The Call Is Coming from Inside the House

The Call Is Coming from Inside the House

In last month’s newsletter (July 2026 Newsletter) we discussed the various sources of risk, with the ultimate form of risk being not knowing what you are doing.  Translation: we as individuals – investors or otherwise – are often our own worst enemy when it comes to where risk truly resides.

But it is human nature to want to blame someone or something else – the proverbial ‘they’ out there somewhere conspiring against us (the ‘victims’).  While that may be an easy out, it is only that: an excuse to remove self-responsibility and accountability.

Case in point: the recent Situational Awareness hedge fund blowup.  Over the course of a few days last month, this once $45 billion hedge fund run by 25 year-old wonderkid Leopold Aschenbrenner collapsed by roughly $35 billion.  What was the big culprit?  Some exogenous event like an unexpected and unknowable pandemic or terrorist event?

Nope.

The fund took on around 400% leverage (a source of risk I identified as being behind most financial blow ups).  So, when the stocks the fund owned (via both longs and shorts) worked against them, the leverage amplified the losses and boom, the next thing you know they had to offload the bulk of their holdings (which were also subject to massive losses).

Let’s put that leverage in perspective.  Around the same time (mid-July), venerable IBM suffered its largest single one day drop in history (around 25%).  IBM is no spring chicken.  It was founded in 1911 and has survived the Great Market Crash of 1929, Black Monday 1987 when the US market dropped over 22% in a single day, the Worldwide Pandemic of 2020….

If you simply owned IBM outright then sure, you had a bad day, but you lived to tell the tale (and the stock is up over 16% from the intraday low). 

But if you were leveraged 400%? Game over. 

As with Situational, you’d be getting margin calls from you broker and knocks on your door to pay the piper.  Hence the risks of leverage.

But this was an unforced error – no one put a gun to the portfolio managers' heads at Situational and forced them to leverage so much.

Whether it is taking on too much leverage (via margin or even a levered ETF), selling at panic lows stocks for which cash is not needed for years, buying a wildly overvalued stock just because the price is going up, or any of the myriad actions we take unnecessarily, the point is, when it comes to finger pointing, we must aim the digits squarely at ourselves.

Thankfully, that means we also have control over not taking these risks (as opposed to having no control over exogenous events/risks).

What risks are you sitting on without your awareness that could blow up unless dealt with?  One of the many values a well-trained, objective, disciplined Financial Advisor can provide is the review of these potential exposures and ideas as to how to mitigate.  Sometimes we need a second set of eyes to be impartial and fact (vs emotions) based to identify potential ticking time bombs before it is too late.