"No Bear Market Has Lasted Over 3 Years" Long-Term Investment Proven by History... Turn Back the Investment Clock

[Asia Economy Reporter Lee Seon-ae] Among the many proverbs about stock investment that are difficult to practice even when known, the most widely recognized is "long-term investment." Recently, as the domestic stock market plunged sharply and entered an "undervalued zone," securities industry experts have repeatedly advised the need to recall the proverb of long-term investment. Looking back at past records, adopting an investment strategy of holding for more than three years lowers the probability of loss but increases the probability of profit, implying that "selling without practical benefit" should be avoided.

Long-term Holding 'Lowers Probability of Loss'

In the history of the Korean stock market, except for the International Monetary Fund (IMF) foreign exchange crisis (a 44-month bear market), there has been no bear market lasting more than three years. According to the financial investment industry on the 1st, the average time taken to escape from the last three bear markets before the recent bear market was 2 years and 6 months. From January 4, 1980, to this month (as of the 20th), the KOSPI rose on 5,831 days and fell on 5,489 days. On a daily basis, the probability of an increase is 51.5%, and the probability of a decrease is 48.5%.

The story changes when you turn the investment clock. Even holding for just three months raises the probability of an increase to 57.3%. The probability of an increase when holding for one year is 60.9%, and the probabilities for holding three and five years are 75.8% and 82.7%, respectively. The probability of a negative return after five years of investment drops to 17%. Kim Hak-gyun, Head of Research at Shin Young Securities, said, "It is rare for difficult markets to last more than three years, and even if you bought stocks at the peak of the cycle by bad luck, holding them for about three years usually leads to a reversal," adding, "Even if stocks were bought at a mid-to-long-term peak, maintaining optimism over an investment horizon of about 4 to 5 years, mostly around 3 years, is not unreasonable."

The current domestic stock market is undervalued. The price-to-book ratio (PBR) based on confirmed earnings is below 0.9 times. PBR compares a company's market capitalization to its book value, and a value below 1 means the market price is lower than the book value. With the KOSPI down 28% from its peak, the price-to-earnings ratio (PER) based on 12-month expected earnings also falls below 9 times. Roh Dong-gil, Head of Investment Strategy at Shinhan Financial Investment, advised, "Buying stocks when the KOSPI PER is below 9 times has a high probability of positive returns after one year, and the probability of making profits three years later after buying stocks below a PER of 9 times reached 87.4%," adding, "In the low PER zone, the longer the mid-to-long-term investment, the higher the expected performance, so it should be used as an opportunity for rebalancing (restructuring stock portfolios)."

Respond with 'Sectors' Instead of 'Indices'... Build Portfolio After Reflecting Earnings Downgrades

In a bear market, responses should be sector-based rather than index-based. Kim Dae-jun, Head of Investment Strategy at Korea Investment & Securities, said, "Market responses should focus on sectors rather than indices, requiring selective approaches to sectors that may show different trends from the market," advising, "If you choose sectors where profits can increase, you can achieve better performance than the market." The industry highlighted healthcare, IT hardware, food and beverages, and automobiles.

Sectors with favorable inventory conditions are also noteworthy. Choi Jae-won, a researcher at Kiwoom Securities, said, "Looking at major sectors separately, some sectors show a trend of rebounding or bottoming out in inventory turnover indicators," adding, "Electric equipment is the only major sector recording an inventory turnover indicator above neutral, so it deserves attention."

Sectors less affected by or benefiting from high oil prices and inflation are also promising for portfolio inclusion. Industrial goods and energy are considered inflation hedge sectors. Industrial goods and energy sectors such as shipbuilding and transportation recorded the highest year-on-year operating profit growth rates in the second quarter.

Food and beverages, telecommunications, transportation, and refining sectors can also pass on price increases. Entry into dividend stocks is also recommended. Han Ji-young, a researcher at Kiwoom Securities, judged, "Volatile markets can be used as an opportunity to enter dividend stocks as an alternative strategy."

Stocks with a PBR below 1 are also of interest. Despite foreigners continuing to sell, undervalued stocks with a PBR of about 0.5 or less were bought. Stocks included in foreigners' portfolios are Woori Financial Group, KT, LG Display, GS, KT&G, Samsung C&T, and SK. Although there is advice to reduce exposure to the semiconductor sector due to earnings downgrade forecasts, Samsung Electronics remains below a PBR of 1. Yang Hae-jung, a researcher at DS Investment & Securities, said, "Currently, Samsung Electronics has a PBR below 1, which is the criterion for classifying from growth stocks to value stocks," noting, "Historically, the time when Samsung Electronics entered the value stock category was a buying opportunity."

Conservative responses are always necessary. Choi Jae-won of Kiwoom Securities emphasized, "Due to the economic recession, the possibility of downward revisions in corporate earnings forecasts has increased since the second-quarter earnings season," adding, "Since sectoral differentiation is expected due to the readjustment of corporate earnings forecasts, it is necessary to check changes in corporate earnings forecasts starting mid-July and respond accordingly."

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