Every time a star investor implodes, Warren Buffett looks a little smarter.
Leopold Aschenbrenner, 24, a Columbia valedictorian and former OpenAI researcher, was the toast of Wall Street after building a $45 billion hedge fund in under two years, and notching a 1,000% gain since inception this spring.
But disaster struck his firm, Situational Awareness, in late July. A sharp downswing in AI stocks triggered margin calls from the firm’s lenders, forcing a fire sale of most of its publicly traded stock portfolio to Ken Griffin’s Citadel.
Buffett, 95, who retired as Berkshire Hathaway’s CEO at the turn of the year, successfully avoided catastrophe during his six decades in charge.
Yet he also grew Berkshire’s stock price by north of 6,000,000% in that timeframe, trouncing the S&P 500’s 46,000% gain over the same period.
Several of Buffett’s close followers told Business Insider the Situational Awareness fiasco underscores two core tenets of his investing philosophy, and helps explain the enduring appeal of the Buffett approach.
Ross Gerber, the CEO and cofounder of Gerber Kawasaki Wealth and Investment Management, said Aschenbrenner’s implosion can be “understood as a lesson in hubris, leverage, and insufficient experience.”
“The goal is not to become rich as quickly as possible,” Gerber said. “The goal is to build wealth in a way that allows you to keep it.”
He added: “Warren Buffett has demonstrated that investors can produce extraordinary returns over long periods without relying on reckless amounts of borrowed money.”
Michael Burry, the investor of “The Big Short” fame, said in an email to Business Insider that Aschenbrenner is one of many young investors who’ve made “unbelievable gains with leverage and options in the stock markets, chasing momentum and believing they can do no wrong.”
“Aschenbrenner just wins the prize for his generation’s largest ego,” Burry said. “That is saying something.”
Aschenbrenner and a representative for Buffett did not respond to requests for comment from Business Insider.
The power of patience
Buffett waits as long as it takes. Berkshire’s cash pile more than doubled to over $370 billion during his last two years as CEO, as he refused to overpay for stocks in a red-hot market, outbid private equity buyers for acquisitions, or even repurchase his own company’s stock when it no longer struck him as a bargain.
Paul Lountzis, a longtime Berkshire shareholder and the president of Lountzis Asset Management, said Situational Awareness’ issues showed the value of some of Buffett’s defining characteristics: prudence, discipline, and a long-term perspective.
“Patience is just so hard for most investors, and many are always looking for rapid ways to get rich,” Lountzis said. “The problem is that often leads to large losses.”
“While IQ is important once you reach a minimum level, your behavioral and emotional makeup are far more important,” he added.
Similarly, Gerber said that “intelligence alone does not make someone a successful trader.”
He added that when it comes to managing the risk of having billions of dollars in leveraged bets on volatile AI stocks, “experience and temperament matter enormously.”
Risky business
Situational Awareness reportedly employed four times leverage, meaning it borrowed $4 out of every $5 it invested.
Larry Cunningham, the author of “The Essays of Warren Buffett” and the director of the University of Delaware’s Weinberg Center, said the firm’s disaster, and previous meltdowns at Archegos Capital Management in 2021 and Long-Term Capital Management in 1998, showed how dangerous excessive borrowing can be.
“Leverage and concentration can make investors look brilliant for a time, but they leave little margin for being wrong, early, or unlucky,” Cunningham said.
“Long-term wealth is built not only by finding great opportunities, but by avoiding the handful of mistakes that can take you out of the game.”
Indeed, Buffett has repeatedly declared that Berkshire’s survival is paramount, and he would never risk its demise to juice his returns. He famously says, “Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.”
His late business partner, Charlie Munger, was fond of saying that leverage was one of the few ways a “smart person can go broke.”
Lountzis highlighted a quote from Buffett’s mentor, Benjamin Graham: “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
In other words, investing is about not just growing money, but protecting it too.
Gerber said that leverage can magnify an investor’s returns, but when the “market turns against you, leverage magnifies losses just as quickly. What looked like brilliance on the way up can become a devastating collapse on the way down.”
When investors employ a lot of leverage, they’re relying not on a company’s long-term success but on its continued access to financing, its lenders’ willingness to maintain the leverage, and favorable price moves, he said.
“That is not traditional investing,” Gerber said. “It is betting.”
He added that true situational awareness requires “recognizing risk early enough to protect your capital rather than reacting after the damage has already been done.”
John Longo — a finance professor, portfolio manager, and the author of “Buffett’s Tips” — said that Aschenbrenner’s main problem was a “lack of risk management controls.”
Meanwhile, Buffett considered keeping risks in check to be his main responsibility as CEO. “I’m the chief risk officer of Berkshire — that’s my job,” he told his shareholders in 2021.
Situational Awareness not only used heavy leverage, but it also seemed to be unprepared for its short positions to rise in value and its long positions to fall in value simultaneously, Longo said.
Tren Griffin, the author of “Charlie Munger: The Complete Investor,” said the key lesson for investors is knowing what “fraction of capital to wager to maximize compounded growth of capital.”
He said that amount can be calculated using the “Kelly criterion,” a formula discovered by a Bell Labs researcher named John L. Kelly Jr, and endorsed by Munger, who said the “gist of it in terms of sizing your bet makes sense.”
It’s worth underscoring that Aschenbrenner is still in his early 20s and could have a bright career ahead of him, particularly as Situational Awareness still reportedly holds a $5 billion stake in privately owned Anthropic.
But his first major calamity might serve as a cautionary tale to investors about the dangers of pride, impatience, and recklessness — and a reminder of why Buffett’s prudent approach has stood the test of time.
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