The fund was forced to sell almost all publicly traded shares to meet creditor demands. The sudden drop was also contributed to by financial leverage, investing using borrowed funds. When the market rises, it can increase returns, but when prices fall, losses also increase, and investors may be forced to quickly sell part of their assets. This portfolio was later acquired by one of the world’s largest hedge funds – Citadel.
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At first glance, it may seem like another story about the artificial intelligence sector. In my opinion, it is a story about risk management. It reminds us that even the most promising investment idea can end in significant losses if the risk becomes greater than the investor can manage.
The biggest investment mistake – forgetting risk
High returns always attract investors’ attention. This is natural – we all want our investments to earn as much as possible. However, when investing, it is important not only how much can be earned. It is equally important to understand how much can be lost if the market changes.
Working with investors, I often hear the question of what is worth investing in today. But much less often do people ask themselves what risk they are truly prepared to take. In my opinion, the answer to this question ultimately determines more successful investment decisions.
Losses are usually not caused by a wrongly chosen investment. They occur when investors trust one idea, one sector, or one market scenario too much and stop considering what would happen if the situation changed.
The story of “Situational Awareness” illustrates this perfectly. The problem was not the investment direction itself. The problem was that the fund’s success became too dependent on one scenario – that artificial intelligence company stocks would continue to rise rapidly. When the market turned in another direction, this assumption quickly collapsed.
My experience shows that the greatest investment risk often arises not when markets fall, but when they rise rapidly. During such periods, investors fear missing out on earning opportunities, so decisions are increasingly driven by emotions rather than a pre-thought investment plan. It is precisely at such moments that discipline becomes one of the most important investor qualities.
Three lessons for every investor
This story reminds us that investment principles do not change, whether we are talking about a fund managing billions or a private investor. Therefore, investors should remember three things.
First – a good investment idea does not yet guarantee a good result. The recent artificial intelligence boom has once again shown that a promising sector does not necessarily mean a successful investment. When investing, it is important not only to choose a promising direction but also to assess how much risk is taken. Even a very strong investment idea can end in losses if the investor trusts their forecasts too much and is convinced that the market will move in only one direction.
Second – no single investment should determine the fate of the entire portfolio. When one investment or one sector begins to dominate the portfolio, risk increases much faster than many realize. Diversification is not just about having as many different investments as possible. Its goal is to ensure that one unfavorable scenario does not determine the results of the entire portfolio.
Third – first think not about profit, but about the worst-case scenario. Before making an investment decision, ask yourself: could I calmly hold this investment if its value dropped 30 or even 50 percent tomorrow? If the answer is “no,” it is worth reassessing whether the chosen investment risk matches your goals, investment horizon, and tolerance for market fluctuations.
There will always be new technologies, new sectors, and new investment stories promising exceptional returns in the markets. But investment principles do not change. Investors are usually protected from the greatest losses not by the ability to predict the future, but by being prepared for it to be different than expected. Long-term investment success is usually determined not by the ability to predict the next market leader, but by the discipline to stick to your investment plan.
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