How to be humbled

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  By Guest Blogger Sinan Terzioglu

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Levarega can make you wealthy. Leverage can make you poor.

Margin debt in U.S. brokerage accounts reached a record US$1.5 trillion in June 2026, up approximately 49% from a year earlier. Those figures understate the amount of risk investors are taking because margin debt reflects only traditional borrowing against investment portfolios and does not capture many of the other leveraged strategies that have become increasingly popular in recent years.

History has repeatedly shown leverage can magnify gains during bull markets, but it can also accelerate losses when sentiment changes, making it one of the most powerful and dangerous forces in investing.

The growth in leveraged ETFs illustrates how investor appetite for leverage has expanded beyond traditional margin accounts. Assets in U.S.-listed leveraged ETFs have climbed to roughly US$190 billion, while average daily trading volumes now approach US$40 billion, giving investors amplified exposure to themes such as artificial intelligence, technology stocks, and cryptocurrencies.

Leveraged investors blown up in Korea

Recent events in South Korea provide a powerful reminder of the risks that accompany leverage.

After roughly doubling during an AI-fueled rally, the Korean stock market reversed sharply, falling more than 40% in just a few weeks. Investors using leveraged products suffered significantly larger losses, with the Direxion Daily South Korea Bull 3X ETF (KORU) declining more than 75% from its June peak.

Goldman Sachs estimated that more than 1.2 million leveraged retail accounts triggered margin calls by mid-July, with approximately 320,000 to 360,000 accounts forced into liquidation. Roughly one in every 30 working-age adults in South Korea was affected. For many investors, years of gains vanished in a matter of weeks.

While some view leverage as a shortcut to wealth, history suggests it often resembles speculation more than investing. Retail investors are not alone in falling into this trap. Professional money managers can become vulnerable as well, especially when rising markets and strong performance create a false sense of confidence.

One of the most remarkable investing stories of the year was Situational Awareness, the hedge fund founded by former OpenAI researcher Leopold Aschenbrenner.

Through June 2026, the fund reportedly generated returns of approximately 439% for the year, while some reports suggested cumulative gains had exceeded 2,000% since its launch in 2024. Assets under management climbed to as much as $45 billion as investors piled into what appeared to be one of the biggest winners of the AI boom.

Unfortunately, a good investment thesis is not enough when risk management takes a back seat. Situational Awareness reportedly employed approximately 3.5-to-1 leverage, leaving little room for error. When AI infrastructure stocks declined sharply in July, several of the fund’s largest positions fell by more than 35%, triggering margin calls from prime brokers and ultimately forcing the liquidation of much of the portfolio. What had been one of the market’s biggest success stories quickly became one of its largest blowups.

The mathematics of leverage can be unforgiving. An investor using 3-to-1 leverage who experiences a 25% decline in the underlying investment could lose approximately 75% of their own capital before interest costs and fees. At that point, investors are often forced to contribute additional capital or liquidate their positions.

Once a position has been sold, there is no opportunity to participate in a potential recovery. A temporary decline can quickly become a permanent loss.

When leverage made Wall Street wobble

This is hardly a new lesson. Financial history is filled with examples of exceptionally smart people who achieved remarkable success only to see it unravel because of excessive leverage.

One of the most famous examples was Long-Term Capital Management (LTCM) in the late 1990s. The hedge fund employed some of the brightest minds in finance, including two Nobel Prize-winning economists, and relied on sophisticated mathematical models that were considered cutting-edge at the time. Yet heavy borrowing left the fund vulnerable to events its models failed to anticipate. When markets moved against its positions in 1998, LTCM suffered massive losses and became such a threat to the financial system that a consortium of major Wall Street banks was assembled to stabilize the fund.

Warren Buffett has often pointed to another example much closer to home.

In the early days of their investing careers, Rick Guerin was every bit as talented as Buffett and Charlie Munger. Buffett later remarked that all three were on track to become extraordinarily wealthy, but Guerin was in a hurry. By using borrowed money to enhance returns, he left himself vulnerable when markets declined in the 1970s. Margin calls eventually forced him to sell high-quality investments at depressed prices, while Buffett and Munger, who avoided significant leverage, were able to remain patient and continue compounding their wealth.

The lesson is timeless.

Leverage has humbled everyone from retail investors and hedge funds to Nobel Prize-winning economists and some of the most respected investors in history.

Building long-term wealth is rarely about finding the next hot stock, investment theme, or maximizing returns through borrowed money. More often, it comes from owning a balanced and diversified portfolio, managing risk carefully and allowing compounding to do the heavy lifting. In the end, patience, discipline, and diversification have consistently proven to be more reliable wealth-building tools than leverage.

Sinan Terzioglu, CFA, CIM, is a financial advisor with Turner Investments, Private Client Group, Raymond James Ltd.  He served as vice-president of RBC Capital markets in New York City and VP with Credit Suisse in Toronto.

Source: https://www.greaterfool.ca/2026/08/02/how-to-be-humbled/