[Struggling Ant] ① January 'Bull Market' Feels Distant... Foreigners' Returns One-Fifth Amid Inverse Product Concentration

Analysis of Individual Accounts at Major Domestic Securities Firms
Betting on Market Decline... Investment Mistake in Inverse and Leveraged Products
Lack of Investment Capability and Influence of Psychological Factors

[Asia Economy Reporter Lee Seon-ae] In January this year, the KOSPI enjoyed the largest 'January effect' in 22 years and rallied. The KOSPI rose 8.96% over the month of January, the highest figure in 22 years since 2001 (22.45%). Especially as of January 27, it recorded an 11.6% increase. In terms of monthly fluctuation rate, this is the highest rise in about two years since November 2020, when it surged 14.3% in one month. Did individual investors also benefit from this 'bull market'? Contrary to foreign and institutional investors, individual investors received a disappointing report card even during the January 'rabbit rally.' This was because they were weighed down by fears of an economic recession and expected the stock market to decline, flocking to inverse products that bet on a falling market.

On the 8th, Asia Economy analyzed the returns of 666,689 individual investor accounts that traded domestic stocks in January, commissioned by a major securities firm, A Securities. The average return was 7.17%. The turnover rate was recorded at an average of 31.3%. The turnover rate indicates how frequently investors bought and sold stocks. A higher turnover rate means more frequent 'day trading.'

Although individual investors repeatedly bought and sold without rest, their returns lagged behind the KOSPI's rise of 8.96% and the KOSDAQ's rise of 10.27%. The average returns by age group were similar: under 20 (7.15%), 20s (7.12%), 30s (6.98%), 40s (7.17%), 50s (7.34%), and 60 and above (7.14%). While no age group recorded losses, all fell short of the market returns.

By gender, males (6.91%) had lower average returns than females (7.50%). It is interpreted that frequent day trading prevented males from achieving sufficient profits even in profitable zones. The turnover rate for males (34.8%) was higher than that for females (26.7%).

Although their returns did not meet market returns, individual investors still recorded positive returns in January. However, their performance last year was dismal. Calculating the investment returns of 2,452,443 individual accounts that bought or sold domestic stocks last year showed an average loss of 25.4%. This loss exceeded the KOSPI's annual decline of 24.89% last year.

However, even in the rising market of January, individuals were relatively sidelined. Foreign and institutional investors had significantly higher returns. Calculating returns based on the top net purchase stocks by investor type, foreign and institutional investors recorded returns 5 to 8 times higher than individuals. The average return of the top 100 net purchase stocks by foreigners in January (calculated using the average purchase price per stock in January (net purchase transaction amount/net purchase volume) and the closing price on January 31) was 3.31%. They focused on buying semiconductor and bank stocks, and most of these net purchase stocks rose during this period.

The institutional investors' performance was even better. The average return of their top 100 net purchase stocks was 4.66%. The top net purchase by institutions in January was 'KODEX Leverage,' with purchases worth 242 billion KRW. The average return was 4.4%.

The average return of the top 100 net purchase stocks by individuals was 0.66%, barely achieving positive returns. The top net purchase by individuals in January was ‘KODEX200 Futures Inverse 2X’ (710.8 billion KRW). The average return of KODEX200 Futures Inverse 2X was -4.5%.

Excluding January 30 and 31, when the KOSPI ended its consecutive rise and fell more than 1% each day, as of January 27, the average return of the top 5 net purchase stocks by foreigners was 5.1%. For institutions, it was 4.8%. Individuals only achieved 2.8%. Although they made profits, they still lagged behind foreigners and institutions.

The biggest reason for these results was stock selection. In particular, the choices of institutions and individuals in January were completely opposite. Institutions predicted the KOSPI would rise and invested in leverage to earn double returns. In contrast, individuals anticipated a decline in the KOSPI and bought many inverse products. Foreigners, seeing the bottom, concentrated on buying semiconductor stocks. Institutions invested in overcorrected growth stocks.

Individuals weighed on the market decline. The top net purchase ETF by individuals was based on the KOSPI 200 index and yields 2% profit when the index falls 1%. It is called 'Gopbus' because it is twice the inverse that profits when stock prices fall. Having experienced a fearful market last year, psychologically anxious individual investors expected the index to decline this year due to corporate profit decreases from economic recession, interest rate hikes, and inflation.

Experts interpreted these divergent choices as individuals relying more on external noise (opinions, etc.) than foreigners and institutions and lacking information power. Kim Min-ki, Capital Market Research Committee member, and Kim Jun-seok, senior research fellow, pointed out, "Individuals lack investment capability, are easily influenced by psychological factors, and have shown excessive trading and poor investment performance, which has not changed even after COVID-19."

They added, "Investment performance is poorer for small investors and frequent traders, which is presumed to be related not only to high transaction costs and low diversification but also to inefficiencies in selecting investment targets and timing." In fact, the average turnover rate of individual investors in January was over 30% for all age groups except under 20 (21.5%) and 30s (28.7%). The average turnover rate last year was 501%. The lowest was under 20 (275%), followed by 20s (449%) and 30s (467%). The highest turnover rates were in the 50s (557%), 60 and above (541%), and 40s (529%).

Researchers Kim Min-ki and Kim Jun-seok advised, "To improve individual investors' investment behavior and enhance investment performance, it is necessary to increase the utilization of indirect investment methods and professional investment advice."