The U.S. Stock Market is Koreafying. That’s Bad.

South Korea is a wonderful country that has given the world many wonderful things. Food, music, television, movies. I particularly enjoyed Squid Game, a bizarre dystopia of financially motivated competitive mayhem. But here’s a dystopian Korean export we don’t need: the “theme stocks” of the Korean stock market.

Unfortunately, in recent years the U.S. has been following Korea on the road to crazytown. What Americans call “meme stocks,” Koreans call “theme stocks.” These absurd objects have been a wacky feature of the Korean stock market since at least 2007.

In this post, I want to describe three striking features of the Korean theme stock experience:

• Market nihilism. Theme stocks are valued based on premises that range from solid to tenuous to just plain wrong. Facts and logic don’t matter.
• Political theme stocks. During elections, via a mysterious process, certain stocks transform from normal stocks to political theme stocks linked to specific presidential candidates. After the election, these stocks revert to normal.
• Retail investor subculture. Theme stocks are traded by retail investors. Their culture is a mix of cheerful group gambling and deluded conspiratorial beliefs including populist hostility to short selling.

As of 2024, the U.S. stock market has acquired all three of these features and is rapidly Koreafying. What can we learn from Korean theme stocks?

The most important lesson: theme stocks are not normal stocks. Don’t expect them to behave like normal stocks. Let me illustrate by describing the Korean presidential election of 2007.

In 2007, candidate Lee Myung-bak proposed building the “Grand Korean Waterway,” a cross-country canal from Seoul to Busan. Lee’s proposal caught the imagination of both voters and retail investors. A group of six construction companies experienced stock price rises averaging more than 750% prior to the election.¹ Now, 750% sounds kind of high, but maybe it was rational, who am I to judge? When Lee won the election, these stocks plummeted in value, erasing most of their previous gains. I repeat, Lee was elected president, but we saw a huge price decline in the Lee theme stocks which were allegedly going to benefit from his policies.

Make sense? No. Was this just a fluke? No. Basically, we see the same pattern in every subsequent presidential election, for every politician. When candidate A announces his candidacy, stocks allegedly linked to candidate A rise in value, often by implausible amounts. Ditto for candidate B. As the election approaches, both A stocks and B stocks fall in value. When the election takes place, no matter who wins, both A stocks and B stocks fall in value.

Now, in 2007, there was at least a logical and fact-based connection between the candidate and the stocks. In subsequent elections, even this went out the window, a phenomenon I call “market nihilism.

I am not claiming the whole Korean stock market is dysfunctional or mispriced. Most Korean stocks are normal stocks, not theme stocks. Nor am I trying to criticize Korean regulators, who have tried to protect retail investors by engaging in a long battle against theme stocks and suspected manipulation. The problem lies with Korean retail investors. Visualize a stock market where Roaring Kitty and his followers are far more numerous, influential, and have been active since 2007. That’s Korea.

Market nihilism

Nihilism is the belief that nothing matters. Nihilists (as accurately depicted in the film The Big Lebowski) are not a force for good. I take the term “nihilism” from the indispensable Matt Levine, who used the term “cheerful nihilism” to describe the meme stock craze of January 2021 and other events which involved prices that were untethered to reality.² Here’s Levine:

I keep coming back to the nihilism thesis. We talked recently about how the stock of a micro-cap company called Signal Advance Inc., which shot up 5,100% after Elon Musk tweeted something about an unrelated app named Signal. The error, as it were, was quickly corrected: Lots of news stories, and a tweet from the “real” Signal, clarified that Musk was not talking about Signal Advance. The stock kept going up. (It’s still trading at roughly 10 times its pre-tweet price, weeks later.) Perhaps the buyers were impenetrably ignorant, but I suggested another possibility: There is a mass of retail buyers who like to all buy the same stock, and Musk’s tweet gave them a Schelling point to coordinate around. They weren’t confused about what Musk meant; they didn’t care that much about what Musk meant. They just like to all have fun together, pumping some stocks. You don’t actually need a Schelling point to coordinate around. You can just go on Reddit and talk about what stock you’re all going to buy.

Let me comment on this passage. First, as Levine mentions, nihilism is fun; it involves you and your friends comically defying pedestrian thinking. Seinfeld was a show about nothing, and Seinfeld was fun. Who cares if we bought the wrong stock, life is a big laugh, let’s buy some more!

Second, the stock that Levine mentions is an OTC stock, also known as a pink sheet stock.* I would say that in the U.S., pink sheet stocks have always occupied the lunatic fringe of the stock market and have always been somewhat nihilistic. When I say that the U.S. is Koreafying, I am trying to say that bizarre pricing that used to be confined to the pink sheets has now spread to Nasdaq and NYSE. A Koreafying stock market is a stock market that is getting pinker.

Third, Levine mentions Schelling points. A Schelling point, or focal point, is a location at which multiple people can naturally coordinate. The standard Schelling (1960) question: “if you are to meet a stranger in New York City, but you cannot communicate with the person, then when and where will you choose to meet?” The answer as of 1960 was “noon at Grand Central Terminal.” Korean theme stocks are focal points for retail investors to gather.

