The Korean stock market is currently desperate to attract individual investors. This situation is most confusing for those who are just starting to invest. However, individual investors who are just starting out are actually investors with a lot of potential.

This is because, as with everything in the world, investment is also extremely important to learn from the beginning with the right habits and good methods. Therefore, a new individual investor is in a much better situation than most of the pathetic ants who invest based on their own knowledge after being ingrained with bad habits.I have something 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.

Most of the people who come here are probably not interested in trend following, so they are likely investors who want to do value investing. Of course, it is very difficult to define what value investing is, and it is something I am constantly thinking about. But to put it simply, it is buying at a price lower than its value and selling at a price similar to its value (or perhaps a slightly higher price if you're lucky).

Is the opposite possible? It is. Selling at a price higher than the value and buying back at a price similar to the value. We call it short selling. But I recommend that beginners completely stop paying attention to short selling. So, let's just look at it from the long perspective. One question might arise here. When is the stock price below its value? People who have taken finance courses in business management may have heard of the "efficient market hypothesis." The reason why it is called the efficient market "hypothesis" and not the efficient market "theory" is because it has not been proven as a theory. In other words, it means that there are opportunities for value investing in the market.

Then, what is the probability?I think 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 1% or less in the long term.The market is so suspicious these days that many people may disagree with the 10% opinion in the short term. It may have gotten a little higher after the pandemic. But with over 2,500 stocks listed on the KOSPI and KOSDAQ, if you take out each company and compare the stock price to the fundamentals, would the proportion of stocks that are at a level that is not just short-term volatility but really incomprehensible really exceed 10%? If it exceeds 10%, it means that it is quite easy to make profits through value investing. So why is it so difficult to find successful people around us?

Therefore, to make profits through value investing, simply put, you have to repeat the process of "Find a 10% chance that the market is wrong in the short term and buy it -> Wait until the market's chance of being wrong in the long term is 1% and sell it." This sentence may seem simple, but it contains many of my own thoughts. I hope you think about what the numbers 10% in the short term and 1% in the long term mean absolutely and what the relative concept of decreasing from 10% in the short term to 1% in the long term means.

Another question can arise here. What if you find a 10% chance in the short term but the market is stuck at 1% in the long term? In other words, what if the market is stupid and doesn't recognize its value even after you buy and wait for a long time? I will answer this question in point 2.

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

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What does it mean to judge as it is without subjective interpretation? It means that you should think clearly only about what is clear, and just accept the rest as it is.

Due to the nature of my work, I invest a lot in unlisted stocks as well as listed stocks. Unlisted stocks are less liquid, so in the case of old stocks, not new stocks, the entity selling the stock is often the controlling shareholder or management. Naturally, the first question you ask when you see this kind of deal is, "Why is the controlling shareholder or management selling the stock?"

The answers to this question vary. There may be cases where the business has been difficult to run, so they have a lot of personal debt. Or there may be cases where there are tax issues due to inheritance or gifts. Or there may be cases where they simply say that they've been working hard for so long, and they want to take some cash to buy a nice house and a nice car. All of these are case-by-case. And how the company's value unfolds afterwards is also case-by-case. This means that it is bullshit to bring up a few specific cases and say that the controlling shareholder's sale of shares is not a problem because the stock price went up afterwards. If you think about it that way, there are many more cases where it is a problem, aren't there?

There are so many and varied variables that affect the stock price. Macroeconomic factors are external, and internal factors include the company's own capabilities and changes in the industry. Even in the case of the controlling shareholder's sale of shares, the situation varies greatly depending on whether a PE firm bought it out, whether a strategic investor (SI) bought it to pursue synergy, or whether no one wanted it and it was just dumped on the market.

How do you judge and predict all these cases? I don't know.So just accept it as it is without knowing. What does it mean to accept it as it is? It's just a principle. What principle? Insider buying is a good signal and insider selling is a bad signal. When investors invest, the most important thing to pay attention to when they are becoming a minority shareholder, not taking over management, is alignment of interest with the controlling shareholder or management. Keep that in mind and just deal with the rest on a case-by-case basis. Case-by-case means that even if there is alignment of interest, bad results may occur, and conversely, good results may occur even if there is no alignment of interest. So what is needed in this situation? It's probabilistic thinking.

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

If the first of the two articles that new individual investors should read is about probabilistic thinking, then what is the second one?

It's an article about positivity.Many people still think 'positive = optimistic'. That's why they use the word "optimistic" where they should be using "positive," and vice versa.

Positivity is not optimism, it's accepting things as they are. As mentioned in point 2 above, accepting things as they are without subjective interpretation is positivity.Therefore, if the situation is good, it is positive to be optimistic, and conversely, if the situation is bad, it is positive to be pessimistic.Did people who thought last year that "inflation will eventually fall and the Fed will lower interest rates, so the stock market's valuation will recover" have a positive outlook? No, they were just naive optimists.

Then, someone might say this. After all, stocks are ultimately about making big profits through long positions, not short positions. Isn't it more advantageous to maintain optimism than pessimism? Is that really the case?

It is far more advantageous in terms of compound interest to avoid the 10 days with the highest decline than to miss the 10 days with the highest gains. This is because the volatility is greater on the downside than on the upside. Hopeful thinking prevents you from avoiding the big downside volatility and you get hit by it, greatly reducing your long-term compound return.

Then, why do you say not to short if it seems like you'll make a big return by eating the downside volatility?Because humans only see what they want to see and get stuck in their own positions. Once you take a short position, you can't turn to optimism even when the market is near the bottom. So, it's much better to just have an appropriate cash position and respond by buying in installments near the bottom.As mentioned above, the biggest advantage of stocks is that the upside is much bigger than the downside, and one stock that has a big upside can offset the losses of five stocks that have a downside. Then what about risk management? As mentioned above, you can do it with probability. What does it mean to do it with probability? It means that no matter how confident you are, don't go all in.

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