[Viewpoint] Long-Term and Diversified Investment Also Essential for Overseas Stocks

Professor Ahn Hee-jun, School of Business, Sungkyunkwan University

Over the past year, the domestic stock market has undergone significant changes not seen in recent times. The KOSPI, which fell to 1,458 points last March due to COVID-19, has more than doubled to currently hover around 3,150 points. The market has been reorganized with a focus on technology stocks, and especially the participation of individual investors armed with liquidity has been a driving force behind the market's rise.

Individuals have also actively invested in overseas stocks beyond national borders. According to the Korea Securities Depository, the trading amount of foreign currency stocks in the first quarter of this year was $128 billion. If the current trading scale continues, it is predicted to increase 2.6 times compared to last year's $198 billion. Although there are burdens such as capital gains tax compared to domestic stock trading, high transaction costs, and exchange rate risks, considering the expansion of investment opportunities and the advantages brought by global diversification, this is a positive phenomenon.

Most of the overseas stock trading in the first quarter was concentrated in the U.S. market. Among individual stocks, in terms of amount, Tesla, GameStop, and Apple were the most traded. Among these, GameStop stock attracted particular attention. GameStop has many questions regarding its valuation and considerable volatility, so caution is required as it can lead to significant investment losses if mishandled.

GameStop stock, which was in the $3?4 range last July, gradually rose in the latter half of the year and traded near $20 at the end of the year, but it did not receive much attention at that time. Centered on the online community site Reddit, individual investors united to launch a stock-buying campaign against short selling, causing the stock price to surge and a short squeeze phenomenon to occur. On January 28, the price rose intraday to $483 but then fell to the $30 range by February 19, experiencing extreme fluctuations.

In this process, the market’s most fundamental economic function of efficient resource allocation?investing in companies that most need funds?and fair pricing were excluded. In a properly functioning market, the fair price of a stock should be its intrinsic value, faithfully reflecting the company’s future performance. Neither the hedge funds holding short positions nor the individual investors leading the stock-buying campaign against short selling likely believed that GameStop’s fair value reached $300?400. The GameStop incident appears to be a farce caused by excessive liquidity supplied for economic stimulus, structural limitations of the market, and the mobilization of individual investors through online communication.

Among domestic individual investors who invested in GameStop, some certainly made significant profits. However, it is presumed that many also suffered losses due to mistimed trades. Stocks with extreme volatility like GameStop inherently increase the probability of losses when focusing on short-term trading.

According to research by Professors Brad Barber and Terrance Odean, individuals underperform institutions in investment results, primarily due to excessive short-term trading tendencies rather than stock selection or timing abilities. Especially in Korea, compared to advanced overseas markets, individual investors tend to hold stocks for excessively short periods.

Long-term investment is desirable in both domestic and overseas markets. However, this does not mean holding highly volatile stocks like GameStop for the long term. Diversification is as important as long-term investment. The effectiveness of diversification has been firmly proven in academia and practice. Nowadays, various funds and exchange-traded funds (ETFs) targeting overseas stocks are widely available, making it easy to implement long-term and diversified investment strategies. Therefore, individual investors should consider these products rather than individual stocks.