Facts and logic don’t matter

DI Corp manufactures testing equipment for semiconductors. Park Won Ho currently heads the company and is a major shareholder. His son is Park Jae-Sang, better known as “PSY.”

In July 2012, PSY released a video called “Gangnam Style” featuring his signature horse dance. By September 2012, this video had become a worldwide hit and had impacted the price of DI Corp, which rose almost 700% on high volume. In April 2013, PSY had another hit, “Gentleman,” which again lifted the price on high volume, as discussed by Kim and Jung (2015).

How can we explain the impact of PSY’s videos on the stock price? One explanation is the attention-grabbing hypothesis described by Frazzini and Lamont (2007):

A specific story involving irrational or cognitively constrained investors is the "attention grabbing" hypothesis of Lee (1992) and Barber and Odean (2004). According to this hypothesis, individual investors both have limited attention, and rarely sell short. When a stock which they currently do not own grabs their attention, these individual investors are more likely to buy the stock (compared to a stock which does not grab their attention).

Here is Barber, Huang, Odean, and Schwarz (2022) explaining how Robinhood investors are likely to have their attention grabbed by dramatic, news-worthy events:

We first conjecture Robinhood users are more likely to be influenced by attention than other investors. Half of Robinhood users are first-time investors, who are unlikely to have developed their own clear criteria for buying a stock. Inexperienced stock investors are more heavily influenced by attention (Seasholes and Wu (2007)) and by biases that lead to return chasing (Greenwood and Nagel (2009)) … If Robinhood users are more likely than other investors to be influenced by attention, their purchase behavior is more likely to be correlated; that is, they are more likely to herd than other investors. This is exactly what we find.

However you explain the PSY effect, it does not seem especially logical. PSY has no involvement in DI Corp, nor does DI Corp produce any products that are related to viral videos.

At least in the case of PSY, it is factually correct that there is a connection, however tenuous, between “Gangnam Style” and DI Corp. Let’s now discuss two cases which, like the case described by Levine, involve simple factual errors which nevertheless impact stock prices for many months.

The Wrong Ban. In September 2016, Ban Ki-moon was widely seen as a leading contender for the May 2017 presidential election. Here is what happened next:³

The management of Fine DNC, an LCD component manufacturer, was perplexed to see the price of its stock rise fivefold after the Chuseok long weekend. They found out that their company was being considered a "Ban Ki-moon themed stock," that the shares of its stock were related with U.N. Secretary General Ban Ki-moon. Ban is currently mentioned as one of the possible candidates to run for the presidency next year.

They were bewildered as they had nothing to do with Ban. However, some investors focused on the fact that the company recently gained the interest of Pine Asia Asset, where Ban Ki-ro is serving as CEO. Due to their similar names, a rumor was sparked among stock investors that the CEO is a cousin of the secretary general … It turned out that the two Bans are not related at all…

Despite repeated denials by all parties involved, the stock price did not return to normal, and in December 2016 remained at 5X its prior level. Only when Ban Ki-moon announced he was not a candidate did the price fall back to pre-theme levels.

The Three Yoons. The current president of South Korea is Yoon Suk Yeol, elected in March 2022. Yoon is the 8th most common surname in Korea shared by approximately 2% of the population. 

I think you can guess what happened when he announced his candidacy. Two companies, each associated with an unrelated man named Yoon, soared in price. One of these companies, NE Neungyule, went up almost 800% as of June 2021. Here are the facts:⁴

Similarly, NE Neungyule, a local education company, has been assessed as one of main opposition presidential candidate Yoon Suk-yeol's beneficiary companies, just because the firm's largest shareholder has the same family name as the conservative presidential candidate. Despite the fact that the company clearly stated that the firm's business has nothing to do with the politician, the firm's stock price has been fluctuating in line with Yoon's campaign.

Political theme stocks

Theme stocks reflect dramatic events including earthquakes, wars, or scientific breakthroughs. A subset of theme stocks is political theme stocks, including those relating to the presidential elections held every five years. The Wrong Ban and the Three Yoons are examples.

Let me start by saying that there's nothing wrong with looking for a connection between firms and political candidates; political outcomes should impact stock prices in a rational world. Scholars have studied family members, shared school connections, and policy impacts since the seminal Fisman (2001) study of Indonesian stocks.

There’s also nothing wrong with a politician having an associated stock. For example, when Linda McMahon ran for Senate in Connecticut in 2012, she had an associated NYSE stock, World Wrestling Federation. I see no problem with that.

In Korea, the equivalent is Ahn Cheol-soo, who is the founder and major shareholder of publicly traded company AhnLab. Ahn was a candidate in the presidential elections of 2012, 2017, and 2022.

My problems with political theme stocks in Korea are:

• The tenuous connection between candidates and stocks (market nihilism)
• The magnitude of the initial stock price increases
• The predictable pattern of declining prices as the scheduled election approaches

Basically, it’s as if the entire nation of Korea read Fisman (2001), decided to take it way too far, and bungled the execution.

