[Opinion] To Avoid Repeating the 'Despair of the Ants'

Nam Gil-nam, Director of Capital Markets Office, Korea Capital Market Institute

Recently, the domestic stock market has shown signs of cooling off from the rapid rise during the pandemic period, with the KOSPI index threatened at the 3,000-point level and the KOSDAQ index falling below 1,000 points for the first time in 20 years. While it is impossible to definitively predict future stock price trends, the uncertainties surrounding the stock market both domestically and internationally have significantly increased due to the sharp rise in commodity prices, interest rate hikes by major countries, and expanding geopolitical risks. Consequently, the concerns of individual investors, who massively entered the market during the pandemic, have deepened. Considering the proportion of individual investors in the domestic stock market, their future responses could have a significant impact on the market’s future.

Amid the spread of COVID-19, individual investors engaged in stock investment on an unprecedented scale. The average number of small shareholders in December-settlement corporations, which make up most listed companies, reached 21,444 at the end of last year, a 78% increase from 12,066 a year earlier. These increased individual investors net purchased about 64 trillion KRW worth of stocks last year, nearly six times the previous record of 11 trillion KRW in 2018. This year, individual investors have already surpassed last year’s record by net purchasing 84 trillion KRW worth of stocks through the end of September.

The enthusiasm of individual investors for stock investment during the pandemic period bears similarities to the dot-com bubble era that swept through the mid-1990s. At that time, individual investors worldwide flocked to the stock market in large numbers, with the number of stock investors in the United States alone approaching nearly 100 million. The popularity of NASDAQ led to the emergence of more than ten stock exchanges worldwide imitating NASDAQ. In Europe, EASDAQ was established aiming to emulate NASDAQ, and new market exchanges were created in Germany and France to attract internet companies.

However, the dot-com bubble sharply deflated from early 2000, causing most investors to suffer massive losses. According to a 2002 BusinessWeek column titled “The Betrayed Investor,” U.S. investors lost about 5 trillion dollars, or approximately 30% of their investment assets, since spring 2000. Moreover, in Europe, most exchanges that mimicked NASDAQ or bore the name “new market” eventually had to close. Many individual investors who left the stock market at that time reportedly continued to avoid stock investment. While it is impossible to prevent the losses and discouragement caused by the dot-com bubble collapse, the BusinessWeek column suggests that the decisive factor for many individual investors leaving the market was not just the stock price decline but disappointment caused by major accounting frauds like the Enron bankruptcy and insider trading, which implies that appropriate responses are possible.

Ultimately, to prevent a repeat of the mass exodus of individual investors who surged during the pandemic phase leaving the stock market in betrayal and discouragement as in the past, fundamental efforts to enhance the credibility of the stock market are necessary beyond merely hoping stock prices do not fall or improving trading convenience for individual investors. It is essential to detect various forms of insolvency hidden behind the mask of innovative companies, swiftly sanction unfair trading that deliberately inflates unrealistic expectations using new media, and especially reconsider effective measures to protect small investors from the abuse of power by controlling shareholders.

Nam Gil-nam, Director of the Capital Market Research Institute, Capital Market Division