Summary of Key Points
Recently, the South Korean stock market experienced a circuit breaker due to SK Hynix' stock price plummeting by 15% in a single day. This was triggered by the fact that, amid the AI boom, stock prices had already overestimated future growth. Additionally, the daily two-fold leverage products based on SK Hynix in Hong Kong, with a scale of over HK$50 billion, amplified market volatility. Retail investors using financing combined with leverage led to a domino effect of forced selling (deleveraging). This incident highlights investment truths such as "a good company does not necessarily make for a good investment," "the risks associated with leveraged products are far greater than imagined," and "the combination of leverage and financing can be deadly." It serves as a reminder to investors to be cautious about excessive leverage and to retain the right to wait for market values to realize their potential.
1. SK Hynix' Stock Price Plunge: Not Because the Company Is Weak, but Because the Stock Price Was Overhyped
SK Hynix is a key supplier of memory for AI servers (which have high demand for bandwidth). Its stock price had risen several times due to the AI boom, but this increase reflected investors' expectations of growth over the next 3-5 years, not current profits. When the market began to question whether future supply would exceed demand or whether profit growth rates would slow down, the overvalued stock price started to deflate.
Furthermore, there are structural issues in the South Korean stock market: Samsung and SK Hynix account for too large a weight, and retail investors have borrowed a total of 38.6 trillion Korean won to invest in these two stocks. If SK Hynix' stock price falls, investors with leveraged positions are required to deposit additional margin, forcing them to sell their shares, which further drives down the price, creating a vicious cycle of "falling prices → increased selling → even greater declines."
2. The Two-Fold Leverage ETF in Hong Kong: Magnifying Volatility
In Hong Kong, there is an ETF called 7709 (Southern East Capital's SK Hynix Daily Double Leveraged Product), with a scale of over HK$51.8 billion, making it the largest single-stock leverage ETF in the world. Its mechanism involves "chasing gains and cutting losses daily":
- If SK Hynix' price rises by 10%, the ETF increases its holdings to maintain a two-fold exposure, further driving up the stock price;
- If the price falls by 10%, the ETF reduces its holdings, leading to additional selling and exacerbating the decline.
This pro-cyclical approach turns small fluctuations into significant market shocks. For example, if SK Hynix' price drops by 15%, the ETF could theoretically lose 30%, and the subsequent reduction in holdings would add to the selling pressure, potentially triggering a circuit breaker.
3. The Perils of Two-Fold Leverage
Many people think that a two-fold leverage product means a 20% return on a 10% stock price increase, but this only applies for short-term gains. Since the ETF needs to reset its leverage daily, long-term use results in "volatility erosion":
- Example: If SK Hynix' price rises 10% and then falls 10%, a regular stock would lose 1%, while the two-fold leveraged product would lose 4% (from 100 to 96);
- Unbalanced losses: A 30% loss (e.g., from 100 to 70) would require a 78.6% increase to recover the original investment, and a 50% loss would require a 100% increase.
Even if you are long-term bullish on SK Hynix, using a two-fold leveraged product could result in total losses due to short-term market fluctuations.
4. The Deadly Combination of Leverage and Financing
Using leverage simply means investing more money with your own funds, potentially leading to a 50% loss. However, if you also use financing (borrowing money) to invest, you are essentially applying additional leverage:
- Suppose you use leverage to buy the ETF, and SK Hynix' price falls by 15%, causing a 30% loss. This could lead to your margin account falling below the broker's requirements, forcing a forced sale.
Once a position is liquidated, even if SK Hynix' price later recovers, you may no longer have the opportunity to buy back your shares. This is the most frightening aspect of leverage: it deprives you of the chance to wait for the market to rebound.
5. Investment Lessons
- A good company does not necessarily make for a good investment: SK Hynix is a solid company, but if its stock price has been overhyped, buying into it at that point means taking on the risks of future declines.
- Leveraged products are not suitable for long-term investments: Two-fold leveraged ETFs are designed for short-term speculation and should not be used for several months or years.
- Calculate your maximum potential loss before investing: Ask yourself, "If the stock price falls by 20%, how much will I lose? Can I afford that?" Instead of focusing on potential gains.
- Retain the right to wait: Warren Buffett warns against leverage because it can force you to sell at the worst times, leaving you without any chance of benefiting from future market improvements.
Conclusion
The turmoil in the South Korean stock market is not due to the failure of the AI industry or SK Hynix itself, but rather to excessive leverage and valuation bubbles. The primary principle of investing is not to "earn the fastest," but to avoid being permanently removed from the market. Don't let greed and misunderstanding of leverage prevent you from realizing your long-term investment goals.
(Note: This analysis represents personal views and does not constitute investment advice.)