When euphoria meets reality: Lessons from the July KOSPI crash

Key points:

• The KOSPI selloff and the collapse of Leopold Aschenbrenner's AI fund tell the same story: when strong conviction is combined with excessive concentration and leverage, even a temporary market correction can quickly spiral into forced selling and heavy losses.
• A compelling investment theme is not enough. AI remains a powerful long-term opportunity, but investors still need to pay attention to valuation, position sizing, diversification and the risks of chasing momentum.
• Long-term investing is about surviving market cycles. The goal is not to maximise returns in every rally, but to manage risk well enough to stay invested and benefit from the opportunities that follow.

The recent collapse in South Korea's stock market has been one of the most dramatic reminders of how quickly market euphoria can turn into financial stress.

The KOSPI has fallen around 25% in July, making it one of the fastest corrections in the index's history. At one point, the market lost 16% in just two trading days, triggering repeated circuit breakers as leveraged positions were forced to unwind.

The same dynamic played out at the institutional level.

AI-focused hedge fund Situational Awareness, run by Leopold Aschenbrenner, had become one of Wall Street's standout performers. The fund reportedly grew from less than US$1 billion at launch to around US$45 billion in assets, driven by concentrated investments in AI infrastructure companies such as SK Hynix, CoreWeave, Nebius and SanDisk.

Many of these positions were financed using borrowed money. Although the fund has not disclosed its exact level of leverage, falling share prices triggered margin calls, forcing it to liquidate most of its public equity portfolio. The fund lost 67% in July alone before subsequently removing all leverage from its public equity positions.

Neither of these events means the AI investment story is over.

Instead, they highlight a more important lesson: how you build your portfolio can matter just as much as the investment theme itself.

Five lessons every investor should remember

1. Don't confuse a great theme with a great investment

AI remains one of the most important long-term investment opportunities of this decade. But even the strongest themes can become crowded, expensive and vulnerable to corrections.

Take action: Before adding to a position, ask whether you're investing because the long-term fundamentals have improved—or simply because the price has been rising.

2. Build conviction—but avoid excessive concentration

High-conviction ideas deserve meaningful allocations, but no single stock, sector or market should determine the outcome of your portfolio.

Take action: Review your portfolio regularly. If one investment or theme has grown to dominate your holdings after a strong rally, consider rebalancing back to your target allocation.

3. Use leverage to support your strategy—not become your strategy

Leverage can amplify returns, but it also amplifies losses. More importantly, it increases the risk of being forced to sell during periods of market stress.

Take action: Only use margin if you could comfortably withstand a sharp correction without facing a margin call or needing to sell investments at depressed prices.

4. Spend as much time on portfolio construction as stock selection

Owning good companies is only part of successful investing. Position sizing, diversification and liquidity determine how well a portfolio can withstand periods of volatility.

Take action: Diversify across sectors, regions and investment themes, and ensure your portfolio isn't dependent on one market or one investment idea.

5. Focus on staying invested, not winning every rally

Long-term wealth is built through compounding across multiple market cycles—not by perfectly timing every market move.

Take action: Before making any investment, ask yourself one simple question: Could I hold this position through a 20–30% correction without changing my long-term plan? If the answer is no, your position may be too large.

The bottom line

The KOSPI correction doesn't mean the AI story is over. Nor does the collapse of Leopold Aschenbrenner's fund.

Both remind us that a strong investment theme cannot compensate for poor risk management.

The most successful investors are not those who take the biggest risks during a bull market. They are the ones who manage risk well enough to stay invested when markets become uncomfortable.

Because in investing, the greatest risk is often not being wrong about the opportunity—it's taking so much risk that you don't survive long enough to benefit from it.