The Chaebol Returns To The Presidency 1967 [EN]: Chapter 177

177. The Beginning of the Stock Market Bubble

The President clicked his tongue.

“To think they have such pride. First, they insisted on building a World Cup stadium in Pyongyang, and now, with only six months left, they suddenly want to form the team with an equal number of players from each country. It’s just too much!”

“The players who have been preparing for two years are losing their chance to play because North Korean players are participating. They don’t show it, but they’re actually quite dissatisfied. Coach Hiddink, in particular, is protesting that politics shouldn’t interfere with sports.”

“That’s right. There’s still time, so I’ll use this opportunity to negotiate with the North Korean side. Ministers, please step back and let me handle this.”

Although he was a regressor, the President had no idea what historical events would unfold at the upcoming ’74 Seoul World Cup because, in his previous life, it never happened.

* * *

Myeongdong Stock Exchange.

In the 1970s, the stock exchange was located in Myeongdong, then the center of finance, not Yeouido.

There were also significant differences in trading methods, not just the location.

A stockbroker was manually writing quote sheets.

The quote sheets, listing the listed stocks and bid prices, were submitted to the trading posts (posts) installed on the trading floor for each listed stock.

“Dong-A Construction, 200 shares!”

The stockbroker who was tallying the quotes received the quote sheet, noted the time, and announced, “Another construction stock. Construction stocks are selling well. They’re up 50% from a month ago.”

It was a post-trading system where the quote details were organized chronologically on a quote tally sheet, and the supply and demand for buying and selling were matched according to certain competitive principles to determine the price.

Until last year, it had been a *gyeoktak* trading system [a traditional, chaotic trading method].

*Gyeoktak* trading was a method where hundreds of buyers and sellers gathered at the exchange, conveying the quantity and price to buy and sell through hand signals, much like auctioning fish at a seafood market. When a transaction was agreed upon, they would strike a *gyeoktak* [a square wooden block] to signal that the transaction was completed.

The post-trading system was abruptly introduced to replace the rampant collusion issues of *gyeoktak* trading.

At the time, there were only about 50 listed companies, and the *yutong* [流通, circulating] volume was small, so some big players with large capital could manipulate the market by hoarding and artificially inflating stock prices.

Since brokers had significant discretion and there was no evidence of transaction records, big players would bribe stockbrokers to gain profits.

Furthermore, since 80% of stock transactions were conducted using a ‘*cheongsan georae*’ method [청산 거래, a delayed settlement transaction], where funds were settled two months later like futures trading, leverage investments of several times the margin were possible with only a certain percentage of margin. It was possible to gain trading profits in the middle through *ban-dae-mae-mae* [반대매매, forced liquidation] before the settlement date, so speculation was rampant.

Moreover, the market was a den of iniquity because there were no proper laws and systems to manage the stock market, protect investors, and impose sanctions.

In response, the President enacted the Corporate Disclosure Promotion Act (1972).

The Corporate Disclosure Promotion Act was a law that mandated the listing of companies that met certain requirements, with the intention of promoting smooth capital procurement and improving the financial structure of companies, fostering public participation in companies, and contributing to the sound development of the national economy.

After the implementation of the Corporate Disclosure Promotion Act, the number of listed companies in the Korean stock market exploded to 350, and the stock market grew significantly.

The trading volume, which was only in the range of 10 billion to 20 billion won in the 1960s, exceeded 1 trillion won in the 1970s.

As the foundation for revitalizing the stock market was laid, the government abruptly introduced post-trading to replace *gyeoktak* trading in order to protect investors.

Computerizing the post-trading slips would have created a modern stock trading system.

As the number of investment stocks increased and transactions became more transparent due to changes in trading methods, even ordinary people began to participate in the stock market.

Before the oil shock, construction stocks and export-related trading company stocks soared as economic development was in full swing.

The construction sector showed an increase of 135.4% compared to the beginning of the year, accounting for 20.4% of the total trading volume.

During Chairman Wang’s era, the construction sector overheated, showing an increase of over 1,000% in three years.

As word spread about people making a fortune, ordinary investors began to gamble like they were at a horse race.

“I made my monthly salary in fifteen days with Kyungnam Enterprise.”

“Fifteen days? Then your salary doubles?”

“No. If it goes up that much again in the next fifteen days, my salary will be three times as much, not just double.”

“Three times! What money does a salaried person have to invest in stocks? Isn’t that something only the big players in Myeongdong do?”

“Oh, come on, you’re talking about the old days. The number of stock items has increased dramatically, so you can buy as much as you want if the price is right. You can buy up to three times as much if you have a margin, and you can do *ban-dae-mae-mae* [forced liquidation] before the settlement date.”

“So, if you have a margin of 200,000 won, you can invest 600,000 won?”

“Yes. I broke my wife’s *gye* money [계, a rotating credit association] and put in 600,000 won and made a killing. It goes up 5% every night, so I make money even while I sleep.”

“Wow, I need to start soon!”

“I’m going to get a collateral loan using my rice paddies in my hometown and put it in.”

“Even a collateral loan?”

“If you put in millions of won, you can quit your job and become a *yuhanjok* [유한족, someone who lives off their wealth], driving your own car and going on trips. It’s a great world, hahaha!”

*

Myeongdong Dabang (Coffee Shop).

Ordinary stock investors, known as ants, gathered in groups of three or five, exchanging opinions while looking at stock quotes in the newspaper.

“Wow, most of the construction stocks are at the daily limit (+10%).”

