It is said that knowing the enemy and knowing yourself ensures victory in a hundred battles. Can this famous phrase from Sun Tzu's Art of War be applied to stock investment? KB Securities identified the phenomenon that arises from the anxiety of market participants such as corporations, analysts, and fund managers, and proposed investment strategies that capitalize on that anxiety.
Kim Min-kyu, a quant analyst at KB Securities, noted in a report titled "Korea Stock Sentiment Report 2" that "humans dislike anxiety, but much of human behavior can be explained by it," and added, "It is human nature to make choices that are well-known and predictable in order to reduce anxiety."
The researcher had previously analyzed investor characteristics through the first part of the "Korea Stock Sentiment Report" a year ago. At that time, he said, "The sharp fluctuations in stock prices that occur briefly in the Korean market are not a madness driven by irrationality but a winning strategy discovered by investors instinctively realizing that others will not agree with their opinions," and advised, "Choosing stocks with increasing transactions is still reliable, but it is necessary to react sensitively regarding their sustainability."
In this report, the researcher explained that "anxiety about survival evokes desires for ownership and relationships, as having something or being with someone can increase survival probabilities," and stated that "humans engage in 'Self-Extension' by identifying ownership and relationships with themselves to broaden their ego."
He also pointed out regarding corporations that "the stock price is often influenced by factors outside the core business. It is common for valuations to fluctuate due to the growing scale of non-operating profit and loss, management disputes, complex equity structures, and political issues," adding that "the logic behind the valuation model used by analysts, which states that 'if you make money (or you will), you receive a high valuation,' no longer holds true as before."
The researcher analyzed that the corporate mentality behind this is 'self-extension' and that the unique culture of Korea has reinforced it. Many corporations operate in a family-managed form while sharing the success stories of founders as their identity. The conditions inherently lead to a strong closeness that relies on 'reliable blood relations' to carry on that identity. Corporations create a governance structure that can be controlled by a major shareholder's high ownership rate or a low ownership rate, guarding against outside interference.
The researcher expressed, "This is an extension of the self in the form of 'I am the company, and the company is me,' but when the expansion becomes large, anxiety about extinction is stimulated again, which manifests in disputes and complicates the analysis."
The researcher commented on analysts, saying that "the number of analysts has decreased, and the demand for analysis is being replaced by information from non-analysts through social media (SNS), narrowing their foothold. They easily become engulfed in anxiety about survival," and added, "Thus, recent analysts tend to narrow their analytical scope instead of broadening it and conduct more detailed analyses." He elaborated that this behavior of analysts is due to 'perceptual defense.'
'Perceptual defense' is the act of avoiding and disregarding potentially dangerous information. It has the characteristic of allowing a focus on positive aspects while turning a blind eye to uncomfortable but necessary matters. The researcher stated that analysts focus only on leading stocks or those they feel confident about predicting. He noted, "When survival is uncertain, analyzing non-leading stocks has a low reward when correct and a high risk when wrong," adding that "broadening the analysis scope can act as a stimulus for anxiety, thus perceptual defense has led them to disregard this."
Finally, the researcher mentioned 'polarization of motivation' concerning fund managers. In recent years, money has flowed out of active domestic equity funds and into passive funds. In active funds, which prioritize survival, avoidance motivation has increased, while in the growing passive funds, approach motivation has grown. He stated that managers' motivations can be observed as 'risk.'
He explained that "growing risks reflect an approach motivation of 'I will take the risk to generate revenue,' while reducing them is an expression of an avoidance motivation of 'I will reduce losses,'" and noted that "given the shrinking scale of active funds, there exists a paradoxical situation where the passive funds (ETFs) are showing an increased level of risk due to the inability to reveal the approach motivation."
Moreover, the researcher reported that there has been a strong tendency in the Yeouido community to follow others in buying and selling due to avoidance motivation. The risk of recording lower returns than others increases when portfolios differ, but engaging in herd behavior can distance one from that risk. He mentioned, "Especially recently, there is a strong tendency for 'herd selling' in response to rising stock prices, claiming, 'What if I am the only one who did not sell and the stock price drops in the future?' This can be referred to as FOPO (Fear Of Peak Out)."
The researcher indicated that it is possible to establish investment strategies as herd behavior can be measured using supply and demand data. Investing when herd selling intensifies—"when the market devours anxiety"—is a way to enhance returns, and the strength of herd selling can be utilized as a market timing indicator, according to his assessment.
The researcher indicated that the current leading stocks in sectors such as shipbuilding, defense, and space still have room for increased herd behavior. This signifies that lingering anxiety remains. However, he diagnosed that the strength of this behavior is about 70% of its peak. The researcher remarked that "leading stocks have always emerged in a state of detachment from the herd where it doesn't matter who buys them," and advised giving attention to sectors where the herd behavior has weakened recently or where stock prices and herd behavior have begun to rise together, recommending construction, consumer goods, and securities sectors.