If the late Charlie Munger could get away with saying that, then surely a lady can.

Anytime market conditions have been comfortable long enough, investors get a little too comfortable using leverage. We’re seeing that now. And when investors get a little too comfortable using leverage, with their perspective blurred by too many dollar signs, it can cause all of us pain. Allow me to explain.

Leveraging is borrowing money against your investments to buy more investments. Also known as margin. It can also refer to leveraged ETFs, which move 2-4 times further than their underlying investments, in either direction, by using leverage. If the S&P 500 index moves by 1.5%, a triple-leveraged index ETF moves 4.5%. There are more leveraged ETFs in the market now than at any time before.

A pullback on a levered position can trigger a margin call. In an overleveraged account, the investor is forced to sell to repay what they owe. Overleveraged investors across a broad scale can trigger forced selling on a broad scale, pushing the broader market into a deeper pullback than it would have in a less-leveraged market.

This is something to be cognizant of, particularly if you’re using leverage, but even if you’re not. Leverage is at an all-time high right now, so some of you are likely overleveraged, and in a market as pleasant as we’ve had, where the growth opportunities have been plentiful, there’s really no need for anyone to be leveraging at all.

A couple of my favorite Warren Buffett quotes on this are:

“If you’re smart, you don’t need leverage; if you’re dumb, it will ruin you.”

and

“It’s only when the tide goes out that you learn who’s been swimming naked.”

And when I say it matters to you even if you don’t use leverage, I mean the overleveraged environment we’re in can put unnatural pressure on market pullbacks, cutting deeper than they used to, due to that forced selling on a broad scale. This can warp your view of how bad things really are and trigger panic where it’s unwarranted. Market corrections are natural and usually should not be a cause for fear, and the depth of some of the dips we’ve seen in recent years can be partly blamed on the overuse of leverage. I’m saying don’t let someone else’s poor judgment skew yours.

We’re in a healthy market, driven by healthy earnings, driven by a healthy consumer economy, driven by a healthy employment rate. That being said, we’re always at risk of a hiccup that could be caused by a pandemic, geopolitical tensions, tariffs, Fed policy changes, and corrections to elevated valuations. The overleveraged investors can’t see those potholes in the road ahead; they’re staring into a future they believe is so bright, they’re blinded by it.

A dip is always on the horizon. We don’t know exactly when it will arrive, but don’t be overleveraged when it gets here. And if you never were levereged, don’t panic when the forced selling is hard to stomach. It does hit a bottom when all debt is cleared, selling comes to an end, and the storm passes. If you’d like advice on this, I’d rather you call me before you lose all of your money on leverage, not after.