The Double Edged Sword.

The Chairman of OakTreeCapital has written a memo to his investors which is available here .
His theme is: Volatility + Leverage = Dynamite

Excerpts from the Memo:
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It’s no coincidence that today’s financial crisis was kicked off at highly leveraged banks and investment banks. ……

If you’re doing something novel, unproven, risky, volatile or potentially life-threatening, you shouldn’t seek to maximize returns. Instead, err on the side of caution. The key to survival lies in what Warren Buffett constantly harps on: margin of safety. ……

Leverage doesn’t add value or make an investment better. Like everything else in the investment world other than pure skill, leverage is a two-edged sword – in fact, probably the ultimate two-edged sword. It helps when you’re right and hurts when you’re wrong. ……..

The riskier the underlying assets, the less leverage should be used to buy them. Conservative assumptions on this subject will keep you from maximizing gains but possibly save your financial life in bad times.

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My Notes: Derivatives are highly leveraged assets. When you take positions in the F&O segment, you are taking on a lot of leverage. As I have warned on CNBC many, many times, only professional traders should trade in the Futures & Options segment.