“I placed a buy order with the broker this morning, and it’s already at the daily limit from the opening quote.”

“Damn it! They’re swarming like bees. If there are 1 million shares left at the daily limit, they won’t give you a chance to buy at all.”

“If you get in wrong after several days of hitting the ceiling, you’ll be catching the top. Be careful.”

“Then what should we buy?”

“You have to buy something that hasn’t gone up yet. There’s a new construction stock here. It’s just starting, so it hasn’t gone up yet.”

“New? Let’s see… Horangi (Tiger) Food? That’s a food stock, isn’t it? Anything other than construction is useless.”

“This guy doesn’t read the newspaper properly. They added the construction business as a new business purpose in yesterday’s announcement. So it’s a construction stock!”

“Is it okay to suddenly do construction while making bread?”

“If construction is involved, money pours into the stock market and the stock price jumps several times. That’s how they do a rights offering to increase their capital, and then they use that money to expand their business. That’s why companies are establishing construction companies as affiliates.”

Small housing companies that used to build only a few houses suddenly became large as their market capitalization snowballed due to the construction stock boom and blind investments. Companies could easily raise funds at low cost through rights offerings.

Taking advantage of this overheating, existing non-construction public companies added construction to their business objectives to transform into construction stocks and attract funds.

Blind investments that didn’t consider housing construction performance or financial statements were the beginning of the stock market bubble.

“Call and see what the market price is.”

“Should I?”

He called the stock exchange on the phone in the coffee shop.

“This is Kim Jung-bae. What’s Horangi Construction at right now?”

– It just hit the daily limit.

“Oh no! Already?”

– As soon as it was classified as a construction stock, buy orders poured in this morning, and it eventually hit the daily limit with 500,000 shares remaining.

“Damn it, I’m one step late!”

– It’s hard to get on board with these industry change stocks unless you catch them at the opening quote.

Kim, who finished the call, grumbled.

“It’s at the daily limit. 500,000 shares remaining.”

“See? As soon as construction is involved, it immediately hits the ceiling.”

Park said, looking at the newspaper.

“Why is Heopung (Exaggeration) Construction down 5%?”

“They’re doing a rights offering. 1:1.”

“What does a 1:1 rights offering mean?”

“This guy is a complete beginner.”

“You introduced him, so you’re responsible.”

“Tsk, if my disciple wants to know, I can’t help it. Listen carefully. I’ll give you some high-level information.”

“Yes, Master!”

“It means they’re issuing one more share for each share you already own, at a certain price. In theory, the total number of shares doubles, so the value per share is diluted by half.”

“Then the stock price should drop by half. Why did it only drop by 5%?”

“It’s because of expectations for the future. They expect that the money raised from the rights offering will expand the business and double the sales.”

“The stock price is determined by expectations, not performance?”

“The stock price reflects future potential in advance. Even if the current performance is good, if the future outlook is bad, it’s traded at the future price. The fact that a construction stock has doubled in a week doesn’t mean that the construction company has doubled its sales and profits in a week, but it reflects the expectation that it will happen in the future. That’s why it hits the daily limit every day.”

“Ah! It takes years to complete an apartment, but the fact that it hits the daily limit for several days when a construction order is announced is because of that reason!”

“Now you’re opening your eyes.”

“I should buy Heopung Construction when it drops a little. They’re going to build apartments with the capital increased by the rights offering.”

“Usually, after a few days of adjustment, the stock price returns to its original state. The key is how much it drops when the new shares are listed, but since the number of shares doubles with a 100% rights offering at a discount, if the stock price doesn’t fall below half, that’s a huge profit.”

“That’s right! If the stock price returns to the pre-announcement price by the time you receive the rights offering new shares, you’ll make 100%.”

“That’s right. If it goes up, it’s possible to make quadruple. I heard that Namsa Construction made four times the profit with a rights offering last time.”

“Wow, if the stock price goes up with a rights offering, it’s a jackpot! I have to catch this guy quickly before it rebounds.”

“Should I buy it too?”

As he was about to place a buy order, the broker said.

– The current price is +8%.

“Oh no, it was in the minus yesterday, but it jumped up in the meantime.”

– What should I do?

“Judging by the looks of it, this guy seems to be hitting the daily limit too. Buy 10,000 shares.”

– 10,000 shares?

“I’m betting all the money I’m borrowing.”

– Okay. Oh, but it’s already up 1% in the meantime.

“Hurry up and buy it at the market price! Quickly!”

– Should I buy it while chasing it? Or should I place a buy order at the current price?

“If it goes up again, I won’t be able to buy it. Do whatever it takes to catch it at the market price.”

– Okay, boss!

That’s how the three friends fully bet the money they borrowed.

*

A few days later.

The three friends gathered at the coffee shop again.

They turned pale as they looked at the newspaper.

“What is this? Heopung Construction is at the lower limit (-10%)!”

“Why is a construction stock at the lower limit? That can’t happen unless it’s about to go bankrupt?”

“Isn’t it because of the rights offering? In theory, the number of shares doubles, so the stock price drops by 50%.”

“Surely, it won’t be halved?

“Halved? Don’t say such a terrible thing. Sigh~ Did I get too greedy? Should I cut my losses now?”

“Don’t talk about cutting losses! The margin is 30%, so it’s a 3.3x leverage bet. It’s not a 10% loss, it’s a 33% loss!”

“Ah, that’s right! It’s a 3.3x leverage with the margin.”