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The ability to wait may be one of the greatest advantages an investor can have. And this is a great advantage that individual investors have over institutional investors, who have to report their performance regularly and deal with redemptions when things are not going as well as expected.

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Nothing like one day after another.

Earlier this month, I mentioned that I was reducing my exposure to PayPal and wrote:

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The Brazilian petrochemical giant filed for out-of-court restructuring on August 24, seeking to reorganize approximately US$10.9 billion in financial obligations. That should have surprised no one. The move gives Braskem an opportunity to renegotiate its debt while continuing to operate, rather than immediately entering a judicial bankruptcy process.

At the heart of the crisis is a mismatch between Braskem’s financial obligations and its ability to generate sufficient cash to service them.

Braskem’s difficulties are not the result of a single event. The company has spent years dealing with high leverage, substantial short- and medium-term obligations and challenging conditions in the global petrochemical industry.

I wrote extensively about the petrochemical industry last year, when we started investing in a few selected names in the US, and again, earlier this year, following my trip to the US.

Petrochemical companies are particularly exposed to fluctuations in commodity prices, global demand and industry margins. Braskem has therefore been operating in an environment where its revenues and margins can be pressured at the same time that its financing costs remain elevated.

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One of the problems with investing in companies like this is that most investors are forced to think in very short time frames.

Portfolio managers have to report their numbers at the end of each month or quarter, and they are therefore much more sensitive to what the stock is going to do over the next few weeks than to what the underlying business might be worth two or three years from now.

As a result, they would rather not be associated with a company that is currently out of favour, even if the underlying fundamentals remain relatively sound. A stock can therefore become increasingly disconnected from its long-term value simply because there are not enough investors willing to tolerate the short-term volatility.

This is a problem for many investors, but not necessarily for those who can look a few years ahead and are willing to accept that the stock may remain unpopular, or even decline further, before the market eventually recognizes the value.

That is particularly relevant here.

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CSL. After an almost 60% run in roughly four months, I’m closing out the position.

The shares are up almost 18% today, their biggest single-day gain since June 2001, and have hit a six-month high after the latest results and guidance reassured investors, according to Bloomberg.

To me, it was fairly clear that the company was going to “take a bath” to start the new financial year and reset expectations. Here in Australia, of course, the fiscal year begins on 1 July. The idea was to draw a line under the weaker period and give the company a clean slate to deliver better results from here.

What’s interesting now is the positioning. After several quarters in which analysts were rushing to downgrade the stock, they may now have to start moving in the opposite direction.

The average analyst price target is still around $134.25, while the stock is trading at $157. That disconnect will likely force analysts to revisit their numbers and start lifting their targets.

And that’s where things can get interesting. As those upgrades come through, they can trigger systematic and quant-driven buying, creating another potential tailwind for the shares (but I won’t play this game).

And, to be honest, the results themselves weren’t exactly spectacular:

Source: Bloomberg, L2 Capital

This is what happens when expectations become so negative that even a relatively modest positive surprise can have a significant impact on the share price.

That’s an area I like to play.

THIS IS NOT FINANCIAL ADVICE. PLEASE DO YOUR OWN DUE DILIGENCE AND DO NOT BUY OR SELL ANY SECURITIES BASED SOLELY ON THIS INFORMATION.

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This is one of those situ…

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The most interesting platforms are often those where higher engagement, better monetization and new products reinforce each other, creating a flywheel that becomes increasingly difficult for competitors to replicate. The latest results from one such company suggest that this flywheel may be getting stronger.

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I consider myself a “crisis investor” or, perhaps more accurately, a “niche investor”. My focus is on situations where the relationship between risk and potential reward is heavily skewed in my favour.

I am not trying to predict every market move or own every great company. Instead, I look for opportunities where the downside is relatively limited compared to the upside if the investment thesis plays out.

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Please find below the portfolio update:

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Before that, he had also spent time at FTX, the cryptocurrency exchange that spectacularly collapsed in 2022, wiping out billions of dollars in customer funds and investor value (something prescient about it?).

