The Mother of All Evil: Speculation & Leverage

“The mother of all evil is speculation. Leverage!”

– Gordon Gekko in the movie Wall Street: Money Never Sleeps (2010)

Rule #1: Never lose money.

Rule #2: Never forget Rule #1.

Remember this famous Warren Buffett quote that everyone loves to cite?

The key is understanding what it really means. It’s not about being down on a position for a while or losing a bit on an investment — that happens all the time. That’s volatility, not failure. If you invest, you must endure it to enjoy the rewards of long-term compounding.

Rule #1 is about something far more serious: permanent loss of capital.

That’s the real danger. To stay in the game long enough to win, you must keep your capital alive. You can’t lose it for good. That’s why risk management exists — to preserve capital so you can come back when opportunity knocks again. And trust me, it always does.

So, why bring this up now?

Because last Friday, we witnessed the biggest wipeout in crypto history (chart 1). $19 billion in market value vanished. 1.6 million accounts liquidated.

How did it happen? Because of the mother of all evil.

Speculation — and leverage.

Chart 1: The $19 billion crypto meltdown – the day leverage died, Binance

The Root Cause — Leverage Gone Wild

So, what exactly happened last Friday?

The main show was in the crypto market — where, as you might have noticed, many gamblers and speculators migrated after Covid. Betting big didn’t disappear; it just shifted to another asset class: cryptocurrencies.

Because it’s still somewhat outside the mainstream financial system, when disruptions hit, they often go unnoticed by the broader public.

But the scale of this one?

Massive.

Crypto just experienced the largest liquidation event in history — and nothing else even comes close.

To grasp how unprecedented the sell-off was:

• 1.6 million traders wiped out – that means their accounts all hit ZERO (!)
• That’s 9 times larger than any liquidation event before it
• 19 times larger than the March 2020 COVID crash
• Even FTX’s collapse looks small next to this
• Over $19 billion in liquidations in 24 hours

Let’s unpack what triggered this chain reaction — and why it spiralled so violently:

1. A crowded, over-leveraged market. Crypto positioning had become euphoric. Traders were heavily leveraged — often 10, 20, even 100× their actual capital — betting on higher prices. Everyone was “long”.
2. Complacency at its peak. When everyone’s bullish and no one’s left to buy, the market becomes dangerously fragile. A “complacent market,” as we like to call it — primed for a sharp reversal once the smallest shock appears.
3. The spark. That shock came from Trump’s tariff announcement against China. Not catastrophic news in isolation, but the timing was lethal — a Friday evening, during a low-liquidity window when traditional markets were closed (Remember Lesson #2: Liquidity is survival from our Lehman story). Crypto stood alone, naked to the storm.

The result?

The total crypto market erased 20% of its value in a matter of minutes (chart 2). Bitcoin printed a $20,000 daily move — erasing roughly $380 billion in market value in a single day. That’s more value than all but 25 public companies on earth.

So… is crypto dead?

No. This wasn’t a fundamental collapse — it was a technical flush. Not the end of crypto — just the end of greed. A reset moment.

What lessons can we investors draw from this incident?

Is history any guide?

Chart 2: Total Crypto Market erased 20% of its value in a matter of minutes

History Does Not Repeat But It Often Rhymes

As Jesse Livermore — arguably the greatest trader who ever lived — once said:

“A lesson I learned early is that there is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.

Greed, speculation, and the laws of human nature — they never go away.

They simply change their form.

History gives us endless examples. From the first great bubble, Tulipmania, to the South Sea Bubble that even Sir Isaac Newton couldn’t escape (and lost everything), to the Dotcom Boom, each era had the same story at its core: dreams of easy riches fueled by leverage and euphoria — ending in collapse.

But one period stands out among them: the Roaring ’20s.

An age of champagne, margin debt, and boundless optimism — until it all ended in the Great Depression.

And coincidentally, just this week, Andrew Ross Sorkin — the author of Too Big To Fail — released his newest book: “1929: Inside the Greatest Crash in Wall Street History — and How It Shattered a Nation.”

It’s the latest addition to our arvy Book Club (chart 3), because studying the past is the best way to understand the present — and prepare for the future.

The story of 1929 is timeless: reaching for the sky, blinded by greed, until the illusion of an endless boom meets the hard limit of human self-deception.

That’s exactly why, at arvy, our investment philosophy rests on a few simple but powerful rules, being part of the “Good Story”:

1. We never take on margin or leverage in our portfolio.
2. We avoid investing in highly levered businesses.

Simple.

Boring, maybe. But bulletproof when it matters most.

You can see it in our portfolio today — a Net Debt/EBITDA ratio of just 0.6, compared to 1.3 for the global market average.

That discipline helps us do one thing above all else: preserve capital in turbulent times. This quality criterion of less leveraged companies is also reflected in a portfolio volatility of 12.5 % compared to 15.8 % on the global markets over the last seven years or a maximum drawdown of -24 % compared to -34 %.

Because as we said at the beginning — and as Buffett reminded us — the greatest risk isn’t volatility.

It’s permanent loss of capital.

Chart 3: 1929: Inside the Greatest Crash in Wall Street History – and How It Shattered a Nation

Boring is Good

To put history into perspective — just look at the numbers.

During the Great Depression, the Dow Jones lost (chart 4):

• 17% in 1929
• 34% in 1930
• 53% in 1931
• 23% in 1932

That’s a cumulative collapse of over 80% — a brutal reminder of what unchecked leverage, speculation, and overconfidence can do.

Of course, every investor must accept a fair amount of volatility and drawdowns along the way. But history has also shown that quality compounders — the boring-but-good businesses, the so-called tortoises — weather such storms best. The ones we look for at arvy.

Naturally, focusing on downside protection means giving up a bit of upside. That’s reflected in styles like ours at arvy, where we typically capture around 70% of the downside but still close to 90% of the upside.

Sure, it can look cool to ride the wave of a roaring bull market — fully leveraged, all-in, chasing that next big win.

Until it doesn’t.

Because those stories often end not just in permanent loss of capital, but in sleepless nights too.

The lesson from prior bubbles — 1929 and last Friday’s turmoil alike?

When markets wobble or volatility spikes — be grateful. But also stay invested, disciplined, and patient. Let time do the heavy lifting.

That’s how you survive the storms and let compounding quietly work its magic.

It always pays to be the compounding tortoise for the long run.

After all, the tortoise wins the race against…

…the leveraged and speculative hare —

and it can sleep soundly at night.

Chart 4: Dow Jones during the Roaring 20s, Great Depression and the subsequent recovery