Money talk — making sense of financial jargon

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Money talk — making sense of financial jargon.

I hate financial jargon and try wherever possible to speak plainly and articulate what money terms actually mean. But it is easy to trip up, especially when you are surrounded by others 'in the business' who speak the same language.

For a lot of investors, financial jargon is off-putting and incomprehensible. What's more, jargon can make them feel like outsiders who don't have permission to understand it.

I was interested in two columns recently — one an excerpt from a book "How to Speak Money" by John Lanchester, the second from Wall Street Journal columnist Morgan Housel entitled "Oh, the Silly Things That Financial Pros Say". Both talked about the peculiar language used in the financial industry that, while not deliberate, can confuse investors.

Lanchester told a story about his father beginning a career at Hongkong and Shanghai Banking Corporation. On joining the bank, his father was given a guidebook on how to communicate with Head Office. The book quoted a message: "The marketplace is dominated by small Manchurian bears". The father had visions of small bears causing stallholders to flee as they rampaged carts and awnings in the search for nuts and honey. Turns out the phrase referred to the influence of pessimistic small-scale investors who invested in or were based in Manchuria.

Lanchester gave other examples such as the word "hedge" which began its life in economics as a term for setting limits on a bet. The idea is that by putting a hedge on a bet, gamblers can limit the size of their potential losses just as a real hedge can limit the area of a field or paddock.

Over time the use of the word hedge morphed, and the term 'hedge fund' evolved to mean something quite different. A hedge fund has nothing to do with limits; rather it is a large pool of private capital, often using leverage and borrowing (with very few limits) to multiply the size of its bets.

Lanchester also pointed out words that actually mean the opposite of what non-financial people would expect. To 'bail out' means to slop water over the side of a boat. But in financial terms, a bail-out is when money is actually put in, to avoid an institution failing. 'Credit' has been reversed; in finance it actually means debt. Inflation doesn't mean something getting bigger — it means money is worth less.

The Wall Street Journal piece went further in exposing certain phrases used by financial experts which don't necessarily make sense. Housel says the commonly used term "cautiously optimistic" is an oxymoron. It sounds smart until you realise that the two words mean opposite things. This allows the professional to appear correct regardless of the outcome.

When experts say "we expect more volatility in the near future" they are stating the obvious. There is no such thing as a stock market without volatility. Even if markets are calm for a day or two, volatility will always return. Housel says that's like forecasting that Sunday will come after Saturday.

He mentioned another pertinent phrase, especially heading into the profit results season. When an analyst says "earnings missed analyst estimates" it is actually a misnomer. Earnings don't miss estimates; estimates miss earnings (i.e. the analyst gets it wrong). In arriving at an estimate or forecast, it is the analyst's job to foresee challenges which might cause a company's earnings to fall short.

Another common phrase used is "investors are fleeing the market" which is similar to "there were more sellers than buyers today". As Housel points out, every stock is owned by someone all the time and there is one buyer and one seller for every trade. He says that this phrase is the equivalent of saying someone has more mothers than fathers...

Unfortunately jargon is likely to be here to stay, just as it is in sectors outside the financial world. Though as Lanchester says if we allow ourselves not to understand this language, we are signing off on the way the world works today and the prospect of an ever-widening gap between those in the know and everyone else. We can do better than that.


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