Yahoo Finance Decoding Wall Street's Wall of Jargon
The nerve center of American investment has never had an official motto, though the sharp-dressed financial elite might opt for an unofficial one. Something along these lines: "Wall Street -- Where obfuscation and intimidation rule the conversation."
Outside of high-tech, few fields have as much jargon clogging the linguistic pipelines as investing.
What does is sound like in real time? Like this: While interpolating a Fibonacci curve is desirable in advanced forex, financiers in or outside arbitrage must weigh the advantages of selling short or long vis-a-vis market cap and diluted earnings per share, while considering the K-ratio attached to equities or the diversification of certain exchange-traded funds.
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Add to this a mudslide of acronyms offered by Peter Frawley, senior vice president of CoreCap Investments in the greater Detroit area: "CMOs, CDOs, CDSs, EBITA and ETFs. Have you ever had a conversation with a doctor about the HT2A receptor involved in the cognitive process of the prefrontal cortex?"
Frawley adds: "I've even had conversations with marketing agents and after three minutes I'm lost in a rabbit hole of jargon that is more bewildering than a chat with the Cheshire Cat."
A closed curtain. If professionals can't always grasp the verbiage, no wonder why so many pluggers hit the convenience store window and say, "Five Powerball tickets, please" -- which is much easier to grasp. Meanwhile, otherwise boisterous investors sit on the sidelines and plant their money in, say, a Cancun timeshare.
"The jargon is used to intimidate, confuse and keep the opaque curtain closed on investors," says Matt Hall, president and co-founder of Hill Investment Group and author of "Odds On: The Making of an Evidence-Based Investor."
"This isn't just a cynical point of view," Hall says. "It's reality. If clients knew the facts they'd likely leave the organization. In the same way Michael Pollan simplified food through his clear writing, the investment world is ripe for a language overhaul."
He may have a point, especially from a historical perspective. "Financial markets are filled with technical terms developed over several centuries of investing in order to make communication easier between investors, if you can believe that," says Martin Schamis, vice president and head of wealth planning at Janney Montgomery Scott in Philadelphia.
Differing views. But the view of jargon is clearly split as to whether it serves as both velvet rope and barbed wire.
"The truth is that most people on Wall Street are working very hard to make investing simpler and easier to understand for the average investor," Schamis says.
"While there are definitely unscrupulous financial professionals looking to take advantage of naive investors, any thought of a wide-spread conspiracy to keep investors in the dark is unwarranted," says Ben Carlston, assistant professor of finance at the University of the Pacific's Eberhardt School of Business in Stockton, California.
High-tech holds a shareholder Rosetta Stone. "Looking up definitions is always a great place to start, but more often than not you'll find video explanations on sites such as YouTube that can provide greater clarity," Carlston says.
Those might even be grand ideas for financial hotshots.
"The truth is that sometimes advisors are busy and don't understand specific complex concepts or instruments themselves," says Paul Bennett, a clinical professor of finance and business economics at Fordham University's Gabelli School of Business and former chief economist at the New York Stock Exchange. "They might be tempted to fall back on jargon to sound informed."
By the way, this is sometimes known in more general circles as sesquipedalian loquaciousness. Or, if you're a Trekkie, you might prefer the actual label of "Spock speak."
Key phrases to know. A very recent example of investor jargon -- and an insidious one at that -- is bespoke tranche opportunity. Many insist it's a reboot of the messy mortgage manipulations that nearly destroyed the U.S. economy in 2007.
"A bespoke tranche opportunity is the same wolf in a different sheep's clothing," said Kyle O'Dell, managing partner of O'Dell, Winkfield, Roseman & Shipp in Denver. "Hiding beneath its obscure moniker are the same risky mortgage products offered before the financial collapse."
[See: 10 Ways You Can Throw Retail Stocks in Your Cart.]
Still, other terms are more innocent in nature: confusing, but understandable with a little help. Knowing them goes a long way in making savvy market decisions.
Michael S. Beall, executive vice president of Davenport Asset Management in Richmond, Virginia, cites short covering as an essential. "'Shorts' describe investors who are betting against a stock," Beall says. "Sometimes when a short is too popular, stocks can benefit from short covering. We often see it when a heavily shorted name reports 'less bad' results."
On the opposite end of speculation spectrum, market timing is a term every newbie investor needs to know. It's tempting to "time" the sale of stock based on gut feelings, or a simple line graph that shows a rise in share price. But investment authorities almost unanimously slam market timing as poisonous.
"Most experts and main street investors cannot correctly time the market," says Jon Ulin, managing principal of Ulin & Company Wealth Management in Boca Raton, Florida. "Betting on risky investment strategies and fancy names you don't completely understand is like playing high-stakes poker or blackjack with your life savings."
One inviting translator is Investopedia. The website breaks down terminology into bite-sized chunks. So if you look up K-ratio, for example, Investopedia will explain how it works: "The ratio takes the return of the security over time, and it is considered a good tool to measure the performance of an equity."
But even Investopedia can get lost in the woods. "The K-ratio calculation involves running a linear regression on the log-VAMI curve." Huh?
A popular strategy. In the final analysis, the greatest argument against jargon might be a sliver of jargon itself: buy and hold. A favorite strategy of billionaire Warren Buffett, it involves purchasing stock and keeping it in your portfolio for years or decades.
Buy and hold requires patience. And in the mutual effort to junk the jargon -- or at least tame it -- investors and their advisors need to exercise patience with each other.
"Don't be afraid to ask your advisor to slow down and help you," says Andrew Crowell, vice chairman of D.A. Davidson & Co.'s individual investor group. "Good advisors will do just that and will be patient if you need to have something explained more than once."
As for the other side of the gold coin, "Advisors need to frame their conversations around the experience of the investor," says John Diehl, senior vice president of Hartford Funds in Radnor, Pennsylvania. "What do they know about the investor? Do they know where they were educated? Do they know their profession? Do they know their hobbies or family situation?"
[Read: Investing as a Game: Is It Big Business?]
Or Crowell says: "I would remind all advisors that strong communication is the basis of all great relationships. In your enthusiasm about the markets, don't forget that not everyone understands everything you say."
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