Individual Investors Stick to Direct Investments

Lee Seong-jae, 31, a graduate student majoring in finance, decides which stocks to buy after a thorough analysis of the company’s financial statement and growth outlook. Last year, he invested 35 million won and earned a return of 100%.

“I invest in stocks in order to put theory into practice,” Lee said.

Office worker Shin, 27, bought stocks worth 2 million won last year immediately after being told that a stock listed on the KOSDAQ would soon rise. After temporarily increasing from 1,800 won, the share price began falling and eventually nosedived to 200 won. She tried to console herself, saying, “It’s comforting that I invested only 2 million won.”

As the average Korean household buys at least one fund product, indirect investment has widely spread. However, the stock market is still flooded with individual investors deciding for themselves which stocks to buy.

Individual investors who go against the current norms differ from professional analysts whose investment strategies depend on thorough analysis. These investors also invest for diverse purposes. Some invest to learn how the economy operates while others invest to gain a windfall.

○ Learn through Investment

According to the Korea Securities Depository, there were 3,052,352 individual investors. On average, each of them held 2.8 stocks in late-2006. In the Korean stock market, individual investors make up 53.2% of all shares held, far exceeding institutions with 29.4% and foreign investors with 17.4%.

Despite common belief, it is not true that most individual investors have been losers in the stock market.

The Korea Exchange analyzed the growth rate of the top 50 stocks bought by individual investors, institutions and foreigners. According to the survey, institutional investors earned the highest return of 174%. Surprisingly, individual investors earned a return of 135.11%, far greater than the 89.67% of foreign investors.

Lee Jae-gwang, general manager of securities operation team of KDB Asset Management, said, “Lots of individual investors have outstanding capabilities that are comparable to analysts. Those investors gained a lot in last year’s bull market.”

Not only do returns differ by investor capabilities, but each individual invests in the stock market for different reasons.

Many college students choose to directly invest to learn how the economy operates.

Sogang University’s management student Kim Dong-hyeon, 23, joined S.R.S., a club that shares investment strategies. He explains, “Club members collect money and invest it. The research team and investment team under the club hold weekly meetings to decide investment strategies.” He added, “By investing into the stock market, I have been more interested in the overall economy and have learned about the strengths and weaknesses of many firms.”

○ Stock Investment Good for Both Money and Fun

Stock investment has become an everyday thing for many individual investors. These kinds of investors indulge in the excitement of investing. At the same time, however, they gain lots of money through their investment.

Individual investor Kim, 73, has invested in the stock market for 30 years. Every morning, he goes to the floor of the securities firms located at Yeouido, Seoul. He mainly trades 20 stock items and has even memorized code numbers of most stocks.

Mr. Kim, who buys and sells stocks several times a day, invested 300 million won and earned a return of 10% last year. He said, “I’ve gotten good returns by investing in stocks that benefit from President-elect Lee Myung-bak’s election and those related to investments in North Korea.”

Kong, 26, quit his job and has become a fulltime investor. He exclusively deals with derivatives such as equity linked warrants, futures and options. He said, “I was employed for one year after graduation. But, I quit because I love to invest by myself.” He added, “If I have stocks, I cannot help but lose money in a bearish stock market. However, if I have derivatives, I can earn money even in a bearish market. That’s why I stick to dealing with derivatives.”

Hoping to get a return of 1% per day, Mr. Kong focuses on short-term buys and sells. Last year, he increased his fortune to 60 million won, starting with seed money of 15 million won.

One thing that individual investors have in common is a strong belief that “stocks are the best investment destination.”

Lee, 41, who teaches students at a private academy, invests in stocks to pay back debt he drew to buy his house. He earned 20 million won after investing 200 million won in a stock last year.

“My investment principle is to invest in the largest firm in each sector and sell the stocks when the return reaches 20%,” Lee said. “I will stop investing in stocks when I pay back all my debt.”

○ Go Abroad

Recently, increasingly more individual investors are directly investing into overseas stock markets, including those in China and Japan.

Office worker Cho, 36, began investing in Chinese stocks in May 2007. In charge of work related with China, he said, “I began investing in China since I wanted to learn more about the country. I have increased my portfolio to 25 million won from 15 million won.”

Kim Woo-seok, head of overseas stock management team of Good Morning Shinhan Securities, said, “In the past, only those who had relatives in a certain country invested in that market. Recently, however, increasingly more individual investors are choosing to directly invest in overseas stocks after having gained large profits through overseas fund products.”

The number of individual investors investing directly in overseas stocks via Good Morning Shinhan Securities has significantly increased from 2,500 early last year to the current 10,000.

Market experts says that individual investors who stick to direct investment, regardless of the recent preference for fund products, are strongly convinced that “they can do it better themselves.”

Lee Jae-gwang of KDB Asset Management warned, “Even individual investors with stunning investment capabilities cannot easily yield a return exceeding the growth rate of the KOSPI due to the lack of information. They may also suffer big losses when the market goes downward.”

aryssong@donga.com