A Devilish Lexicon of Investment Discourse

The back cover of Jason Zweig’s 2015 book summarizes it in this way:

The Devil’s Financial Dictionary skewers the plutocrats and bureaucrats who gave us exploding mortgages, freakish risks, and banks too big to fail.  And it distills the complexities, absurdities, and pomposities of Wall Street into plain truths and aphorisms anyone can understand.

Book blurbs are famously promotional (like investment pitches), but the work lives up to its billing.  Zweig provides a mix of history, etymology, and satire that takes the book well beyond the typical dictionary.  Skepticism about the language and practices of the investment world is essential for lay investors and professionals alike — and the recurring abuses and calamities of the investment industry come in for deserved cynicism.

Zweig is the perfect guide to the lexicon of “Wall Street,” a term used to indicate “the financial industry, wherever it is situated.”  In his work as a columnist for the Wall Street Journal, he demystifies and debunks the fads of the day.

In 2003, Zweig provided commentary for a revised edition of Ben Graham’s The Intelligent Investor, using examples and ideas from subsequent decades to illuminate the precepts outlined in that seminal work.  A new, updated edition is now available for pre-order; it “offers readers an even clearer understanding of Graham’s wisdom and how it should be applied by investors today.”

The dictionary

Entries in the dictionary cover a range of topics, from A:

AAA, adj.  Traditionally pronounced “triple-A” — but, more recently, “AAAAAAAAAAAAAAAAAAAAGH!”

To Z:

ZOMBIE FUND, n.  A portfolio, typically a HEDGE FUND or PRIVATE-EQUITY FUND, that functions like the living dead.

Each of those entries goes on to provide more context and each is still timely today, given that AAA tranches of commercial mortgage-backed securities are now showing losses in value (something that is never supposed to happen) and there is increasing concern among asset owners about zombie funds, which linger beyond their expected or productive lives but provide managers with additional fees.

The excerpts show the general form of the definitions; the capitalized items within them cross-reference to other terms in the book.  In addition, fanciful (imagined) situations accompany some of the entries, complete with clever names for the individuals and firms cited.  To wit:

“We’re advising investors to overweight financial stocks,” said Shirley Hugh-Geste, chief market strategist for Kahn, Mann, Crooke & Banditto, the Wall Street investment bank.  “We think 2008 will be a record year for earnings in the financial sector as the housing sector regains its momentum.”

A few more examples (some of them are just the first parts of longer entries):

AXE, n.  The Wall Street analyst whose opinions hold the greatest sway over the price of a stock — until his or her hot streak runs out, at which point a new “axe” takes a whack at it.  This bizarre cycle continues for decades without most investors ever noticing that the blade is never swung by the same person for long enough to be meaningful.

BULL MARKET, n.  A period of rising prices that leads many investors to believe that their IQ has risen at least as much as the market value of their portfolios.  After the inevitable fall in prices, they will learn that both increases were temporary.

CAREER RISK, n.  The risk that, by thinking independently, a money manager might lose clients, endanger a big salary, and harm his or her own career; for money managers, the only risk that matters.

DISCLOSURE, n.  A statement that, by law, absolves a company of all responsibility — including any responsibility to present the statement in language that isn’t so stupefyingly obscure that nobody can understand it.  Intended to protect investors, disclosure instead protects the firms that issue it.

IPO, abbr. n.  “Initial public offering,” or the first sale of a company’s stock by private owners who know everything about it to public buyers who know nothing about it.

NEW ERA, n.  A period of collective investing insanity during which, according to its proponents, stocks should be valued by new rules — such as “this company is growing so fast that its value is infinite.”

NON-TRADED REIT, n.  A real-estate security that promises high income for the investor but usually delivers it only for the financial advisor.

OVERSIGHT, n.  A word with two opposite meanings:  “supervision,” as by a regulator or risk manager, and “omission or negligence.”  The directly contradictory meanings should serve as a warning to investors:  oversight can result in either outcome.

REGULATOR, n.  A bureaucrat who attempts to stop rampaging elephants by brandishing feather dusters at them.

STOCK-PICKER’S MARKET, n.  An imaginary set of circumstances in which shrewd and skillful investors stop competing against each other and are able to trade exclusively with an unlimited supply of morons.

UNCERTAINTY, n.  The most fundamental fact about human life and economic activity.  In the real world, uncertainty is ubiquitous; on Wall Street, it is nonexistent.

