[Lee Jong-woo's Economic Reading] In the Era of Individual Investors, We Were Not Solid

As COVID-19 emerged and stock prices rose, claims surfaced that a "new era of individual investors" had begun. There was some basis for this. Individual investors bought stocks in response to sales by foreigners and institutions. Thanks to this, customer deposits, which were less than 30 trillion won before the COVID-19 outbreak, increased to 74 trillion won within a year. Considering that individual investors absorbed 64 trillion won worth of sales from foreigners and institutions during that period, nearly 100 trillion won of individual funds entered the stock market. The number of young investors also increased. Since a generation well-versed in stocks participated in the market through social networking services (SNS) and YouTube, it was expected that a different form of investment from the past would take root. And two years have passed. What was the outcome?

The KOSPI index rose from 2250 before COVID-19 to around 2600 now, marking a 15% increase over two years. This is a modest result compared to the global attention it received. The proportion of individual investors in the market has decreased. Investment performance was also poor. Individual funds began entering the stock market in earnest from November 2020, when the KOSPI surpassed 2200. Since the current stock price is not much different, most investors, except those who bought stocks early in the rise, likely incurred losses. Considering that investment amounts tend to increase as stock prices rise, even those who bought early may not have made profits. This indicates that individual investors failed to establish a foothold in the market, and since they suffered losses, their aversion to the stock market likely increased compared to before COVID-19. Rather than accelerating the era of individual investors, it is more likely to be delayed.

The new era of individual investors was not built on a solid foundation. Above all, the funds entering the stock market were less than during previous booms. Stock prices began to rise in October 1998, just one year after the foreign exchange crisis. The KOSPI, which was at 280, surged to 1050 eight months later, marking the largest increase in the shortest time in the history of our market. Stock-type funds such as "Buy Korea" played a role in driving stock prices up by bringing in nearly 1 trillion won of individual funds daily. Since the market capitalization was about 300 trillion won in 1999, 1 trillion won then would be equivalent to over 7 trillion won in today's market capitalization. A similar event occurred in 2005. Individual investors also led the rise then, with nearly 1.5 trillion won flowing into funds daily, pushing the KOSPI above 2000. Adjusted to today's value, 1.5 trillion won in 2005 exceeds 4 trillion won. Although individual investors' money flowed into the market significantly right after COVID-19 in 2020, the scale was less than half of past booms. The era of individual investors was not about to begin.

Expectations for the young investing generation have existed during every boom. New investors are inevitably centered on the younger generation because they had not previously invested in stocks. Past new investors also accumulated knowledge and information about investing through various channels, so there was no significant difference from 2020.

What needs to be done for the era of individual investors to open? Above all, events like those of the past two years must not recur. As stock prices rose, securities firms, media, and new media were desperate to attract investors. This was for commercial purposes, but as expectations inflated and then deflated, aversion to the stock market increased instead. The KOSPI started at 100 in 1980. Now at 2600, the overall performance is not bad. During this time, our market has experienced a stair-step rise rather than a straight line. After the KOSPI first surpassed 100 in the mid-1970s, it took seven years to completely move out of that index range. It took even longer to surpass 1000 and 2000, requiring 16 and 12 years respectively. The stock market has repeated rapid rises over 2-3 years and long-term slumps exceeding 10 years. This pattern results from energy being excessively concentrated during price rises and then quickly dissipating. When stock prices move like this, individual investors cannot stay in the market long. If one must wait over 10 years to recover the principal after a bad investment, the cost is too high. To encourage more individual investors to participate, it is necessary to prevent excessive energy concentration during price rises, but the behavior of securities firms, media, and new media over the past two years was the opposite.

Low stock investment returns are also a problem. If you had bought 10 million won worth of stocks in 1990, its value would now be about 32 million won, based on the representative KOSPI index. This corresponds to an average annual compound growth rate of about 2.3%. If you had invested the same amount in bonds during the same period, its value would now exceed 84 million won, 2.6 times higher than stocks. The higher interest rates before the foreign exchange crisis were a decisive reason why bonds outperformed stocks, but even if the baseline is shifted to 2011, bonds still outperform. Over 11 years, stocks rose 18%, while bonds earned 31% in interest alone. Government bonds are a representative risk-free asset. They have a low probability of default and predictable returns, making them more stable than any other asset. Stocks are different. They can incur losses, and the probability of returns matching expectations is lower than the probability of not meeting expectations. If risky assets yield less than risk-free assets, individual investors have no reason to invest in them.

For the era of individual investors to open, stock investment returns must be at least higher than bonds. Otherwise, investors will repeatedly enter the market briefly when prices rise and returns increase, then exit when prices stagnate. Companies must deliver good performance and establish transparent governance. Without a shareholder-friendly environment, liquidity alone cannot change the market.

The proportion of stocks in household assets relates to financial behavior. Except for the United States and the United Kingdom, no country has capital markets as the center of finance. The same applies to us. It is difficult for individuals to become the center of the stock market, and to overcome this and elevate stocks to the center, the attractiveness of stocks must increase. Until then, no matter how much one claims the era of individual investors has arrived, it remains an empty statement.

This content was produced with the assistance of AI translation services.