The World’s Most Confident Investors

This is a Short Note.

I have been following Samsung over the last few years. It makes really great products – microchips, smartphones, kitchenware, and many others. But Samsung is not necessarily spotless. It has had its Galaxy Note 7 exploding-battery problem and continues to battle with Apple in the smartphone business. Yet, despite these issues, Samsung stock has not frozen; a QZ newsletter explains it thus:

Throughout all this, Samsung Electronics—the crown jewel of the larger Samsung empire—has been running a tear on the Korea Exchange. Its components division, which makes OLED displays and semiconductors, has kept operating profit strong. The company’s market capitalization has increased by $85 billion, up almost 44% from one year ago. It seems that in the eyes of shareholders, the turmoil surrounding Samsung Electronics remains secondary to its solid fundamentals.

And the big one few days ago: the heir to the Samsung empire, Lee Jae-yong, was convicted and sentenced to five years in prison. He had been founded guilty in an illegal donation as the company pursued its merger plans.

While not condoning what has happened in Samsung including the illegal donation and making sub-par products that put people at risks, you cannot miss the discipline of its investors. In U.S., Samsung could have paid severe penalty. In short, the conviction of the Samsung heir could have pushed the stock to deep worry territory. Of course, the guy will not even be near Samsung before the trial was over. Activists would have asked him to step down, and resigned from the company. Some could have asked him to sell his shares.

If you think former Uber CEO Travis Kalanick was misbehaving, remember that no one had convicted him of any crime. Yet, they pushed him to step down despite the clear evidence that he was generating alpha.

So, if you look at the South Korean people, you need to question how they have navigated all these issues which have befallen Samsung and still believed. They understand that the company has solid business fundamental, and have refused to be distracted by the scandals. Indeed,  it is hard to fathom how a company’s owner (yes, he is the heir) of such a large firm was convicted, and the stock did not even move. The only explanation is: provided Samsung keeps generating profits, nothing matters. They are indeed confident on the fundamentals of this business and Samsung is lucky to have them.

While I do not necessarily support the level of confidence, what is happening in South Korea tells me about resilience and expectation at national level. There is something for every nation to learn here: knee-jerk reaction may not do so much good. The unprecedented collapse of the Nigerian stock market nine years ago cannot be totally blamed on the Great Recession, but the fact that we simply over-reacted to events that we were not necessarily at the center. Even if the foreign investors had pulled their capital, Nigerians could have done things differently. Of course, without solid confidence in the markets and the companies, that would be hard to expect.

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