Lessons from the Lernaean Hydra

By Steven Crouse, Senior Financial Planner, Octagon Private Wealth

The Myths and Legends of Ancient Greece speak of grandiose monsters and imaginary creatures rousing shock and awe, and the inspiration for the Greek culture and belief system. From the Minotaur and the Centaur to the Sirens and Medusa, the characters and creatures form the basis of the study of Ancient Greek civilisation.

In addition to the creatures and monsters, the literature also tells stories of heroes and their interaction with the gods – brave men like Hercules and the Argonauts, and Achilles and the battle of Troy. Of great interest to me as a child reading these stories was Hercules and the legend of him fighting, and beating a lion – known in the sources as the First Labour of Hercules. But those with a broader imagination might regard a hand-to-hand battle with a lion as a plausible contest – depending on the weapons Hercules had, of course! Even the Gladiators of Rome – mortal men, not mythological at all – were pitched against lions in the arena of the Coliseum and at times even won.

However it is his Second Labour that I find more fascinating. After killing the lion, Hercules was sent by Eurystheus to slay the swamp creature of Lake Lerna – the Hydra. A serpent-like monster with many vicious heads – by many accounts, more heads than could be counted – and whose breath itself was so poisonous that being in its presence could kill a man. Yet it could not be defeated by simply cutting off its heads, as  for every head that was cut-off by Hercules, another two would grow back in its place! Imagine the shock on Hercules’ face after he dealt the first blow to the Hydra with his sword only to find a multiplying effect resulting from his actions.

Consider if you will, the connection of Hercules to ourselves as investors, and the Hydra to the risks we face daily. While we hope to approach volatility with a cool head and an air of anticipation, it is often the unforeseen risks that we face that catch us all by surprise. Truth be told, there really is not anything out there that can be regarded as “100% risk-free” – risk is ever-present, it just depends on how that risk is either mitigated or managed out of your portfolio to a greater or lesser extent.

June this year serves as a great analogy of the Hydra’s re-growing heads. At the end of May markets globally were at all-time highs, Bond yields had fallen consistently over a lengthy period of time and were at historic lows, while Property had notched up ever further gains and growing yields. Then came the statement from “Helicopter Ben”, Mr Bernanke, the Chairman of the US Federal Reserve, saying that the end of the Fed’s bond-buying-bonanza was lurking on the horizon. While he didn’t say anything about how much this round of QE (Quantitative Easing, as it has come to be known) would be cut back by, or specifically by when, he only said that it needs to be slowed down in the future. Off the back of this speech equity markets fell, bond yields spiked and listed property suffered losses into the double digits. But as the saying goes, “Cool heads prevail”, and it was the investors who maintained their positions and strategies that saw it through the month to emerge on top.

There is no doubt that the volatility and uncertainty of June 2013 will repeat itself – we’re not sure precisely when, but we are sure it will happen again. And while the next minor or major shockwave will likely be an unforeseen one, it is our responsibility to be like Hercules and think out of the box to ensure that the process undertaken in constructing your portfolio will provide sufficient protection against this risks (be they old or new).

When Hercules found himself fighting what appeared to be an undefeatable foe, he believed that the Hydra had to have had a way that it could be beaten. Eventually he had the idea to snuff the base of each head that he cut off with fire before the replacement heads could grow back. In so doing, he ultimately triumphed over the Hydra, killing it to emerge victorious and become (pardon the pun!) the stuff of legends!