3 Things to Tell Beginners in Stock Investing

The Korean stock market these days seems desperate to attract individual investors. This situation is most confusing for individual investors who have just started investing. However, in truth, individual investors who are new to the stock market are investors with a lot of potential.

Because, just like everything else in this world, it's incredibly important to start investing with the right habits and learn the best methods from the very beginning. Therefore, a new individual investor is in a much better situation than most pathetic 'ants' who invest based on flimsy knowledge with ingrained bad habits.I have something I want to say to those individual investors.

1) Value investing is ultimately about buying from a market that has a 10% chance of being wrong in the short term and selling to a market that has a 1% chance of being wrong in the long term.

Those who come here are probably mostly investors who are not interested in trend following and want to do value investing. Of course, defining what value investing is is quite difficult, and it's something I'm constantly thinking about. But to put it simply, it's about buying at a price lower than the value and selling at a price similar to the value (or maybe a slightly higher price if you're lucky?).

Is the opposite also possible? Yes, it is. Selling at a price higher than the value and then buying back at a price similar to the value. We call that short selling. However, I recommend that beginners completely avoid any interest in short selling. So, let's assume we're only looking from a long perspective. Here, one question may arise. When is the stock price at a lower price than its value? Those who have taken finance-related courses in business schools may have heard of the 'efficient market hypothesis.' The reason it's called the efficient market 'hypothesis' rather than the efficient market 'theory' is because it hasn't been proven theoretically, which, in other words, means that there are opportunities for value investing in the market.

Then, what is the probability? I believe that the probability of the market being wrong, i.e., the probability of the stock price deviating significantly from its value, is about 10% in the short term and less than 1% in the long term.Since the market has been so strange lately, many people might not agree with the 10% figure for the short term. It might have increased slightly after the pandemic. But with over 2,500 listed companies on the KOSPI and KOSDAQ, if you take each company out and compare its stock price with its fundamentals, would the proportion of companies whose stock prices are truly incomprehensible, not just at the level of short-term volatility, exceed 10%? If it significantly exceeds 10%, it means that it's quite easy to make a profit through value investing. Then, why is it so difficult to find successful people around us?

Therefore, to make profits through value investing, to put it very simply, you need to repeat the cycle of 'Find the 10% chance of the market being wrong in the short term and buy -> Wait until it becomes a 1% chance of the market being wrong in the long term and sell.' This sentence may seem simple, but it encapsulates a lot of my thoughts. I hope you consider what the numbers 10% for the short term and 1% for the long term absolutely mean, and the relative concept of how it goes from 10% in the short term to 1% in the long term.

Another question might arise here. What if you find the 10% short-term chance well but it happens to fall within the 1% long-term chance? In other words, what if you buy and wait for a long time, but unfortunately, the market is foolish and fails to recognize its true value? I'll answer that in point number 2.

2) Don't interpret subjectively, judge as it is, and then approach it with probabilities.

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What does it mean to not interpret subjectively and judge as it is? It means that you should only think clearly about what's clear and just accept the things that aren't.

Due to the nature of my work, I invest in unlisted stocks as well as listed stocks. Unlisted stocks have low liquidity, so in cases of old shares rather than new shares, the seller is often the majority shareholder or management. Naturally, the first question that comes up when you see a deal like that is, "Why is the majority shareholder or management selling their shares?"

The answers vary. Some may have accumulated a lot of personal debt while struggling to run their business. Others may be facing tax issues due to inheritance or gifts. Some may simply be honest and say they've worked hard for so long and now want to get some cash to buy a nice house or car. All of these are case-by-case situations. And how the company's value unfolds afterwards is also case-by-case. This means that it's bullshit to take a few specific cases where the majority shareholder sold their shares but the stock price went up afterwards and say that the majority shareholder's share sale is not a problem. If you look at it that way, wouldn't there be many more cases where it is a problem?

There are countless and diverse variables that affect stock prices. Externally, there are macro factors, and internally, the company's own capabilities and industry changes all have an impact. Even in the case of the majority shareholder's share sale, it can vary greatly depending on whether a PE firm did a buyout, a strategic investor (SI) bought the shares and is aiming for synergy, or whether no one wanted to buy them and they just threw them onto the market.

How can we judge and predict all these cases? I don't know. So, just leave it as it is and accept it as it is. What does accepting it as it is mean? It's simply a principle. What principle? The principle that insider buying is a good signal and insider selling is a bad signal. When investors invest, unless they're taking over management, the most important thing for a minority shareholder is the alignment of interests with the majority shareholder or management. Just keep that in mind and respond to the rest on a case-by-case basis. Case-by-case means that even if interests are aligned, bad results can occur, and conversely, good results can occur even if interests are not aligned. So, what's needed in this situation? It's a probabilistic way of thinking.

3) 'Positive = Optimistic' is not true. Positive is accepting things as they are.

If the first thing I'd like new individual investors to read is about probabilistic thinking, what's the second?

It's about positivity. Many people still believe that 'Positive = Optimistic.' That's why they use the word 'optimistic' where they should be using 'positive,' and vice versa.

Positive is not optimistic, it's about accepting things as they are. As mentioned in point 2 above, not interpreting subjectively and accepting things as they are is being positive.Therefore, being optimistic when the situation is good is being positive, and conversely, being pessimistic when the situation is bad is being positive.Last year in the stock market, was someone who thought, 'Inflation will eventually fall, and the Fed will cut interest rates, so the stock market's valuation will recover,' a positive person? No, they were just a delusional optimist.

Then, someone might say, 'Stocks ultimately require making a large profit through long positions rather than short positions, so isn't it more advantageous to maintain an optimistic stance than a pessimistic one?' Is that really the case?

Avoiding the 10 days with the highest decline is much more advantageous in terms of compound interest than missing the 10 days with the highest increase. This is because volatility is greater on the downside than on the upside. Hopeful investors fail to avoid the large downward volatility and get hit by it, significantly reducing their long-term compound returns.

Then, if you take advantage of the downward volatility, wouldn't your rate of return be higher, and why shouldn't you short sell? Humans only see what they want to see, so they get stuck in their positions. If you take a short position, you won't be able to shift to optimism even when the market is near the bottom. That's why it's much better to simply maintain an appropriate cash ratio and respond by buying in stages near the bottom.As mentioned above, the biggest advantage of stocks is that the upside is much greater than the downside, and one stock that has gone up significantly can offset the losses of five stocks that have experienced a downside and still have some left over. Then what about risk management? As mentioned above, you can use probabilities. What does using probabilities mean? It means that no matter how confident you are, don't go all-in, that's it.

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