The Shortcut That Can Destroy Years of Wealth

South Korea recently gave investors a painful lesson about borrowed money.

Its stock market had become one of the world’s hottest trades. Excitement over artificial intelligence sent chip stocks soaring, while individual investors rushed to participate.

After South Korean stocks surged 75% in 2025, retail investors rushed in and became the market’s biggest buyers this year. 

Many borrowed money or purchased leveraged funds designed to multiply daily returns.

For a while, the strategy appeared brilliant.

Rising prices produced larger profits. Those profits encouraged more borrowing, which pushed even more money into the same popular stocks.

Then the direction suddenly changed.

South Korea’s KOSPI plunged nearly 11% in a single session, followed by another sharp decline the next day. 

The selloff erased roughly $2 trillion from the market within one month. Many leveraged investors faced margin calls or forced liquidations as their collateral collapsed. 

The damage was even worse for investors using leveraged funds tied to SK Hynix, South Korea’s leading memory chipmaker.

Some of those funds lost nearly 30% in just one week as the stock reversed sharply. A fund designed to triple the South Korean market’s daily movement dropped almost 18% during a single session. 

The underlying companies did not disappear. Demand for artificial intelligence did not vanish overnight. Leverage simply turned an ordinary market decline into a financial disaster.

The danger was not limited to individual investors in South Korea.

Situational Awareness was run by Leopold Aschenbrenner, a young investor widely viewed as an AI wunderkind in Silicon Valley.

He gained attention in 2024 after publishing a widely discussed essay predicting how artificial intelligence could reshape society.

His firm built large, concentrated positions in AI stocks and reportedly gained 439% from the start of the year through the end of June.

His reputation and early success attracted enormous attention. Yet even a brilliant view of AI’s future could not protect an overleveraged portfolio when prices reversed.

The firm managed roughly $16 billion in public stocks while using significant borrowing to increase its exposure.

Then, technology stocks reversed sharply.

The fund suffered steep losses and began asking investors for additional capital. It entered urgent talks to sell a significant portion of its public stock portfolio.

On July 30, Citadel agreed to purchase a large portion of the fund’s $16 billion public stock portfolio. 

The rushed transaction was completed within roughly 24 hours after steep losses created urgent pressure to sell.

Situational Awareness may have remained confident about artificial intelligence. But leverage gave its lenders enormous influence over when positions had to be sold.

A portfolio that had produced spectacular gains suddenly needed a buyer within hours. The investment thesis may not have changed, but the financing pressure did.

That is the hidden danger of leverage. It can force an investor to sell before patience has time to work.

Charlie Munger, Warren Buffett’s longtime partner, offered investors a memorable warning.

“There are only three ways a smart person can go broke: liquor, ladies, and leverage.”

Buffett later joked that Munger added the first two because they began with the same letter. The real danger was leverage. 

Leverage means using borrowed money to increase an investment. Suppose an investor has $100,000 and borrows another $100,000. That investor now controls $200,000 in stocks.

A 20% gain creates a $40,000 profit before interest costs. The investor earns 40% on the original capital.

That is the attraction.

However, a 20% decline produces a $40,000 loss. The investor loses 40% of the original capital. A 50% decline can wipe out the entire $100,000.

The broker still expects its money back.

That is the part investors often overlook during a bull market. Leverage magnifies gains, but it does something far more dangerous to losses: it removes time.

An investor who does not use leverage can hold a strong company through a temporary decline. That investor can study the business, remain patient, and wait for earnings to recover.

A leveraged investor may never receive that opportunity.

When prices fall, the broker can demand additional cash. If the investor cannot provide it, the broker sells the position immediately at the current market price, often during a sharp selloff when prices are already collapsing.

The investor loses control at the worst possible moment and may lock in losses that patience could have recovered.

South Korea showed how quickly that process can spread. Falling prices triggered margin calls. Margin calls caused forced selling. Forced selling pushed prices even lower.

The investors who needed patience most were denied it.

Investing should improve your financial life, not threaten everything you have built.

There is nothing wrong with getting rich slowly. In fact, slowly is how most lasting wealth is created.

A strong business grows revenue, increases earnings, generates cash, and reinvests that cash. Shareholders allow this process to compound over many years.

That may sound less exciting than doubling money through leverage.

It is far more dependable.

Investors sometimes believe borrowed money will help them reach their goals faster. They see the upside while assuming they can escape before the downside arrives.

Markets rarely provide advance notice.

A surprise earnings report, economic concern, political development, or change in investor sentiment can quickly produce a sharp decline.

When that happens, leverage transforms volatility into permanent loss.

I think about it like the board game Monopoly.

You move around the board, buying properties, collecting rent, and building your position.

The last thing you want is one reckless decision sending you back to GO.

Investors approaching retirement should understand this especially well. They have already spent decades earning, saving, and building wealth. There is no reason to risk that foundation for faster gains.

Warren Buffett warned against risking what you have and need to pursue something you do not have and do not need. No extra return is worth putting your financial security in danger.

The goal is not reaching the finish line first. The goal is arriving with your wealth intact.

Investors do not need leverage to build meaningful wealth. A sound strategy, steady saving, and time can produce powerful results.

South Korea’s selloff exposed the danger facing ordinary investors. Leopold Aschenbrenner’s forced sale showed that even an AI wunderkind was not protected.

Being right about the future is not enough when borrowed money controls your timetable.

The lesson is simple. Avoid leverage and give compounding time to work.

There is nothing wrong with getting rich slowly. Staying in the game is what allows wealth to grow.

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Regards,

Charles Mizrahi
Prosperity Insider