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| gettyimagesbank |
By Jeon Yong-bae
These days, the stock market seems to fluctuate due to animal spirits, characterized by impulsive behavior. In particular, stocks related to secondary batteries are experiencing significant fluctuations of 10-20 percent per day. With record high levels of short selling and credit loan balances for these stocks, the volatility is becoming worrisome.
The stock market is a market where rationale and emotions interact in a complex way. In economics, stock prices fluctuate based on long-term rationality. In other words, they fluctuate according to the future growth potential of the respective companies.
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| Jeon Yong-bae |
In the 17th century, there was a famous event called the Tulip Bubble in the Netherlands. A craze for tulips among the upper class drove up the price of a single tulip bulb to as high as the value of a luxurious mansion in 1636. Despite considering tulips to be ridiculously expensive, people believed that someone else would buy them at an even higher price the next day, following the Greater Fool Theory.
However, in early 1637, rational individuals began to question the tulip prices, leading to a gradual decline and a sharp crash in February. Eventually, tulip prices became lower than onion prices and the tulip bubble tragically burst.
In the early 2000s, a new technology company called Saerom developed a free international calling service called Dialpad. As a result, investors flocked to the stock, causing its price to skyrocket from 2,000 won ($1.54) to over 200,000 won, a 100-fold increase in a short period of time. At that time, its market capitalization exceeded 3 trillion won, surpassing Korean Air, which owned dozens of aircraft ― in terms of market value.
This situation was difficult to understand rationally. However, as rational investors increased, the stock price of Saerom started to plummet, eventually leading to bankruptcy and causing significant losses for investors.
With the rapid global growth of electric vehicles, there is no doubt about the growth potential and profitability of the secondary battery industry. However, recently, the stock prices of some secondary battery-related companies have skyrocketed to levels that cannot be justified by any valuation. Their future growth potential has been excessively inflated.
The market capitalization of these companies has now surpassed that of major domestic corporations. As of July 25th, the combined market capitalization of the leading secondary battery players ― EcoPro and EcoPro BM ― exceeded 80 trillion won, surpassing the market capitalization of Samsung Electronics (46 trillion won) and Hyundai Motor (42 trillion won).
Yet, individual investors are jumping into the market. This is a typical case of FOMO (Fear of Missing Out), where individuals fear being left out and rush in belatedly, leading to a precarious situation.
This is a moment to remember Warren Buffett's famous quote, "Be fearful when others are greedy and greedy when others are fearful." When the general public behaves irrationally, price fluctuations are magnified and prices become higher than intrinsic value, creating a bubble that will eventually burst at some point.
Investment gurus like John Templeton, Warren Buffett and Peter Lynch have achieved great success by buying stocks that will increase in value in the future and then selling them when the price reaches their actual value. When the majority of investors lose their rationality, the small minority of investors who are rational, make a profit.
Now is the time to focus on finding hidden gems in sectors that are characterized by pessimism rather than optimism. As the legendary investor John Templeton's saying goes in the stock market, "Bull markets are born on pessimism, grown on skepticism, mature on optimism and die on euphoria."
The writer is a senior consultant and auditor of Franklin Templeton Investments Korea, where he previously worked as CEO, and is professor of University of Maryland Global Campus' MBA program.
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