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

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A few years ago, my friend Mr. Kim started investing in stocks for the first time. After hearing that Samsung Electronics was a good bet, he impulsively invested several million won when the stock was trading around 80,000 won. Before he knew it, the price had fallen to the 50,000 won range, and his account showed a negative 30% return. Unable to do anything about it, he left it untouched for years. Finally, with the advent of the artificial intelligence (AI) era, his principal was recovered.

Once his principal was restored, his returns soon exceeded 20%. Although Mr. Kim had even heard rumors that Samsung Electronics might go bankrupt, he thought a 20% return was good enough and pressed the sell button. However, right after he sold, the stock price began to soar, at one point surpassing 200,000 won. After being stuck for three years, he now blames himself for selling while satisfied with just a 20% gain.

When he shared this story with others, everyone said it felt like their own experience. It's hard to find a domestic stock investor who hasn't been stuck in Samsung Electronics at some point, and many probably regret not buying when the price surged this year.

Why can't individual investors make money from stocks? According to the Capital Market Institute, which analyzed the data of about 200,000 individual investors in the Korean stock market, individuals tend to quickly sell stocks that have made gains but hold on to loss-making stocks for a long time. Researchers called this the "disposition effect."

Why do individuals hold onto losing stocks for so long? Professor Daniel Kahneman, a renowned behavioral economist and Nobel laureate, explained this as "loss aversion." He argued that people feel the pain of losses more acutely than the joy of gains. Because of the belief that a loss is not real until the stock is sold, people avoid the pain of loss. Professor Kahneman said, "Investors are overconfident when buying stocks, but become timid when selling them."

The Capital Market Institute's analysis showed that domestic individual investors tend to trade excessively and exhibit speculative behaviors. These irrational investment habits lead to high transaction costs, greater investment risk, and both overreaction and underreaction to market events, ultimately resulting in poor investment performance. As trading has become easier via smartphones and alternative trading systems have increased trading hours, trading frequency has risen even further.

Compared to foreign investors or domestic institutional investors, individual investors also invest more heavily in so-called lottery-type stocks. They tend to rely on luck rather than thorough analysis, favoring highly volatile stocks. This behavior was especially frequent among male investors and younger investors. Investors who preferred lottery-type stocks tended to have lower portfolio diversification, higher trading frequency, and poorer investment performance. In other words, there are many so-called "prayer traders" who buy hot stocks simply because others say they're good, and then just hope for the best.

One of the sayings among those who have survived in the stock market for a long time is "cut losses quickly, let profits run." Experienced investors cut their losses decisively if things don't look good, but hold onto winners for the long term if the prospects remain favorable. The idea is that if your fundamental investment thesis is broken, it's best to exit early-even at some loss-before the damage gets bigger. Conversely, if your thesis holds and the company’s earnings outlook is strong, you should resist the urge to take quick profits and hold for longer.

Experienced investors fear the opportunity cost lost when they fail to cut losses in time and end up in involuntary long-term investments. The lesson is not to become an involuntary long-term investor by neglecting your own research, buying at high prices, and convincing yourself you're a value investor after getting stuck.

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