What Orpheus and Eurydice teaches you about patience

Matthew Partridge unpicks the lessons for investors in the ancient Greek legend, Orpheus and Eurydice.

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Orpheus and Eurydice is an ancient Greek legend. It tells the story of Orpheus, the son of Apollo, whose lyre-playing skill was legendary. He falls in love with and marries Eurydice, but she dies after being bitten by a snake. Orpheus descends to Hades, the underworld, to bring her back, a bid which ultimately ends in tragedy.

The key moment

Pluto, ruler of Hades, is moved by Orpheus's music, and agrees that he can return with his wife to the land of the living on one condition. Eurydice shall follow Orpheus out of Hades, but he must not turn to look at her until they have completed the ascent. At first, Orpheus obeys. But he grows convinced that Pluto has tricked him, and so turns around. He watches in horror as Eurydice fades back to the land of the dead.

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Lesson for investors

Just as patience is good for your investments, so impatience can cost you dear. To take full advantage of the high potential returns on offer from illiquid investments (those that are difficult to buy or sell easily), you must resist the temptation to sell them at the first sign of bad news. Just as Eurydice vanished when Orpheus turned to look at her, selling illiquid assets after a short period could result in a large chunk of your returns being eaten up by the high transaction costs associated with illiquidity. If you prefer to focus on short-term trading, stick to liquid assets.

Other financial wisdom

As Orpheus came close to finding out, if you are patient enough, illiquid assets can be a good investment because they trade at a discount to those that are more liquid. Several studies have confirmed this link between illiquidity and returns. For example, Yakov Amihud of NYU and Stanford's Haim Mendelson found that, from 1961 to 1980, stocks with a relatively large 1.5% spread (the gap between buying and selling prices) returned roughly 0.45% a month more than the wider market. A similar study by Wharton's Marshall Blume and Roger Stambaugh suggests that illiquidity explains why shares in smaller companies tend to outperform those of larger companies.

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