I’ve already mentioned the baffling time pattern observed for political theme stocks around presidential elections. For scheduled elections, as the resolution of uncertainty approaches (the election date), political theme stocks fall predictably. “Buy the rumor, sell the news.”

Going back to Ahnlab, the stock price has a 5-year seasonality associated with Ahn’s repeated presidential candidacies. Every five years he runs, every five years the stock goes up and then down. This “Ahn cycle” looks very unlike a random walk. By the way, Ahn is currently 62 years old, and the next election is in 2027.

Nam (2022) finds that on average the market-adjusted cumulative returns in the year prior to the election are on the order of +50%. So the stock prices of candidates A, B, and C, as a group, all outperform the market by 50% before the election, peaking around two months prior.

As the election approaches, the stock prices of all candidates decline. By the time the election is finished, the cumulative returns on all political theme stocks are back to where they started a year ago. It doesn’t help if your candidate wins (Nam (2020)).

Retail investor subculture

Themes emerge in response to exciting events. Impacted stocks undergo a transformation from boring regular stocks to exciting speculative instruments that are volatile and horrifically overpriced, sometimes for many months.

Who is responsible? Ants. That’s the Korean term for retail investors. It’s a self-deprecating name adopted by the retail investors themselves, similar to how some U.S. meme stock investors call themselves “apes.”

As with the social media that propelled U.S. meme stocks in 2021, ants have an online community. Here’s a description from 2012:⁵

Forming a complex web of online connections between them, sharing tips and rumors, individual investors respond with lightning speed to news, waiting to take advantage of any spark in particular shares and sell immediately after gains in value, due to whatever reason. The environment is obviously ripe for manipulation and scams.

This festive, get-rich-quick community embraces market nihilism. I’ve previously described various economic models of “greater fool” speculative pricing, which involve inability to short, high volume, and high volatility. We see all these in theme stocks:⁶

At the end of the day, most retail investors buy theme stocks for short-term gains. Their purpose is often jumping on the upward bandwagon and getting off just before it crashes.

Many of them are aware that certain themes do not have anything to do with the value of the firms they are investing in, but they simply want to profit from the rally fed by rumors.

The high volatility is a feature, not a bug. High volatility means “gamblers’ excitement.” That’s one explanation for why prices decline as the election approaches; no more uncertainty:⁷

“Most individual investors already know that politically-themed stocks surge despite their fundamentals, but they target stocks that show volatile movements to reap short-term profits,” said Ha Eun-su, an official at the Financial Supervisory Service’s (FSS) themed-stock investigation unit. “These people don’t make rational investments, even though they know they’re dealing with ticking time bombs. The bubbles that are building around these themed stocks will continue until the day of the election, and this trend will recur in five years’ time.”

The ants are a vocal community that, like some U.S. retail investors, believe the system is rigged against them. First, they object when regulators step in to prevent trading in theme stocks or investigate manipulative practices. Second, they believe that short sellers are somehow cheating them and that short selling should be banned.

Ants are a potent political force; their tactics include driving around in a colorful bus adorned with the charming slogan “I hate short selling.”⁸ Ants may not have a firm grasp on which Yoon is which, but they know what they don’t like. Thanks partly to this pressure, Korea instituted a “temporary” ban on short selling in November 2023, and President Yoon (the real one) has shown no inclination to reverse the ban.

Going full Korea?

Let me sketch out a vision of a dystopian future where the U.S. has gone full Korea:

• Meme stocks become a substantial fraction of the universe of stocks.
• In every presidential election, every candidate has dozens of stocks which are (often erroneously) associated with the candidate
• Short selling is banned

Happily, we are not there yet. The nihilists are on the march, but they have not yet won. To my fellow Americans, I say the following. Let us say yes to K-pop, K-drama, and K-cinema. But let us say no to K-finance.

*References to this and other companies in this commentary should not be construed as recommendations to buy or sell specific securities.

References

Barber, Brad M., Xing Huang, Terrance Odean, and Christopher Schwarz. "Attention‐induced trading and returns: Evidence from Robinhood users." The Journal of Finance 77, no. 6 (2022): 3141-3190.

Fisman, Raymond. "Estimating the value of political connections." American Economic Review 91, no. 4 (2001): 1095-1102.

Kim, Y. Han Andy, and Hosung Jung. "Investor PSY-chology surrounding “Gangnam Style”." Pacific-Basin Finance Journal 37 (2016): 23-34.

Lamont, Owen, and Andrea Frazzini. "The earnings announcement premium and trading volume." 2007

Nam, Gilnam. “Concerns over Politically Themed Stocks Ahead of Korea’s 21st General Election.” 2020.

Nam, Gilnam. “A Thought on Politically-themed Stocks Ahead of Korea’s 20^th Presidential Election.” 2022.

Schelling, Thomas C. The Strategy of Conflict. Harvard University Press, 1960.