Translation to English
[Honorary Columnist’s Report] Holding on to Inefficient Businesses, Real Estate is Eating into Investment Returns"
TCK Investments’ Chairman Ohad Topor writes for Maeil Business Newspaper
Ohad Topor for Maeil Business Newspaper
July 24, 2024
As an investment manager, I've had the privilege of discussing wealth allocation with countless business owners and ultra-high-net-worth individuals in Korea.
They often share their investment triumphs and regrets. Despite their diverse backgrounds, a common thread emerges: many hold on to underperforming assets, unsure of their future prospects, yet they don't take the steps to sell and consider better investments.
Larger business-owning families typically have core holdings: the main family business, key subsidiaries, and strategic real estate like company buildings. However, they often hold onto other subsidiaries or assets that are not core and are stagnating, yet they don’t sell. It’s often inherited property or personal investments that underperform but are hard to sell. Ironically, these small, inefficient assets consume more mental and emotional energy than they’re worth.
This tendency to cling to underperforming assets typically stems from two sources. First, there often hasn't been a thorough, honest assessment to consider selling and exploring alternatives. Second, emotional attachment and fear of realizing losses, known as the "Endowment Effect," play a significant role.
This behavioral bias, studied by Nobel laureate Daniel Kahneman and Amos Tversky, leads people to overvalue what they own, making them reluctant to sell at a loss even when reinvesting in better opportunities would be wiser. An example of this is evident in the stock market. Many individual investors underperform because they hold on to losing stocks for too long.
In Korea, business owners and individuals often overlook the importance of reviewing their asset mix. A practical rule for such a review process is to identify assets that haven't doubled in value in the last 10 years, and are unlikely to double in the next 10 years, and consider selling them.
Achieving double with good financial advice should be achievable with a diversified portfolio of global stocks and bonds.
Consider the example of a Korean business family owning a company or a subsidiary. Since 1990, the average market value of listed companies in Korea, which is a good estimate for any company or subsidiary, has grown by an estimated 5.5 times, equivalent to 1.63 times increase per decade on average. In contrast, Korean residential property returned 8.1 times in total since 1990, or 1.83 times per decade on average.
Meanwhile, a globally diversified portfolio, with 60% in top global stocks and 40% in high-rated bonds, returned 20 times in total, or 2.38 times per decade on average. An outstanding return for the global portfolio (All numbers are in KRW).
Small differences in return per decade, compounded over decades, have a huge impact. A 1.63 times multiple per decade results in a 5.5 times increase since 1990, while a 2.38 times multiple per decade results in a 20 times increase in the same timeframe.
If you decide to keep holding an average business, subsidiary, or stock in Korea instead of reinvesting in a global portfolio, you may miss out significantly. Assuming historical trends continue, for a ₩1 billion investor, this means the difference between ₩5.5 billion and ₩20 billion over the next 35 years.
While history doesn't always repeat itself, the global portfolio's growth potential is based on a fundamental driver of growth of the world population, growth of sales and earnings of the best companies and focus on shareholder value in developed markets. These drivers have enhanced the values of stocks around the world for many decades and are repeatable, while concentration only in Korea is less predictable.
Indeed, investing in a global liquid portfolio has its challenges:
Inexperience with Long-Term Holdings: People lack long-term experience with stocks as a long-term holding, often viewing it as short-term trading, which leads to bad experiences and a perception of high risk.
This perception is incorrect. Investing in broad portfolio of stocks and bonds with good management can be more reliable for long term investors.Market Timing Temptations: A common mistake is succumbing to the temptation to time the markets. Getting out of the market, even for small periods, can be very costly in terms of long-term performance.
Once an investor buys a diversified portfolio, they need to hold it through inevitable ups and downs. A $1 investment in a portfolio of US stocks held continuously since 1980 would have turned into more than $144 today. However, if you missed just the best 10 days in every decade, the $1 investment would be worth only $13 today, meaning 90% lower gains. Essentially, missing even a few days meant missing almost all of the long-term gains.
Instead of a diversified portfolio, maybe I should invest in a handful of companies that I choose or my broker recommends? It is common to hear success stories from friends or family that bought companies like Nvidia, Tesla, or some other stock very early and held on.
First, even the biggest experts do not find it easy to know which stock will succeed and which stock can disappear. Second, when betting on a stock or what people perceive to be a risky investment, people usually do not put the majority of their wealth into it; they put small amounts. This means that even if successful, it did not move your wealth enough.
On the other side, when a portfolio is well-diversified among many stocks and markets, its performance becomes more predictable, as it relies on the overall growth of the world market and not just a single company. Being diversified makes people feel more confident to hold it over time and therefore allocate a big portion of their wealth to this growth. Eventually, this strategy beats stock picking.
This last point ties into a key financial goal that is often overlooked, and that I encourage everyone to pursue: make your investment journey less stressful and more pleasant. While a global portfolio is broad, diversified and liquid, most Korean investors hold highly concentrated, high-hassle, and illiquid assets. This sometimes makes even wealthy people very nervous.
One additional major benefit of holding a global portfolio is the exposure to the US Dollar.
As more than 60% of global stock value is currently in the United States, holding a global portfolio gives you a large position in Dollar-denominated assets. By any metric, the Dollar is the world’s pre-eminent currency, for example it’s the most used globally for cross-border payments and for investments.
Many factors back the Dollar, including the strength of the US economy, the track record of the US Federal Reserve, the stability of the US legal system, the primary role of the USA as gatekeeper of global financial markets, etc. This finds evidence in the data. The US Dollar appreciated against all other major currencies over the past 20 years. Moreover, the Dollar provided reliable protection during periods of crisis. On average, in the last five major episodes of financial market turmoil that occurred in the last 30 years, the US Dollar appreciated against the Korean Won by more than +50%, on average. For example, the Dollar gained more than +150% against the Won during the IMF crisis, and more than +60% during the Lehman crisis, etc.
I believe that a globally diversified portfolio is one of the most reliable and accessible ways to grow wealth for long-term patient investors.
Families, business owners, holding companies, and individual investors who shed underperforming assets and invest properly for the future, will be the most successful in the next 30 years. Underperforming assets, whether a stagnating business subsidiary, legacy real estate, or old stock or fund holding, can drag down wealth significantly.
Practical Steps for All Investors:
Review Your Portfolio Regularly: Set a schedule to review your assets, for example, once a year.
Analyse Performance: Identify underperforming assets and determine if their poor performance is temporary or long-term. Be honest with yourself.
Be Objective: Keep emotions out of decisions. Focus on data, long-term trends, and expert advice.
Don’t Limit Yourself to Korea: Korea is less than 2% of public global market value. A global investment approach captures global growth and opportunities.
Don’t Fear Changes: Selling an asset can be a hassle, but inaction often costs more. Be proactive.
Consult Trusted Professionals: Seek advice from financial and tax advisors for tailored recommendations.
Following these steps isn’t difficult – you just need a plan and commitment. As the late John Bogle, founder of Vanguard, wrote: “Successful investing involves doing a few things right and avoiding serious mistakes.” If you want your portfolio to flourish, take action now.
Chairman Ohad Topor
Founder and Chief Investment Officer of Topor & Co Korea (TCK)TCK is the first independent wealth manager in Korea. Mr Topor has been managing assets for prominent business families and their companies for 24 years and since 2013 in Korea. He is based in Seoul and London, is a Stanford MBA and author. Hwang Young-Key and Howard Marks are senior advisors to TCK.