Is leverage a way to make more money or to lose everything?
Many novice investors believe that leverage is a tool for professionals. In reality, leverage does not make you a better investor. It only magnifies the consequences of both your wins and your mistakes.
Why leverage is dangerous
The biggest problem with leverage is not the loss. The biggest problem is time.
An investor without leverage can calmly ride out a 30-50% market decline if they are confident in the quality of the business. An investor with leverage does not have that luxury.
When prices fall sharply, the broker will demand additional money (a margin call). If there is no money, the positions will be closed automatically - often exactly when the market is at its low.
You may be absolutely right about the company you chose. But if you use leverage, the market may not let you wait until being right turns into a profit.
The story of Leopold Aschenbrenner
Leopold Aschenbrenner is a young artificial intelligence researcher and a former OpenAI employee. He founded Situational Awareness, a fund focused on companies tied to the development of AI.
At first his ideas proved exceptionally successful. The fund grew quickly, and according to the business press, its assets reached about $45 billion in early July 2026. Success made Aschenbrenner one of the most talked-about young investors on Wall Street.
But the portfolio was not only concentrated but also heavily leveraged. The fund used borrowed money and derivatives to increase its positions in AI infrastructure stocks.
When the key stocks began to fall, what always threatens a leveraged investor happened:
- the value of the collateral fell;
- lenders demanded that the debt be reduced;
- the fund was forced to sell shares;
- the sales took place in an already falling market;
- the decline triggered new collateral requirements.
In July, the fund’s portfolio lost 67% in a single month.
What this story teaches
Aschenbrenner may have been right about the main thing: artificial intelligence really can create huge demand for computing power, memory, electricity and data centers. But a correct long-term forecast does not guarantee that the related stocks will rise every month.
Between a strong investment idea and a positive result there can be:
- overvalued stocks;
- a temporary drop in demand;
- a change in market sentiment;
- a lack of liquidity;
- declines of 30-50% in individual stocks.
Without leverage, this is a drawdown. With leverage, it is a possible liquidation.
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