The story of Icarus is one of those legends of Greek mythology that fascinates audiences especially because of the character’s desire to go beyond human boundaries as well as for the tragic consequences this brought about.
The myth tells us a story of a father,Daedalus and his son Icarus who were imprisoned by the king. The duo construct wings stitched together with wax as a means of escape. The father warns Icarus that he should however guard against flying too close to the sun as the heat could melt the wax. The escape is successful and Icarus is able to fly above the prison walls and soar into the sky. However in his enthusiasm he forgets his father’s warning and flew too close the sun. The sun melts the wax holding the feathers together thereby resulting in Icarus falling from the sky and dying.
Thus Icarus story has two parts to it… one the innovation that let the boy to escape from imprisonment , the other the same innovation which helped escape prison led to his death as well. Hence the paradox.
The Icarus paradox is a neologism coined by Danny Miller in his 1990 book by the same name.The term refers to the phenomenon of businesses failing abruptly after a period of apparent success, where this failure is brought about by the very elements that led to their initial success( Wikipedia)
This is true of Fund Managers, investor Advisors and Investors as well. We all fall into the trap that what got us initial success, will continue to be the most successful bets we make in the future as well.
For example, people who invested in real estate in the early 90s & 2000s have seen a phenomenal appreciation and have tended to increase their real estate allocation in fact in much larger quantum to disastrous results esp over the past decade. Same is the case with stocks, that some of the fund managers buy and get emotionally attached to..such that they are unable to sell and look for another opportunity. We get emotionally attached to some of our investment and business decisions and fail to see the inevitable failure in our approach until it is too late.
Ways to overcome the ICARUS PARADOX in investing :
Always review with an independent mind at all your investments including those that have been stupendously successful for you, check if you need to change. Do so of your failures as well, they could be becoming profitable now , keep an open mind ;
Seek an external independent assessment, sometimes our emotional connect may be blocking our view of the obvious which an external person may objectively point out to us.
Ask yourself , esp with the big winners you have in your portfolio, if you deeply believe they are going to continue to do the same.
Diversify your portfolio, even if you have some big winners, encash them as liquidity is important and diversification is a key tool to overcome risk in an uncertain world.
While we would all like to soar high with our portfolio returns, being reminded of the ICARUS story will certainly enable us to double check your investments to make sure you are in the right course.
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