When it falls, it plummets by 80-90% every day or two… You need to decide where to invest based on your style.
“People are really buying American stocks these days. There are many people who start with American stocks when it comes to stock trading for the first time. “I think American stocks are the trend.”
My answer to this. “Many people who trade in American stocks have only started trading in the past few years, but that’s because they don’t yet know how scary it is. It looks good right now because the U.S. stock market is on the rise, but when U.S. stocks fall, they fall drastically. “After experiencing that, many people will come back thinking that Korean stocks are better.”
The U.S. stock market has clear advantages, but…If you ask me which is better, American stocks or Korean stocks, the answer is clear. I like US stocks better. There are three main reasons why I avoid Korean stocks.
The first is paid-in capital increase, which occurs all the time. Almost every time the stock price rose, a paid-in capital increase was announced. Not all companies will be like this. However, over the years that I have been investing in Korean stocks, I have been ‘subjected’ to paid-in capital increases several times. When a paid-in capital increase is announced, stock prices plummet. If you experience something like this a few times, you’re bound to lose your affection for it, right?
The second is a transaction suspension. If something happens to a company and the stock price seems likely to plummet, trading will be halted. Also, trading is halted when the stock price seems to be rising too much. Nominally, it is said to be to protect investors. But is a plunge in stock prices more harmful to investors, or is a trading halt more harmful? What is even more incomprehensible is that trading is halted even when stock prices skyrocket. In the eyes of the financial authorities, the stock price of this stock must be at a certain level, but if it rises above that level, they consider investors to be investing irrationally and suspend trading. I put a lot of thought into buying stocks that I thought were good, but if I got hit with a trading halt a few times, I lost interest in them.
The third is the stock price level that is formed regardless of performance. Stocks that move according to political issues or trends may fluctuate regardless of performance, but in general, stock prices should rise in the long term in proportion to the degree of performance improvement. However, among Korean stocks, there were quite a few cases where their stock prices did not rise no matter how good their performance was. One of the reasons is inheritance tax. For companies preparing for inheritance, inheritance taxes rise further when stock prices rise. These companies have a strong incentive to prevent their stock prices from rising. However, when analyzing a company, should I also look into how old the chairman (major shareholder) is and what the inheritance plan is? In Korea, corporate divisions and mergers are actually carried out according to inheritance plans, so if you want to invest in stocks, you cannot help but consider inheritance issues. Betting should not be placed on games where there are many players who do not play hard to win. This is the main reason why I got out of the Korean stock market.
Immediate exit of companies with no growth potential
The American stock market did not have the problems that disappointed me in the Korean stock market. Although I have owned various U.S. stocks for over 10 years, I have never experienced a plunge in stock prices due to a paid-in capital increase. The same goes for trading suspension. Although trading has been halted for a few days due to administrative issues such as corporate mergers or stock splits, trading has never been suspended due to a plunge or surge in stock prices. And there is confidence that American companies are trying to increase their stock prices. In American companies, executives including CEOs, major and minority shareholders, and workers all benefit when stock prices rise. So there is trust that they will not use tricks to lower the stock price after listing.
In other words, the reasons why I do American stocks can be summarized as there is no decline in stock prices due to paid-in capital increase, no trading suspension, and no listed companies that do not want their stock prices to rise. This is not because American stocks have much higher returns than Korean stocks.
If you own US stocks, you’ll make more profits? Regardless of the sport? Could stocks be that easy? If U.S. stock returns were that good, every American who invests in the U.S. would become rich. That doesn’t happen. Investing in stocks in any country is difficult. The reason U.S. stocks look good right now is because the U.S. stock market has been on the rise in recent years. It is difficult to think that “this is how it is” or “US stocks are the answer” when something is good in the short term.
In my view, the scariest thing about American stocks is that when they fall, they fall endlessly. In the case of Korean stocks, they may be considered ‘miscellaneous stocks’, but there is a certain limit to the decline of stocks of large corporations. Even if the stock price falls due to poor performance or management issues, the decline is only 20-30%. A 50% drop is truly enormous, and it is difficult to find stocks that fall that much in the short term, even if it is long term.
Not in America. No matter how promising or large a company it is, if it incurs unexpected losses or becomes embroiled in corruption controversy, it will plummet. The same applies when questions arise about the business model. At this time, plummets of 80-90%, not 50%, often occur.
As for Korean stocks, we can expect things like, “It has fallen this much, so it won’t fall any further,” or “The fall is excessive, so it will rebound.” But you can’t expect that from US stocks. It has fallen tremendously, but it falls further, and no matter how big the drop is, there is a further decline. Recently, there is great anxiety about what will happen to Samsung Electronics’ semiconductor business. Although it has had overwhelming competitiveness so far, there are doubts about its ability to survive in the new semiconductor environment. However, despite this uncertainty, the stock price has only fallen 35% over the past six months. There is talk everywhere that Samsung Electronics’ stock has plummeted, but in reality, it has only fallen that much. What would it be like in the United States? The moment future competitiveness and viability are questioned, 50% may simply drop. Rather than falling gradually over six months, it immediately plummets 50% within a day or two, or at most a week. That possibility always exists in the U.S. stock market. So, I think we should not touch exchange-traded funds (ETFs) that track stock prices, such as Tesla, by more than two times. According to our common sense, it is impossible for the stock of such a large company to be cut in half in a day or two. So, I think the 2x tracking ETF is also safe. But America is different. It is possible for Tesla to suddenly be cut in half one day. If the stock price is cut in half, the 2x leverage will result in loss of all principal and liquidation.
The U.S. stock market continued to rise over the long term. This is an outstanding performance compared to any other country. However, behind the fact that U.S. stocks appear to be rising so much, there is an atmosphere of mercilessly shutting out poorly performing companies and zombie companies. To protect existing investors, even companies with low growth potential are kept alive as listed companies? Korea does, but not the United States. As a listed company, it simply eliminates worthless stocks and continues to accept newly profitable companies. So overall, it just looks like stocks are continuing to rise. If you look at individual companies, there are a huge number of companies that plummet and go out of business.
US stocks are the answer for diversified and long-term investment
So, I think that American stocks are no better than Korean stocks if you only invest in a few companies or make short-term investments. In fact, there is a greater possibility of a collapse than in Korea. If you take a long-term approach by diversifying investments in several companies, focusing on high-quality companies, American stocks are clearly more advantageous than Korean stocks. Otherwise, American stocks are riskier and not much better than Korean stocks. In particular, some people make short-term bets with U.S. stocks, but if that’s the case, short-shots with Korean stocks cost less in transaction fees and taxes.
I am a long-term investor with diversified investments. Therefore, the U.S. stock market, which does not have issues such as paid-in capital increase or trading suspension, is a much better investment destination. However, it is difficult to say that the United States is better for people who make concentrated investments, short-term investments, trend investments, and chart investments. So, let’s not buy into American stocks blindly thinking that the U.S. stock market is good. I think which is better depends on your investment style.
Dr. Seongrak Choi…
Graduated from Seoul National University’s Department of International Economics and earned a doctorate in public administration from Seoul National University’s Graduate School of Public Administration and a doctorate in business administration from Seoul National University Graduate School of Science. He worked as a professor of business administration at Dongyang Mirae University, but retired after making 5 billion won in assets through investments in 2021 and is living as a Fire family member.
*If you search and follow ‘Magazine Jin Donga’ and ‘Two Avengers’ on YouTube and portal sites respectively, you can find a variety of investment information such as videos in addition to articles.