In April 2024, Aschenbrenner was sacked from OpenAI. Shortly afterward, he published a lengthy essay titled “Situational Awareness”, in which he laid out his expectations for the coming decade of artificial intelligence.

His central argument was that AI progress would continue at an extraordinary pace, leading to systems with superhuman capabilities much sooner than most people expected. He also argued that the race to build these systems would have profound economic, geopolitical, and national security implications.

The essay quickly became one of the most widely discussed pieces of writing in the AI community. Supporters praised it as a clear-eyed assessment of where the technology was heading, while critics argued that some of its timelines and predictions were overly ambitious. Regardless of where one stood, the paper succeeded in putting him in the spotlight.

He later capitalized on that visibility by launching a hedge fund named, you guessed, “Situational Awareness” (SA). The fund reportedly began with approximately $45 million in assets under management. According to recent reports, however, it has grown dramatically, reaching roughly $45 billion by late last month.

Naturally, a large part of that growth reflects fresh capital from new investors, as well as additional commitments from existing ones. But another important driver has been a much older financial tool: leverage.

By borrowing capital to increase the size of its positions, the fund was able to amplify gains in a market that has rewarded concentrated bets on the AI boom. Of course, as I mentioned many times, leverage is a double-edged sword. It can significantly enhance returns during favorable periods, but it also magnifies losses when markets move in the wrong direction, a lesson that financial history has repeatedly illustrated.

But, as the old Wall Street saying goes, in a bull market, even turkeys fly. During periods of abundant liquidity and investor euphoria, exceptional skill and favorable market conditions can be difficult to distinguish.

Almost everyone looks like a genius when asset prices keep rising and capital is readily available. SA was no exception. Riding the wave of enthusiasm surrounding artificial intelligence, the fund grew at a breathtaking pace, attracting ever more capital and taking increasingly larger positions.

The success story, however, appears to have come to an abrupt end on Thursday morning. According to market reports, SA agreed to sell its portfolio to Citadel in a transaction that, allegedly, brought the fund’s brief but spectacular run to a close.

If those reports are accurate, it marks one of the most extraordinary (and shortest-lived) success stories in the recent history of hedge funds. A fund that seemed destined to become one of the industry’s dominant players instead serves as another reminder that rapid ascent and leverage can make for an equally rapid descent.

Of course, the market, knowing the situation, took full advantage of it, as we can see below:

Fund’s largest positions at the end of the 1st Q:

Source: Bloomberg, L2 Capital

So, let’s have a look at the top 3 positions, corresponding to aprox 55% of the fund (the rest looks pretty much the same):

Bloom Energy:

Source: Bloomberg, L2 Capital

Sandisk:

Source: Bloomberg, L2 Capital

Corewave:

Source: Bloomberg, L2 Capital

Yes, the market saw the problems coming and did not make his life any easier. Once investors began to question the sustainability of the strategy, the pressure intensified. Heavy selling followed, creating a negative feedback loop in which falling prices forced more selling.

Now, after the significant liquidation and the reported acquisition of many of the fund’s assets by Citadel, some of the affected companies may eventually recover, although I still think they are overpriced.

This episode is also a powerful reminder of one of Warren Buffett’s long-standing warnings about leverage. As he famously put it: “If you’re smart, you don’t need it; and if you’re dumb, you shouldn’t be using it.”

This is not the first time a “genius” has been introduced to leverage (remember LTCM?), and the results were remarkably similar.

Leverage can magnify returns when things go well, but it can also destroy an entire career. The challenge is that, during a bull market, the risks often appear invisible, until they are not.

Be careful out there.

In this environment, it is essential to remain informed, think critically, and evaluate the credibility of the information we receive.

The pictures below illustrate the importance of developing our own knowledge and informed opinions about issues that matter to us, rather than simply accepting or repeating someone else’s point of view.

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