Why We Choose Steady Compounding

This week, a hedge fund that was up 439% for the year nearly blew up.

Situational Awareness is an AI-focused fund run by a former OpenAI researcher. It launched less than two years ago, and by the start of July it had swelled to $45 billion in assets. Then AI stocks sold off hard, and because the fund was reportedly running around four times leverage, one bad month was all it took.

The margin calls came in, and the entire public stock portfolio was sold to Ken Griffin's Citadel in a single block. Even after all that, the fund is still up roughly 80% this year (likely due to their private equity position, Anthropic, that's offsetting the catastrophic cash losses from the public market bloodbath... but this is just my guess). It just very nearly didn't survive to enjoy it.

Reading the news, my first reaction was that this story feels familiar. We have seen it before.

In March 2021 it was Archegos, Bill Hwang's family office. Concentrated bets on tech and media stocks, roughly five times leverage through swaps, and when the positions fell, $20 billion of wealth evaporated in two days. (Hwang was later convicted of fraud over how those positions were built, which is its own saga. The overlap with this week is the leverage and the margin calls, not the fraud.)

In 2022 it was Three Arrows Capital, the crypto fund run out of Singapore. Same shape. Riding the sector bull wave, leveraged up, gone within weeks once prices turned.

And in 1998 it was Long-Term Capital Management, which had two Nobel Prize winners on the team and still needed the Federal Reserve to organise a rescue because of, you guessed it, leverage.

And it isn't just the famous cases. I know a few people personally who went through their own version of this. A bull market came along, they got intoxicated with the easy money, started taking on leverage to speed things up, and had their ass handed back to them when a speedbump came along.

I understand the temptation. When your portfolio grinds out a normal year while some AI fund is printing 400%, the slow path feels almost embarrassing, and leverage looks like the fastest way to catch up. In a bull market it even looks free, because every month it works, it feels a little smarter.

These funds all invested in different assets. What blew them up was the same every time: leverage. If the first half of this year made your portfolio feel slow, I hope this week serves as a reminder of why we invest the way we do. No borrowed money means nobody can ever force us to sell. It isn't the fastest way to compound, but it keeps us in the game long enough for compounding to work.

That is also why I wrote The Lunch Break Investor. It's the slow path in book form, a six-step system for analysing and owning great businesses one lunch break at a time. The book launches on August 18, and you can pre-order it here.

Compound Steadily,

Thomas

P.S. If you're in Singapore, I'm doing a book talk at Kinokuniya Takashimaya (Level 4) on 22 August, 4pm, with He Ruiming from The Woke Salaryman moderating. Come say hi: details here.