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← Back to List2026.07.03#EvolutionOfInvestment#AssetAllocation#Momentum

[Evolution of Investment Ch.6] Riding on Greed: Discovery of Momentum ​

Discovery of Momentum

Intro: The 'Inertia of Greed' That Destroyed Me ​

I have lengthily explained the theories of great scholars earlier, but to confess, I was not some noble value investor in the 2010s.

Far from value analysis or fundamentals, I was a typical moth drawn to the flame, merely chasing after political theme stocks and skyrocketing penny stocks where the crowds flocked and hit the daily upper limit. Swept up by the public's sticky greed and FOMO (Fear Of Missing Out), I threw my account into the fire.

The price of that mindless trend-chasing was gruesome. My account was halved, and as I revealed in the prologue, it took me exactly 11 agonizing years (until 2021) just to recover my principal. Because of this terrifying trauma, for a long time, I deeply despised the very act of 'buying rising stocks'. I firmly believed it was not investing, but gambling and the path to ruin.

However, as I properly began studying the history of investing, I fell into a massive state of shock.

I learned that the blind trend-following and the mad herding of the crowd that shattered my account was not simply the deviation of foolish retail investors... but rather a '4th law of generating returns' officially recognized by academia.

My failure was not in riding the 'trend' itself. The problem was 'emotionally betting that massive energy of greed on garbage stocks (theme stocks) without any system or principle'.

1. Mark Carhart Decodes the Market's 'Inertia' ​

An influential academic framework for describing this kind of price persistence appeared in 1997: the four-factor model developed by Eugene Fama's student, Mark Carhart.

Realizing that his mentor's Fama-French 3-factor (Market, Size, Value) model alone could not explain all the returns of fund managers, he dug through massive data and discovered a '4th Factor'.

That was the 'Momentum Factor (UMD: Up Minus Down)'.

Newton's First Law Descends on the Investment World ​

The conclusion of the momentum factor was so simple it was almost violent. "The stocks that have risen the most over the past 3 to 12 months have the highest probability of continuing to rise next month." Conversely, "The stocks that have fallen the most will continue to plummet next month."

The First Law of Physics, the 'Law of Inertia (an object in motion stays in motion)', perfectly dominated the stock market. It didn't matter whether a company's intrinsic value was excellent or garbage. This horrifying truth—that once it rides a trend (Momentum), it flies endlessly on the power of that inertia—struck the back of my head hard, as I had blindly trusted fundamentals.

2. The True Fuel of Momentum: Human Greed (FOMO) ​

Then, what power drives an already expensive stock to rise even further? As I dug into the secret of momentum discovered by Carhart, I once again encountered the 'Behavioral Finance' from Chapter 3.

The rocket engine fuel that launches momentum is none other than human's sticky greed.

  • The Public's FOMO (Fear Of Missing Out): Once a stock begins to surge, rational analysis ends. "I heard my neighbor Charles bought a foreign car with this, am I the only one missing out?" This fear invites blind, moth-to-a-flame buying, shooting the stock price into the sky.
  • Institutional Window Dressing: Fund managers are ultimately salarymen. At the end of the quarter, they must brag to clients, "Our fund holds the hottest stocks right now!" so money doesn't flow out. Thus, even knowing full well it's a bubble, they bite the bullet and buy more of the stock at its peak, prolonging the trend.
  • Senseless Trend Following by Machines: Added to this are algorithmic bots that mechanically hurl buy orders whenever they detect a rising trend, turning momentum into an uncontrollable monster.

3. Securing the Backbone of the Sharpest 'Spear' ​

Carhart's research perfectly filled the void in my investment philosophy. "When the market loses its reason and runs madly, do not hide behind the shield (Value) trying to teach the market a lesson. Temporarily put down the stubbornness regarding fundamentals, mechanically climb onto the back of that running horse of madness, and suck the sweet nectar until the end!"

This great realization later became the unshakable backbone allowing me to forge the final puzzle of my portfolio and the sharpest spear of attack. The true terror of the Momentum factor lies not simply in its high returns, but in its complete lack of 'loyalty' or 'stubbornness' toward any specific industry or stock. When the environment changes, it ruthlessly abandons the tech stocks it praised yesterday and switches to energy or healthcare—making it a 'fierce survival chameleon'. (How this momentum factor actually materialized into a chameleon-like weapon that adapts most astutely (SPMO) in my account will be covered in great detail later in Chapter 9.)

Through history, following the heavy shield (Value) that feeds and grows on human 'fear', I had finally acquired the spear (Momentum) that adapts most astutely to environmental changes and flies riding on human 'greed'.

Conclusion and Next Chapter Preview: Things That Threaten the Greatest Basecamp ​

Now, my arsenal looked formidable.

  • The solid ground forming the foundation of everything, Market Average (Index Fund)
  • The titanium shield that picks up fear, Value
  • The sharp spear that pierces greed, Momentum

The theory was perfect, and John Bogle's teaching that "If I hold a market index (S&P 500) tightly as the core, I will never go bankrupt!" was firm. However, while reviewing past charts, I faced the collapse of the most bizarre and massive bubble in human history that occurred in 2000, the 'Dot-com Bubble', followed by the '2008 Global Financial Crisis', and got goosebumps.

In this hellish crash, the index fund itself ultimately survived and proved its upward trend, but the 'human mentality' holding it completely collapsed.

Why did investors face ruin even while holding the S&P 500 they believed in like a religion? The difference between machines and humans, and the story of the 'Smart Beta' revolution that emerged to protect our mentality amidst consecutive massive crashes, unfolds in the next chapter.

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