"The Big Short" Burry’s star pupil warns: South Korean stock market appears to be a "capitalist paradise," but in reality hides a "value trap"

According to Zhihui Finance APP, renowned investor and protégé of Michael Burry—the real-life inspiration behind the movie "The Big Short"—Phil Clifton has issued a warning that there are hidden traps behind South Korea’s cheap stocks: 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 his trip to South Korea and Japan in August, he met with around 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: Appears to be a “capitalist paradise,” but interests are often misaligned

In his letter, Clifton wrote: "At first glance, South Korea’s stock market seems like a capitalist paradise," with high-margin and steadily growing businesses everywhere. However, he pointed out that the interests of shareholders frequently diverge from those of company management.

He noted that many South Korean companies are significantly undervalued compared to their global peers, but this excess value is often difficult for minority shareholders to access, particularly in firms where the founding family retains significant control.

Clifton was the last portfolio manager at Scion Asset Management other than Burry. Burry is set to close the hedge fund in November 2025. Burry shot to fame for shorting the U.S. subprime mortgage market before the 2008 financial crisis, inspiring the main character in "The Big Short". Reportedly, Burry once recommended Clifton to clients as a talented young investor and an outstanding thinker. Clifton established Pomerium this January.

Inheritance and gift tax incentivize controlling families to depress stock prices

Clifton attributes the issue to South Korea’s inheritance and gift tax, where rates reach up to 60% in some cases and listed company equity is taxed based on market value. As a result, controlling families are motivated to keep stock prices low by hoarding cash, investing in unrelated businesses, and paying little or even no dividends.

He stated: “Shares in these companies are essentially perpetual bonds with no coupon and no principal repayment, becoming ‘value traps’. No matter how well the underlying businesses perform, the stock price remains stagnant.”

In recent years, as the South Korean government has promoted corporate governance reforms to enhance shareholder returns—especially targeting family-controlled conglomerates—the country has attracted more and more global investors. Some investors are optimistic that these efforts could lead to a re-rating of South Korea’s stock market. For a long time, the market has suffered from the so-called “Korea discount”, and similar reforms have previously driven up stock prices in neighboring Japan.

This push for reform, along with South Korea’s crucial position in the global artificial intelligence supply chain, has helped the Korea Composite Stock Price Index (KOSPI) rise by more than 100% this year, reaching a peak in June. However, as concerns over AI returns have grown, the rally has gradually faded.

Japanese stock market more popular: Discount has yet to disappear entirely

The Japanese market has made Clifton even more optimistic. He noted that, until recently, the market was full of severely undervalued companies, but efforts by exchanges and regulators to address valuation discounts have been quite successful.

He wrote: “Fortunately, Japan’s valuation discount has not yet disappeared entirely.” This phenomenon is especially apparent among smaller, faster-growing companies, such as healthcare technology company Medley Inc., which is Pomerium’s top holding.

In August, Medley’s board announced a dividend policy targeting a payout ratio of around 30%. Although Clifton prefers additional share buybacks at current prices, he welcomed this move. “This is certainly much better than acquiring luxury hotels or investing in data centers,” he said.