A Newbie’s Guide to Investing in Korean Stocks (Part III)

Why are their reports fishy? Well, they all say ‘Buy’! In investing, the idea of buy/sell/hold – the standard recommendation system used by analysts – is a relative one. If you are an investor, you have certain choices: stock A or stock B; stock B or bond C; bond C or foreclosed Miami condo D; foreclosed Miami condo D or LIBOR-cubed interest rate swaption E. (I don’t know if the last one really exists, by the way). If all of the above are ‘good’, and you have a finite amount of money, you’ll want to know which are relatively more and less attractive, right?

I would say that the vast majority of Korean stocks are rated ‘buy’ by analysts. ‘Buy’ should really just be for the most relatively attractive stocks; we have ‘hold’ available for the average ones, and ‘sell’ for the crap ones. Yet here, the good, the bad and the ugly are all ‘buy’. If anyone here rates a stock ‘hold’, that means, ‘for the love of God, don’t touch this dog with a ten-foot, asbestos-plated pole’.

Why does this happen? As you know, Korea is a place where you don’t publicly insult someone. Especially when that someone happens to be, er, a massive corporation. If an analyst in Yeouido used buy/sell/hold ratings to show his real opinion, he might well see his career take him in surprising new directions – such as the mailroom of a branch office in Gangwon-do.

Most large listed companies are chaebols, or the offspring thereof. And of course, you don’t mess with the big boys. However: that doesn’t mean these reports are worthless. Writing them is an art form, and so is reading them. A good analyst will find ways to say ‘Company X’s new widget-gizmo is a positive development’, whilst informing you between the lines that Company X is still a dog. Read a few, and you’ll see what I mean.

Note: This is the third installment of a five-part series. Read Part I and Part II or read on to Part IV.

Daniel Tudor

About Daniel Tudor

Daniel Tudor is the Korea correspondent for The Economist. His book, ‘Korea: The Impossible Country,’ will be published by Tuttle in spring 2011. He often uses obscure British expressions which you can look up here. Find out more at daniel-tudor.com

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