[Opinion] Stock Market

The most common error made by stock investors is that they often ignore one simple fact - stocks you are about to buy were put on sale by some others and that they believe the values of those stocks will drop as mush as you believe the values will rise. Likewise, you put on sales those stocks you believe will fall, then some who believe they will rise buy them. Both of the sides cannot be right at the same time. Therefore, the better-informed side is bound to win.

▷ And there are two ways to be better informed in the stock market. One is resorting to insider trading to get informed ahead of others, which is illegal. The other is to produce data on your own by doing research, equity analysts’ job that requires much effort and expert skills. Often times individual investors jump into the stock market with little knowledge and information, and the rumors and instinct they have only serve to widen the gap with well-informed professional investors.

▷ The science of economics sees a stock market as an information-processing tool. When stock prices strike a balance at a certain point, it reflects all the information available for investors. There is an equal balance in the number of people who believe prices will rise and who believe will fall. So, it is often said, “Bad factors are already weighed in.”

▷ If the information-processing tool works perfect, stock prices will reflect new factors the moment the information is provided. No one knows what will happen in the following quarter – whether good factors or bad one will come out. Then no one knows in which direction the stock market will move. This is why economists call fluctuation of stock prices “random walk,” which implies steps of a drunken man who has no idea of where to go. For long time, geniuses have looked for a golden formula that will bring them great fortune, to no avail. The market remains still impossible to predict. Battered by tumbling stock prices, many now begin to doubt the future of the stock market. Given the unpredictability, however, they must not become skeptical.

Kim Jong-seok, Guest Editorial Writer,

Economics Professor at Yonsei Univ. jskim@hongik.ac.kr