Mythology: What Icarus Can Teach Us About Investing in Soaring Markets
In Greek mythology, Icarus and his inventive father, Daedalus, attempted to escape from captivity on Crete by constructing wings of feathers and wax. Daedalus warned Icarus not to fly too close to the sun, as the heat would melt the wax. But Icarus, swept up in the rush of flight, disregarded his father’s warning. Higher and higher, he soared, drunk on daring, until the sun melted the wax, and the wings disintegrated. Icarus, like many who reach too far too fast, became a victim of his own ambition, plunging to death in the unforgiving sea.
The tale of Icarus serves as a powerful metaphor for the challenges investors face, particularly during the euphoric highs of market cycles. When markets are surging, it’s easy to be seduced by easy profits and believe that the laws of gravity no longer apply. Like Icarus, we may find ourselves soaring ever higher, buoyed by a sense of invincibility, a belief that we have discovered the secret to limitless wealth. But just as Icarus learned the hard way, hubris and complacency can be catastrophic.
“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria.” Sir John Templeton’s words could be used to describe the dramatic market shifts we’ve seen over the past few months. In October 2023, investors were licking their wounds after the S&P 500 fell almost 20% from its peak amid rising interest rates, slowing economic growth, and geopolitical tensions.
Fast forward five months to March 2024, and it’s as if we’re in a different universe. The S&P 500 has not only recovered its losses but surged to new all-time highs. The prevailing emotion has shifted from caution to exuberance, a fear not of losing money but of missing out on potential gains. The S&P’s forward P/E ratio has ballooned well above its long-term average, while the Shiller CAPE ratio, which takes a more expansive view by looking at inflation-adjusted earnings over a decade, is flirting with levels seen during the heady days of the dot-com bubble or the run-up to the Great Depression. Risk, which was at the forefront of every investor’s mind just a few months ago, has been relegated to the back burner.
Yet it’s precisely in these moments that risk is at its most insidious. When positive news drowns out any whisper of caution, when even the most speculative bets are met with ravenous demand, and when the fear of missing out eclipses the fear of losing, investors are vulnerable. It’s a paradox of human psychology that we often feel safest when we are, in fact, at the greatest risk.
Risk doesn’t disappear just because markets are in rally mode. If anything, it’s amplified by the complacency and overconfidence that often accompany upswings. Valuations stretch to extremes, leverage creeps up, and due diligence takes a backseat to chasing momentum. The seeds of the next correction are sown in the soil of the current boom.
So, how should investors navigate times when risks are running high but the market seems to be turning a blind eye? At Vermillion Private Wealth, we believe the answer lies in a strategy that is at once adaptive and grounded, acknowledging the potential for short-term turbulence while not losing sight of the long-term. It’s an approach that requires a certain clarity of vision, a willingness to see the market for what it is — warts and all — rather than what we wish it to be. It means being nimble enough to adjust when the winds shift but also having the conviction to stay the course when the storm clouds gather. Above all, it means investing with our eyes wide open.
On a practical level, this philosophy translates into a proactive approach to portfolio management. It doesn’t mean abandoning long-term strategies at the first sign of trouble but fortifying them. This might involve rebalancing — trimming positions that have grown beyond their intended weight and deploying that capital into areas we perceive to have better value. It could mean adding exposure to sectors or positions that have traditionally held up well in times of stress to introduce a ballast to the portfolio. In some cases, we may even look to incorporate downside hedges. The aim is not to eliminate risk, which would be both impossible and counterproductive, but rather to build in an extra layer of protection.
However, risk management is about more than the mechanics of portfolio construction. It’s also about understanding and managing the psychological factors that lead us astray, particularly in the heat of a market melt-up. When everything seems to be going right, and profits are piling up, it’s easy to get swept up in the euphoria, to let our discipline slip and our standards slide. We start to believe that we’re invincible, that we’ve somehow cracked the code of the market. That’s why we’re redoubling our efforts to stay grounded. We’re asking ourselves the tough questions: Are we chasing returns at the expense of our principles? Are we taking on more risk than is suitable? Are we letting our egos cloud our judgment? By maintaining a healthy sense of humility and perspective, we aim to avoid the pitfalls that ensnarl even the most sophisticated investors.
In the Greek tale, Daedalus warned Icarus to find a middle path that would be neither flying too low and risking the sea nor too high where the sun’s heat could melt the wax. For investors, the lesson is clear. As Icarus should have navigated between two extremes, investors must chart a middle course between excessive risk-taking and extreme risk aversion. Flying too high by chasing the most speculative bets can lead to catastrophic losses. However, hugging the safety of the shoreline can lead to meager returns that fail to meet long-term objectives. The key is maintaining an equilibrium that balances the desire for growth with the need for resilience.
In a sense, all investors are trying to escape captivity from the twin demons of fear and greed. To succeed, we must learn to channel both the daring of Icarus and the wisdom of Daedalus. We need Icarus’s sense of possibility and his willingness to fly high. But we also need Daedalus’s restraint, understanding of limits, and respect for risks.
