Friends,
My wife's career has covered an interesting cross-section of professions. Currently, she's combining mindfulness meditation with athletics. That led her to former Chicago Bulls coach Phil Jackson's Sacred Hoops.
The key chapter of the book is titled: "Awareness is more important than intelligence." In it, Jackson talks about how the smartest basketball player in the world isn't worth anything if he/she isn't aware of what's happening on the court at any given moment.
I thought that was a perfect analogy for what we saw in the stock market last week.
A stunning reversal
One month ago the Situational Awareness hedge fund was sitting atop Wall Street. Run by 20-something Leopold Aschenbrenner -- a former employee of OpenAI who was Columbia's valedictorian at just 19 years old -- the fund returned 439% in the first half of 2026 alone.
And then the wheels came off.
He was betting heavy on the AI infrastructure stack (think: memory chips, ready-to-deploy energy, etc), and shorting software names. The month of July did not go well for him: the AI stack sold off while software names rallied.
Normally, while that would hurt an investor, it wouldn't be cause for panic. But this wasn't a normal situation: one of the reasons Situational Awareness did so well was because it was highly levered.
As July unfolded, and Aschenbrenner's investments continued causing pain, he had margin calls made on his investments. Unable to get any new money in the doors to meet those requirements, it is estimated that he had to sell the entire portfolio of public stocks. The entire portfolio lost 67% of its value in just one month.
If not for a timely private investment in Anthropic, the fund could have been completely wiped out.
The lesson for investors
Leverage -- where you borrow money to buy stocks and only have to pay back your borrowings (plus interest) -- can be the greatest force in the world. Imagine:
- You have $1 to invest
- You borrow $4 on margin and invest it the entire $5.
- Your investments double, and go up to $10.
- You sell your investments and pay back your margin immediately.
The investments you made went up by 100%. But you turned $1 into $6 after all was said and done -- a 500% return.
But as wonderful as margin is on the way up, it can be about 3x as bad on the way down. Consider Aschenbrenner:
He was right on direction of his investments over 18 months, is up on the year, and leverage still took the decision out of his hands. The public portfolio is gone.
We've long thought of leverage like steroids: they have the potential to get you what you want quickly. But as quick as those gains come, the downside can be just as bad, and last for the rest of your life.
Over the long run, that's not a trade that'll ever be worth it.
Wishing you investing success,
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Brian Feroldi, Brian Stoffel, & Brian Withers
Long-Term Mindset
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