Finding 'Underdogs' over Top Stocks…September Requires Careful Management

They explained that simply being a large company with strong market dominance does not necessarily mean it's a good stock. Investments that do not consider the disparity between a company's value and its current stock price may struggle to generate expected returns.

There's a clear difference between a good company and a good stock. A good company is one that consistently generates stable profits over the long term, but for a good stock, the variable of 'price' is added. In other words, experts explain that a stock can only be considered 'good' when its price is at a reasonable level compared to the company's intrinsic value.

An analysis of data from 1970 showed that long-term investment in only the top-ranked stock yielded about 4,900% returns. However, if investments were diversified across the remaining 499 stocks, excluding the top one, the returns reached an astonishing 42,400%. This highlights the importance of diversified investment, which reads the overall market trend, rather than blind investment in top market capitalization stocks.

Stocks that have entered the top ranks by market capitalization tend to have all investor attention concentrated on them, reflecting all corporate expectations in their price. This convergence of stock price and intrinsic value can diminish their 'potential' and relatively weaken their additional upward momentum. This implies that greater upside potential can be expected from undervalued stocks rather than those already fully appreciated by the market.

In fact, they often underperformed the market. This suggests that the highest probability of achieving excess returns is by investing in a company in its early growth stages, before it enters the top 10.

A strategy is needed to identify promising companies in early-stage industries like the space industry, Small Modular Reactors (SMRs), and Neo Cloud.

For instance, a strategy of diversifying investments across 10-15 stocks with equal weighting in a high-growth sector like 'space' can be effective. This reduces dependency on any single stock, and if some grow significantly, they can drive the overall portfolio's returns. It is recommended to use asset managers' research to construct portfolios and hold for the long term rather than chasing short-term large profits.

For example, over one month in August, the KOSPI 200 Equal Weighted ETF rose by 12%, while the market capitalization-weighted ETF only increased by 2%. This demonstrates the risk of market capitalization-weighted approaches over-investing in already large stocks.

Instead, equal-weighted investments showed better performance for longer durations. The current period is likely the beginning of a shift towards equal-weighted investment. Therefore, for long-term investors, the equal-weighted approach may be more advantageous not only in terms of performance but also investment management.

The Russell 2000, a U.S. small-cap index, has over half of its constituent companies operating at a loss, whereas the S&P 600 consists solely of profitable companies. While stocks of loss-making companies tend to rise more significantly in a favorable market, when the market turns conservative, the S&P 600 index, composed of financially sound, profitable companies, garners attention. Investors must determine which index is more appropriate depending on market conditions.

In the Korean stock market, KOSPI stocks are categorized into large-cap, mid-cap, and small-cap based on their market capitalization. The general standard classifies KOSPI stocks from 1st to 100th as large-cap, 101st to 200th as mid-cap, and 201st and below as small-cap. This classification helps investors understand the characteristics of each market segment and formulate strategies.

The equal-weighted method recorded returns five times higher than the market capitalization-weighted method. This shows that in a market rotation phase, an approach that gives equal weight to all stocks can be more advantageous than one where weight is determined by market capitalization. Therefore, equal-weighted investment can be an effective strategy for many investors, including beginners, and some suggest that the opportunity has arrived.

Contrary to most market participants who expected the Fed to signal interest rate hikes at the Jackson Hole meeting, some experts leaned towards the possibility of a 'hawkish hold.' This refers to a policy where interest rates are not raised, but the strong possibility of future hikes is indicated, keeping the market on edge.

First, there might be an intention to avoid unnecessary conflict with President Trump ahead of the November 3rd mid-term elections. While the Fed aims to maintain political independence, a rate hike before the election could spark political controversy. Second, if President Trump's influence diminishes after the mid-term elections, the Fed might gain more leeway to operate policy independently. Third, the Fed could opt for a 'hawkish hold,' indirectly signaling interest rate hikes through monetary policy reports like the Summary of Economic Projections (SEP) while deferring an actual rate hike. This can be interpreted as a cautionary message: 'No hike this time, but a hike could come next time.'

The results of the US mid-term elections could significantly impact the Fed's policy operations. If the Republican Party loses in the Senate, concerns about the current administration's lame duck status could increase, weakening President Trump's political influence. Especially if President Trump faces legal difficulties in running for re-election, political pressure on the Fed might decrease, making it more likely for the Fed Chair to reinforce an independent, orthodox stance. Such political changes would provide the Fed with considerable room to maneuver in its monetary policy decisions.

September is historically known as a slow season for the US stock market. Coupled with the Fed's monetary policy uncertainty, market volatility is expected to continue. Therefore, September is a time to focus on reviewing existing portfolios and managing risks rather than aggressive betting. The advice is to reduce risk through stock diversification rather than speculation on specific indices.