Stock Soars After I Sell... Why Can't I Make Money From Stocks? [Inside Chodong]

Analysis of 200,000 Individual Investors by the Korea Capital Market Institute
Individuals Quickly Sell for Small Gains, but Hold on to Losing Stocks
Frequent Losses from Easy Investments in Lottery-Type Stocks and Soaring Shares

Changhwan Lee, Deputy General Manager of Securities and Capital Markets Department

A few years ago, Kim, a friend who was new to stock investing, jumped in after hearing good things about Samsung Electronics, investing several million won when the price was in the 80,000 won range. Before long, the share price dropped to the 50,000 won range, and his account showed a 30% loss. He was stuck, unable to make a move, and ended up forgetting about his investment for several years. Finally, as the era of artificial intelligence (AI) arrived, his principal was restored.

Once his principal was recovered, his returns quietly surpassed 20%. Kim had even heard rumors that Samsung Electronics might be doomed, so he thought this was a good enough gain and hit the sell button. But right after selling, the price began to skyrocket, at one point breaking the 200,000 won mark. After being stuck for three years, he now blames himself for selling after settling for a 20% profit.

When Kim shared this story with those around him, everyone said it sounded just like their own experience. It seems hard to find a Korean stock investor who has never been stuck holding Samsung Electronics, and there must be many who regret not buying when the price soared this year.

Why is it so hard for individual investors to make money in stocks? According to an analysis by the Korea Capital Market Institute of data from about 200,000 individual investors in the Korean stock market, individuals tend to quickly sell profitable stocks while holding onto losing stocks for much longer. Researchers call this the "disposition effect."

Why do individuals hold onto losing stocks? Daniel Kahneman, a leading behavioral economist and Nobel Prize winner, explained this as "loss aversion." He believed that people feel the pain of losses more intensely than the pleasure of gains. The reluctance to sell comes from the idea that a loss isn't real until you sell, allowing people to avoid the pain of acknowledging a loss. Kahneman said, "Investors are overconfident when buying stocks but become timid when selling them."

The Korea Capital Market Institute's analysis found that Korean individual investors generally trade excessively and exhibit speculative behavior. These irrational investment habits lead to high transaction costs, increased investment risk, overreactions and underreactions, ultimately resulting in poor investment performance. With smartphones making trading easier and the advent of alternative trading systems extending trading hours, trading frequency has only increased.

Compared to foreign investors or domestic institutions, individual investors in Korea also have a higher proportion of "lottery-type" stock trades. Rather than relying on sophisticated analysis, they often depend on luck and invest in highly volatile stocks—a trend especially common among male and younger investors. Those with a strong preference for lottery-type stocks tended to have low diversification, high trading frequency, and poor investment results. There are many so-called "prayer traders," who buy stocks that are popular and simply hope they will rise.

Among the sayings of those who have survived a long time in the stock market, there is, "Cut your losses short and let your profits run." Experienced investors cut their losses quickly when things don't look good and hold on for the long term when prospects are positive. If a fundamental investment idea breaks down, it's better to exit quickly—even with some losses—before suffering even greater damage. But if the investment thesis is intact and the company has good profit forecasts, it is better to resist the urge to realize quick profits and hold the stock for a longer period.

Seasoned investors fear the opportunity cost lost when they are forced into long-term holding due to failing to cut losses in time. They warn against becoming "involuntary long-term investors"—those who buy without studying and get stuck, then try to justify it by claiming to be value investors.

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