with the aging population and intensifying export competition. The investment culture accordingly will have to adapt to long-term investing seeking stable returns.
Last September, at the peak of the global inflation panic, South Korea's main bourse, the KOSPI, and currency saw a catastrophic fall, resulting in one of the worst-performing indexes. The Korean won dropped to almost 1,450 versus the U.S. dollar. In the midst of market panic, the KOSPI was the center of global concern as it is, for many, the proxy for global growth. As talks of global recession or even stagflation gripped the market, Korean equities faced massive selling from global investors amid talks of a financial market crisis. The concerns of systemic risks soared despite the improving fundamentals of the Korean economy and its financial system.
Since that panic, KOSPI has been one of the strongest performers to date on the back of foreigners returning. In addition to foreign investors, Korea's fund flow has also been helped by retail investors, who, despite the market volatility, have remained supportive throughout. The past 12 months have proven my thesis of the sustainability of retail investors structurally buying financial assets to reduce their heavy ownership of residential property as Korea enters into a decades-long demographic decline. Despite the rising interest rates, Korean retail investors are continuing to buy financial products, gradually replacing residential property ownership.
Typically, the rush into stocks from retail investors is comprised mainly of a speculative type seeking trade-driven, short-term gains. However, there is compelling evidence of incremental buying from "sticky money" that is longer-term in nature. However, that is not to say that retail investors are all comprised of mature and stable types. The recent fund flow analysis suggests that speculative types are still active, as shown by the recent rally in electric vehicle battery stocks. KOSDAQ, Korea's secondary bourse comprised of smaller, tech-focused companies, is one of the best-performing markets in the world.
The KOSDAQ rally was initially sparked by the ChatGPT theme, which seemed to bring the speculative retail crowd back to the market. Despite rising interest rates and talks of a looming global recession, Korean retail investors' "animal spirits" seemed to be returning. Unfortunately, the latest scandal is another reminder of the dangers of buying stocks on momentum and speculative themes. Hopefully, the recent pyramid scheme scandal serves as a lesson highlighting the critical difference between investing and gambling.
Peter S. Kim (peter.kim@kbfg.com) is a managing director at KB Financial Group.
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The price rally ended abruptly when the recent price declines forced margin calls leading to panic selling that snowballed into a collapse, similar to the spectacular demise of Luna cryptocurrency just last year. So far, the investigation led to a group of wealthy individuals who entrusted their trading accounts to a ringleader who then executed what the industry insiders call a "pump and dump" scheme. So far, it is estimated that over 70,000 retail investors were hurt, amounting to 700 billion won ($527 million) losses.
For the broader observer, the collusive scheme amounts to a classic pyramid scheme. The Korean retail investors' irresistible penchant for momentum trading is revealed in this case and registers as another painful lesson on the way to developed economy status. Until the recent correction, KOSDAQ had seen the highest year-to-date returns among major world indexes.
Traditionally, Korean retail investors aww the stock market as an arena for trading and speculation rather than for long-term investing and steady income. This trading culture is also a key reason for the lack of appreciation for dividends, which is considered one of the reasons Korean stocks sell for massive valuation discounts to regional peers.
The speculative investment culture stems from Korea's history of striving for ultra-aggressive growth through cyclical industries. From the early years of industrialization, Korean Inc. had little choice but to enter industries that were highly cyclical and capital-intensive. Backed by government support, Korean companies made bold bets on industries that were highly competitive and severely volatile. But the huge rewards of weathering the cyclical troughs have sown a speculative culture demanding oversized investment returns. The growth that drove the aggressive investment culture is now quickly running out with the aging population and intensifying export competition. The investment culture accordingly will have to adapt to long-term investing seeking stable returns.
Last September, at the peak of the global inflation panic, South Korea's main bourse, the KOSPI, and currency saw a catastrophic fall, resulting in one of the worst-performing indexes. The Korean won dropped to almost 1,450 versus the U.S. dollar. In the midst of market panic, the KOSPI was the center of global concern as it is, for many, the proxy for global growth. As talks of global recession or even stagflation gripped the market, Korean equities faced massive selling from global investors amid talks of a financial market crisis. The concerns of systemic risks soared despite the improving fundamentals of the Korean economy and its financial system.
Since that panic, KOSPI has been one of the strongest performers to date on the back of foreigners returning. In addition to foreign investors, Korea's fund flow has also been helped by retail investors, who, despite the market volatility, have remained supportive throughout. The past 12 months have proven my thesis of the sustainability of retail investors structurally buying financial assets to reduce their heavy ownership of residential property as Korea enters into a decades-long demographic decline. Despite the rising interest rates, Korean retail investors are continuing to buy financial products, gradually replacing residential property ownership.
Typically, the rush into stocks from retail investors is comprised mainly of a speculative type seeking trade-driven, short-term gains. However, there is compelling evidence of incremental buying from "sticky money" that is longer-term in nature. However, that is not to say that retail investors are all comprised of mature and stable types. The recent fund flow analysis suggests that speculative types are still active, as shown by the recent rally in electric vehicle battery stocks. KOSDAQ, Korea's secondary bourse comprised of smaller, tech-focused companies, is one of the best-performing markets in the world.
The KOSDAQ rally was initially sparked by the ChatGPT theme, which seemed to bring the speculative retail crowd back to the market. Despite rising interest rates and talks of a looming global recession, Korean retail investors' "animal spirits" seemed to be returning. Unfortunately, the latest scandal is another reminder of the dangers of buying stocks on momentum and speculative themes. Hopefully, the recent pyramid scheme scandal serves as a lesson highlighting the critical difference between investing and gambling.
Peter S. Kim (peter.kim@kbfg.com) is a managing director at KB Financial Group.
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