A few weeks ago I was invited to attend a breakfast hosted by a national bank and its investment division. The main speaker sounded intriguing, and I for sure wasn’t going to turn down some fresh fruit and bacon, so I accepted the invitation. Before the keynote presentation, there was a short panel discussion with the bank’s head manager in investments. In between my bites of cantaloupe, the manager expounded on the firm’s investment performance, “Last year, our performance was outstanding due to our proprietary alpha-generating strategies and deep quantitative fundamental research.”
He continued referencing PE ratios, basis points, leverage, smart beta, volatility — it all sounded great and astute, but I couldn’t help but think to myself – this isn’t what investors need.
We as humans are naturally impressed when presented with someone of high achievement or when an eloquent speaker captivates a room. However, these natural impulses can be used against us by those who would rather manipulate than educate, a pandering to human instincts.
The longer I’m in this industry the less impressed I am by people who use confusing language and jargon. This type of fancy talk is pervasive throughout our industry. Sure, if you’re really into finance and read the Wall Street Journal business section for pleasure, you’ve probably heard these terms before and they may mean something to you. For the majority of the public, these words mean nothing, but they sound great — and that’s the danger — because people then think an intelligent sounding person will be able to do wizardry with their investment portfolio. This breakfast talk was just a snippet of what gets played out more broadly every day between Wall Street and the investing public.
I am not saying this particular manager was a bad guy in the slightest; actually, I’m sure he is honest, hardworking, and very smart – as are most in the industry. However, sometimes we in the financial industry fool ourselves into rationalizing certain behaviors rather than thinking them through. Jason Zweig says, “It becomes much easier to fool other people once you have fooled yourself into believing that what you are doing is right.”
Balderdash was one of my favorite board games growing up. First, an obscure word is read aloud to the players, such as “widdershins” or “gonzo.” Everyone then either tries to write the correct definition or create their own fictitious definition in hopes of convincing others it’s actually the correct one. For me, it was more fun to creatively think up funny definitions and try to get people to fall for them (or get a good laugh). Just like how I played the board game, Wall Street plays a similar version of Balderdash.
Zweig writes in his exemplary book, The Devil’s Financial Dictionary, which I highly recommend for anyone looking to cut through the “fads and fakery of Wall Street”:
“The denser the jargon, and the more polysyllabic the terminology, the more likely someone is hiding something from you. Wall Street sells stocks and bonds, but what it really peddles is hope. The investing public wants to believe in magic and the financial industry profits from staffing an endless parade of people who claim to know the future and to be able to perform miracles.”
“Investors must master the ways in which Wall Street uses language to conceal rather than reveal information. Every profession is a conspiracy against the laity, and every profession’s jargon is meant to confuse and exclude those who aren’t part of the guild…But rarely is so much at stake in the clear understanding of language: if you find yourself fooled by Wall Street’s gibberish and buy the wrong investment, your dream of a prosperous retirement can be reduced to dust.”
When someone uses a term you don’t understand, ask them to explain it in more simple terms. If they can’t, then maybe they don’t understand it either. Don’t be mesmerized by Finance Balderdash. Ask questions. When something isn’t clear there’s probably a deeper reason – one that pads the pocketbooks of someone else rather than your own.