One Current Market Observation:
Leopold Aschenbrenner’s Situational Awareness fund gave us one of the most spectacular examples of the dangers of leverage in years. After an incredible run betting on the AI theme, the fund reportedly reached roughly $45 billion before suffering a 67% loss in July as its heavily leveraged positions moved against it. It highlights the psychological bias of even the smartest people to get complacent and add leverage late into a bull cycle.
What makes the story so fascinating is that Leopold, despite having the perfect call on AI many years earlier, still nearly lost everything due to the perils of market psychology. It is a perfect case study of how intelligence is not the only trait required for success in markets.
One Nugget of Trading Wisdom:
Being right eventually is worthless if you cannot survive being wrong temporarily.
Leverage changes the game because it introduces a path dependency to your thesis. Without leverage, you can potentially sit through a massive drawdown and wait for your thesis to play out. With enough leverage, the market gets to decide when you are forced out.
Most people who overly simplify investing and trading are missing the fact that path dependency is everything. It isn’t just about being right, but being right in a manner that you can capture the upside without being stopped out or liquidated.
One Reflective Question:
Any time I witness a blow-up of this caliber, it always makes me do a gut check of my own. What area of your trading is most vulnerable to blow-up? Is there a risk you know you are aware of but are choosing to ignore because it’s uncomfortable to acknowledge?
One 1%-Improvement Idea:
Stress-test your trading against something you believe is nearly impossible. Then ask yourself whether you would still have enough liquidity, buying power, and psychological capital to continue trading normally.
The purpose isn’t to predict the disaster. It is to make sure you are following sizing rules that allow you to survive the next disaster that nobody can possibly predict.
One Reading Recommendation:
When Genius Failed by Roger Lowenstein is the perfect book for this moment. It tells the story of Long-Term Capital Management, a hedge fund filled with some of the smartest people in finance that produced extraordinary returns before leverage helped turn relatively small deviations from their models into an existential crisis.
The lesson is remarkably similar nearly three decades later: intelligence, conviction, and even being fundamentally right are not substitutes for risk management.
Forget outcome. Let’s get better this month.
