In a volatile market, an investor has two jobs.

Job #1: Don't get liquidated.

Job #2: See job #1.

I don't use leverage for long-term investing. Not once.

It’s why you can still fail while owning great companies.

This lesson became relevant during the latest AI correction.

Going into Q2 earnings, expectations were sky high. Investors weren't looking for good results. They were looking for grand slams.

If a company just met expectations, the stock often fell.

If guidance disappointed by just a little, double-digit declines were not uncommon.

We've seen multiple AI names swing 10% or more in a single trading session simply because expectations were impossible to satisfy.

Now imagine experiencing those same moves with borrowed money.

Leopold Aschenbrenner built one of the fastest growing hedge funds Wall Street has ever seen.

His AI-focused fund, Situational Awareness, reportedly grew to about $45 billion AUM after extraordinary returns by making concentrated bets on AI infrastructure and using leverage to amplify those gains.

Then the market changed…

As AI-related stocks sold off during the recent correction, those same leveraged positions moved against the fund. 

Losses grew, lenders demanded additional collateral, and the fund was ultimately forced to unwind much of its public equity portfolio, with Citadel purchasing a large portion of those holdings.

Let’s look at what caused the problem…

It wasn't that the long-term AI thesis disappeared. It wasn't that AI infrastructure became worthless overnight. The problem was leverage.

The market moved further and faster than the fund could financially withstand.

You can be right about the long-term direction and still lose everything if your time horizon is shorter than your lender's.

I've been convinced I was looking at a once-in-a-generation opportunity more than once. I still didn't borrow to buy it.

That restraint has never cost me a portfolio.

Conviction is not the same as certainty.

The world's largest hedge funds struggle to predict quarterly earnings, guidance revisions, macroeconomic shifts, interest rates, or market sentiment. 

What makes me think I’m different?

I don't have a Bloomberg Terminal.
I don't have a team of analysts building financial models.
I don't have management on the phone.
Neither do most of the people reading this.
And even with all of that, Aschenbrenner still got wiped. 

And even if you had all of those advantages, you'd still get things wrong.

Leverage will remove your ability to survive those mistakes.

Let's keep it simple...

Let’s say you have $100,000.

Without leverage, you can buy $100,000 worth of stock.

If the stock drops 25%, your portfolio is now worth $75,000.

Now let's add 2x leverage, and instead of buying $100,000 worth of stock, you’re controlling $200,000.

A 25% decline is a $50,000 loss.

Your original capital drops from $100,000 to $50,000.

You’ve lost 50% even though the business only declined 25%.

And that's assuming you get to hold.

At a 25% decline, your $200,000 position is worth $150,000, but you still owe the broker $100,000. Your equity is $50,000 against a $150,000 position. That's 33%.

Most brokers require 30% to 35% on volatile names. Some will require more.

The margin call doesn't arrive sometime later, it arrives right about here, and you sell into the decline whether you believe in the company or not.

Now look at what it takes just to recover…

Down 50%, you need a 100% gain just to get back to even.

Except you won't be there for it. The shares were sold to satisfy the call. Unlevered, you're down 25% and you still own the business. Levered, you're down 50% and you own nothing.

Leverage doesn't just deepen the loss. It removes you from the recovery.

Funds run 3x and 4x leverage.  It’s the same math with even less room.

I did use leverage when I used to day trade. My leveraged positions were closed before the end of the trading day, so I wasn’t exposed to overnight gap risk. I also had stop-losses set. 

A stop-loss is an order, not a guarantee. In a fast market, it will likely fill below your price. If the stock gaps overnight or halts on news, it doesn't fill where you wanted it to fill.

So the exception is narrow on purpose. Same day, defined risk, size I can eat if the stop fails.

Long-term conviction and borrowed money don't belong in the same account.

Warren Buffett has warned investors about leverage for decades.

One of his best-known observations is:

"When you combine ignorance and leverage, you get some pretty interesting results."

He has also repeated Charlie Munger's famous line:

"There are only three ways a smart person can go broke: liquor, ladies, and leverage."

Leverage looks great until it isn’t.  And when it stops working, the damage happens too quick to recover from.

Most investors spend their time trying to maximize returns. Very few spend enough time trying to survive.

You can make a great argument that this is backwards.

The market always offers another opportunity.  Another correction, another great company, or another earnings season.

Investors who compound wealth over decades aren't the ones who find every winning stock.  They're the ones who avoid making mistakes that can take them out.

Protect your downside first!