The B side of South Korea's stock market soaring 78%: removing Samsung and SK Hynix, is this just a "retail investor gamble"?

Bloomberg News has learned that the Korean stock market has been booming this year, leading the global markets. This seems to be a perfect illustration of President Lee Jae-myung’s policy to promote household stock investments—originally a healthy goal that can foster wealth creation and expand financing channels for companies. However, a truly healthy investment culture hinges on diversification, which is currently difficult to achieve in Korea’s stock market. In fact, the high concentration of this rally exposes the market’s lack of mature conditions to support long-term resident investments and serves as a warning to global investors.

Korea’s stock market performance this year has indeed been stunning. Since the beginning of the year, the KOSPI has gained 78%, far surpassing the 7% increase of the MSCI World Index and significantly outperforming the 23% rise of the MSCI Emerging Markets Index. Such gains have attracted global attention and fueled unprecedented enthusiasm among Korean retail investors for stock market investments.

But this “remarkable” performance is actually a “solo act” by a few giants—Samsung Electronics and SK Hynix—who contributed the vast majority of the KOSPI’s gains. Excluding these two stocks, the index’s increase would shrink dramatically to 30%, losing its shine and becoming mediocre. Even if the AI boom continues to push these two memory chip giants higher, their dominant positions reveal a critical flaw: Korea’s stock market as a savings destination for ordinary investors. It also exposes the fragility of the current market’s prosperity.

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For investors, concentrated holdings have always been a double-edged sword: over the past five years, investors focused on tech stocks have achieved returns far exceeding the benchmark, which is the fortunate side; but economic cycles and industry trends are inevitable, and in the long run, diversification remains the most proven and reliable way to preserve and grow wealth over time. Even professional investors rarely succeed in consistently winning the “stock picking game” over the long term, let alone ordinary retail investors lacking expertise and risk awareness.

The AI revolution is pushing the KOSPI’s concentration to the extreme. More concerning is that the two giants dominating the index are both in the highly cyclical semiconductor industry—characterized by “boom times are great, downturns are severe,” with prosperity and recession often alternating in short periods. Although many Wall Street analysts believe that the current supply tightness in memory chips could last longer than expected, forming a so-called “super cycle,” this does not mean the cycle’s规律 has been broken. The global semiconductor industry’s profit fluctuations are significant; after brief periods of prosperity, overcapacity and shrinking profit margins often follow. The continued increase in industry concentration, as seen in the past few years in Korea’s electronics and electrical equipment sector, is amplifying market volatility.

Concentration is never a path to stable wealth creation, and “stability” is precisely the core pursuit of long-term investing. The biggest problem with the KOSPI is its “pulse-like” return pattern—since the early 1990s, the index’s compound annual growth rate has been 7.3%, but almost all capital appreciation has occurred within 10 to 11 calendar years. In other words, the index has been in an upward cycle for less than one-third of the time; the rest of the time, it either moves sideways or experiences sharp declines. A more straightforward comparison: since 1990, the KOSPI has hit a new high only 264 times, with the longest “highs drought” lasting over a decade; meanwhile, the S&P 500 in the U.S., with a mature retail investor culture, has reached 780 new highs in the same period, showing a stark difference in stability.

The sharp fluctuations and pulse-like surges of the KOSPI create a risky investment environment, especially dangerous for ordinary investors. Human nature is averse to losses (even if patience can recover losses over the long term), and investors hope their portfolios trend steadily upward. But when market volatility is excessive and returns are highly uncertain, investors tend to fall into the trap of “chasing gains and selling at losses”—frequent trading and contrarian moves that ultimately diverge from their long-term interests. Without alleviating this “pulse-like” return pattern, it’s impossible to truly guide investors toward rational decisions.

This also raises questions: Is the Lee Jae-myung government truly aiming to cultivate a responsible long-term investment culture, or is it creating a nationwide short-term trading “gambling market”? He often uses the rhetoric of short-term traders, making the KOSPI’s breakthrough past 5,000 points a campaign promise, and even calls himself a “big ant” (a Korean term for short-term retail traders). In fact, when he took office, Korea’s stock market already had serious speculative tendencies. Such a direction will only further exacerbate market irrationality.

On the policy level, Korea has tax incentives to encourage long-term holdings, but they are still significantly weaker than those in the U.S.—lower investment limits make it harder to guide investors toward long-term allocations. Even as ETFs gain popularity, Korean retail investors often use them as high-risk speculative tools: the most popular products include leveraged ETFs, which seek to multiply daily returns of specific stocks or indices through derivatives, but also carry extreme downside risks. During market turbulence or downturns, these can cause devastating losses for investors.

Setting aside rhetoric, the Lee Jae-myung government has introduced some substantive reforms, such as recent corporate governance reforms aimed at protecting minority shareholders. But to truly foster a long-term, stable investment culture that serves voters’ interests, more is needed: updating tax incentives, guiding investors toward efficient investments and retirement planning; encouraging more entrepreneurial activity and IPOs to break market monopolies. However, the latter is extremely difficult in Korea—chaebols controlled by family conglomerates far surpass other companies in scale, and even attempting to curb their influence would take decades to see results.

In the absence of rapid changes to the monopoly structure of chaebols, the most responsible way to help Koreans preserve and grow their wealth is to guide them toward building truly diversified portfolios, including significant allocations to overseas stocks. But the Lee Jae-myung government is doing the opposite—criticizing overseas stock investments and framing investing in Korean stocks as a “patriotic duty,” which will only bind ordinary investors further to this highly concentrated, volatile market, increasing their investment risks.

Ultimately, Korea’s extreme market performance reflects a mirror: it reveals the short-term euphoria of concentrated bets and highlights the potential fall when diversification is lacking. As global tech assets are highly sought after, this “chip myth” offers a lesson to all investors—what can truly withstand cycles is never a precise bet on a single event, but systematic diversification, restraint, and patience.