[Column] Even with Accurate Predictions for AI, 67% Loss... The Market Values Survival Over Correctness

In the market, there are more people who collapse from betting too heavily than those who lose money from being wrong.

Let’s say you accurately predicted that the AI era would come. Let’s also say that your forecast about the growth of semiconductors, data centers, and power infrastructure was correct. Still, that doesn’t mean you won in investing. There is a vast gap between getting the direction right and making money in that direction. Bridging that gap is risk management.

The AI-focused hedge fund ‘Situational Awareness,’ led by Leopold Aschenbrenner, dramatically illustrated this fact. This fund focused on long-term growth in the AI industry and made substantial profits, but in July, its portfolio value plummeted by 67%. As AI-related stocks fell, leverage amplified the losses, and the fund had to hand over most of its publicly traded stocks to Citadel due to margin calls. It wasn’t because the long-term outlook was wrong; it was because they invested in a structure that couldn’t withstand until the forecast was realized.

Correct but Unable to Endure

Aschenbrenner’s argument about AI could remain a defining investment judgment for this decade. The overarching direction that AI will require more semiconductors, power, and data centers may still hold true.

However, the market is not an essay exam. It does not give extra points for how sophisticated your argument is or how far you can foresee the future. It only cares about whether there is capital left in your account until evidence appears.

Even if you pick a good company, if you buy it at too high a price, you will fail. Even if you get the direction right, excessive leverage will lead to liquidation. Even if you are correct in the long term, if you cannot withstand short-term volatility, you will exit the market.

What determines the success or failure of an investment is not ‘how confident you are.’ It is how much you lose when you are wrong.

The Most Dangerous Time is When Confidence is Highest

The problem is that when investors determine their position size, they prioritize confidence over their ability to absorb losses.

When a winning streak continues, they overestimate their skills. They think the market has acknowledged their logic and increase their bets. This is when discipline loosens. Conversely, when a losing streak occurs, fear grows. They either reduce their positions or leave the market at the moment when the superiority of their investment strategy is about to be revived.

Confidence is not an objective investment indicator. It is usually a delayed emotional response that follows recent returns. It is strongest at the peak of the asset curve and weakest at the trough. If you decide your investment size based on that confidence, you will repeatedly buy heavily when prices are high and buy lightly when prices are low.

At the end of July, the Korean stock market showed this compressively. The KOSPI index plummeted by over 17% in three days, only to surge by 17.91% in a single day on July 31. This was the largest increase in the index's history. The market value did not change that much in just one day. After the liquidation of leverage and mechanical selling ended, buying pressure surged, causing prices to explode in the opposite direction.

Investors who lost confidence and sold during the crash missed the rebound. Conversely, investors who became overconfident during the uptrend and increased leverage could not withstand the crash. The problem was not the forecast but the position.

Charts to Look at Before Market Charts

Investors apply moving averages, trend lines, and trading volumes to market prices but often overlook their own profit and loss curves.

If your profit and loss curve is continuously declining, it may signal that the market does not align with your strategy or that you are not executing the strategy properly. What is needed at this point is not stronger confidence but position reduction.

Conversely, if the profit and loss curve shows a stable upward trend and losses are being managed, you can gradually increase your risk exposure. This allows you to earn more when things go well and lose less when they do not.

The goal is not to get every trade right. It is to participate sufficiently when you are right and to lose only enough to be able to try again when you are wrong.

However, mechanically following a moving average of the profit and loss curve is also risky. Short-term performance is often mixed with luck, and if you unconditionally reduce your size after a loss, it may result in reducing risk at the bottom. The profit and loss curve is not a command but a warning light. It should be used alongside market volatility, liquidity, and maximum allowable losses.

Losses Are Not Symmetrical to Profits

If you lose 20%, you need a 25% return to recover your principal. If you lose 50%, you need to earn 100%. If you lose 80%, you need a 400% return.

As losses increase, the required return for recovery grows exponentially. This is why avoiding a large loss once is more important than making small profits multiple times.

Investors consider missed opportunities for profit as losses. However, the real loss is losing the capital to participate in the next opportunity. Profit opportunities will come again, but a liquidated account will not see the next chance.

The Digital Asset Market is Even More Ruthless

These principles apply much more strictly in the digital asset market.

The digital asset market does not stop 24/7. Unlike the stock market, it does not give investors time to think as the market closes. Prices can fluctuate dramatically while you sleep, stop-loss orders can be executed continuously, and forced liquidations can lead to further liquidations.

In perpetual futures, high leverage can be used with small amounts. Even a slight movement against the expected price can cause the account to disappear before the investor’s logic is validated. In fact, on July 30, during the dramatic fluctuations of Bitcoin and Ethereum prices, approximately $286 million worth of leveraged positions were liquidated in just one day. Although there was no significant change in price over 24 hours, many investors exited the market in the meantime.

Even if the price later returns in the expected direction, it is of no use. Liquidated investors are left with only the thought, ‘In the end, I was right.’

In the market, the order of survival is more important than correctness. Survive first, then get it right.

The long-term growth of AI may be correct. The long-term rise of Bitcoin may also be correct. However, the moment you use unbearable leverage based on that forecast, the correct argument turns into the most dangerous investment.

The market does not reward the investor’s confidence. It only gives the next opportunity to the capital that survives.

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