"The Big Short" Burry's protg warns: The South Korean stock market appears to be a "capitalist paradise," but in reality it hides a "value trap."

Renowned investor Michael Burry's protg, Phil Clifton, warns that behind South Korea's cheap stocks lies a trap: much of their value is often out of reach for minority shareholders. Clifton is the founder of Pomerium Capital Management LLC in Cupertino, California. During an August trip to South Korea and Japan, he met with about 20 companies. In a letter to investors dated September 29, he wrote that the trip convinced him that investing in South Korea "requires extra caution and close attention to management incentives." South Korean Stock Market: At First Glance a "Capitalist Paradise," but Interests Are Often Misaligned Clifton wrote in the letter: "At first glance, the South Korean stock market looks like a capitalist paradise," full of companies with high profit margins and steady growth. But he pointed out that the interests of shareholders and corporate operators are often misaligned. He said many South Korean companies trade at substantial valuation discounts relative to global peers, but this excess value is often difficult for minority shareholders to access, especially in companies where founding families retain considerable control. Clifton was the last portfolio manager at Scion Asset Management besides Burry. Burry closed the hedge fund in November 2025. It is reported that Burry rose to fame by shorting the U.S. subprime mortgage market before the 2008 financial crisis, which also made him the prototype for the protagonist of the film "The Big Short." Reports say Burry once recommended Clifton to clients, calling him a brilliant young investor and an exceptional thinker. Clifton founded Pomerium in January of this year. Inheritance and Gift Taxes Incentivize Controlling Families to Suppress Share Prices Clifton blames South Korea's inheritance and gift taxes, with rates reaching as high as 60% in some cases, and listed company equity is also taxed at market value. This gives controlling families an incentive to suppress share prices by hoarding cash, investing in unrelated businesses, and paying little or no dividends. He said: "The stocks of such companies are effectively perpetual bonds with no coupon and no return of principal, becoming a 'value trap,' where no matter how well the underlying business performs, the share price stays stuck in place." In recent years, as the South Korean government has pushed corporate governance reforms to improve shareholder returns, especially targeting family-controlled chaebols, South Korea has attracted more and more global investors. Some investors are optimistic that these efforts could drive a re-rating of the South Korean stock market. For a long time, the South Korean stock market has been dragged down by the so-called "Korea discount," and similar reforms once drove gains in neighboring Japan's stock market. This reform push, combined with South Korea's key position in the global artificial intelligence supply chain, helped the KOSPI rise more than 100% this year and reach a high in June, after which the rally gradually faded as doubts about AI returns intensified. Japanese Stock Market More Favored: Discount Has Not Yet Fully Disappeared The Japanese market makes Clifton more optimistic. He said that until recently, the Japanese market was full of heavily undervalued companies, but efforts by exchanges and regulators to address the valuation discount have been quite successful. He wrote: "Fortunately, Japan's valuation discount has not yet fully disappeared." This is especially evident in smaller, faster-growing companies, such as health tech company Medley Inc., which is also Pomerium's top holding. Medley's board announced a dividend policy in August, targeting a payout ratio of around 30%. Although Clifton would prefer more share buybacks at current prices, he welcomed the move. "This is certainly much better than buying luxury hotels or investing in data centers," he said.