Zweig is excellent at connecting the current meanings of terms to their historical roots.  For example, “broker” is derived from the phrase of six centuries ago meaning “to tap a barrel of wine or ale,” allowing for an analogy to a person today “who taps — and potentially drains — a source of liquid wealth.”  And who would have guessed that a bond “indenture” would connect to “dentures” because of the toothed pattern by which the document for a deal was split (so that the parties could match up the pieces to confirm authenticity in the case of a dispute or expiration)?

“Panic” — both a noun and a verb — comes from the god Pan, “a grinning but ugly man with the horns, ears, and hairy legs of a goat . . . the god of herds and flocks, serenading them with his pipes”:

To the Greeks, a sudden fright was called panikos, “of Pan.”  Today’s herd of panicking investors, scattering in a selling frenzy set off by the unexpected, would be all too familiar to the ancient god.

The book highlights a number of absurdities that common discourse takes for granted:

~ The market is said to “act” this way or that, and many other verbs are applied to it in ways that are appealing to humans but not revealing, part of the storytelling that is built into the business.

~ “One company could spend twice as much on its borrowings as another and still report the same EBITDA,” which Charlie Munger referred to as “earnings before including the decisive adjustments.”

~ “The next _________” is catnip, be it regarding a person, a stock, or whatever.  Peter Lynch said that “the next of something almost never is — on Broadway, the best-seller list, the National Basketball Association, or Wall Street.”  As Zweig notes, “the next Peter Lynch” was applied to many asset managers who turned out not to be.

~ “The investors who obsess the most over beating the market are the most likely to get beaten by it.”  An important point that is little discussed.

~ Wall Street forecasts, “almost never have probabilities attached,” unlike weather forecasts or sports odds.  (An aspect of the seer-sucker theory:  “For every seer there is a sucker.”)

~ “Pareidolia” is the “human tendency to see meaningful patterns or trends in random events or images.”  Investors often engage in the equivalent of seeing “the Virgin Mary on a grilled-cheese sandwich.”

~ “Touch” is that certain something that (currently-winning) professional investors have.  “When that streak ends, people will say that the manager has lost his or her ‘touch’ — although none of them would have been able to say what exactly that was while the manager was hot.”

The book reinforces the view that despite all the new products and ideas being spewed forth year after year, the underlying forces that drive investor behavior are remarkably similar across the generations.  Which is not to say that there is a constancy of perspectives, beliefs, or actions.  Interpretations change with the market winds.  Three examples:

~ One tendency of investment providers is to let self-serving bias affect their descriptions of recent performance:

When a portfolio earns high returns, its manager will ascribe that outperformance to his or her rational, skillful selection of superior investments.  The behavior of other investors, the overall environment, and luck itself have nothing to do with it.

When a portfolio performs poorly, however, the manager will attribute that to bad luck, “unprecedented events,” a “difficult environment,” or the bizarre behavior of all those other investors who are too irrational to appreciate the fine investments he or she has selected for you.

~  The “halo effect” is powerful:

In early 2000 . . . with Cisco Systems’ stock up more than 100,000 percent over the previous decade, Fortune magazine called its chief executive, John Chambers, “the world’s greatest CEO.”  A year later, with the stock down almost 80 percent, Fortune described Chambers as having been dangerously blind to signs of the coming collapse.

~ In a 2002 speech, Alan Greenspan extolled the benefits of securitization in dispersing risk throughout the system.  Eight years later, he said that securitization “was the immediate trigger of the current crisis.”

Using the dictionary

Unlike most dictionaries, this one can be read from cover to cover in a relatively short period of time.  Or you can pick it up to digest a few entries now and then.  One great way to use the book is by looking up common terms as you read them in a portfolio manager update or an analyst research report.  Doing so will help you to think more carefully about what you are being told — and to be cautious about using the lingo you throw around yourself.

From Zweig’s introduction:

Luck, uncertainty, and surprise are the most fundamental physical forces in the world of investing.  Wall Street’s communications with the rest of the world are often designed specifically to deny the power of these forces.

The denser the jargon, and the more polysyllabic the terminology, the more likely someone is hiding something from you.

The Devil’s Financial Dictionary explores the language of investment practice, providing a helpful perspective for investors — and raising a caution flag for professionals and organizations who think that business as usual is the way things ought to be.

 

A footnote for rare book collectors and seekers of value:  The initial press run for the dictionary erroneously left out the last few chapters.  At the time that error occurred, Zweig called it his own Inverted Jenny, in reference to a famous stamp that has an unintended upside-down image of an airplane.  It is highly prized by philatelists.