What Wall Street Jargon Really Means

As long time readers know, IMHO, much of the financial services industry is what I like to call the “Don’t Worry, Be Happy” crowd. You can toss them all off the top of the Empire State Building, and all the way down they all say the same thing – “So far so good!”

Here is the true meaning of the jargon these folks use:

BIG PRODUCER, n. A stockbroker or insurance agent who produces big commissions. The term is erroneous, however: The broker or agent doesn’t produce the commissions. It is his clients who produce them. He just collects them.

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.

CHURN, v. To trade a portfolio so rapidly that the only positive returns are earned by the brokerage firm that fills the orders. Formerly committed almost exclusively by stockbrokers, churning has become a common form of financial hara-kiri, in which speculators who mistakenly call themselves “investors” rapidly trade their portfolios over and over again. So long as any money remains in their accounts, they refer to what they are doing as “learning to trade.” When their balances hit zero, their education will be complete.

DATA, n. The raw material from which Wall Street fabricates distortions for marketing purposes.

DAY TRADER, n. See IDIOT.

DODD-FRANK ACT, n. A financial-regulation law, enacted in 2010, that sought to prevent financial institutions from becoming “too big to fail” but succeeded mainly at being too long to read, too complex to understand, and too convoluted to implement.

DOWNSIDE PROTECTION, n. A tactic put in place by a financial advisor to protect against whatever hurt the value of a portfolio last time. The portfolio will be hurt by something entirely different next time, however.

EFFICIENT MARKET HYPOTHESIS, n. A theory in financial economics believed only by financial economists. In theory, the market price is the best estimate at any time of what securities are worth; it immediately incorporates all the relevant information available, as rational investors dynamically update their expectations to adjust to the latest events. In practice, however, investors either ignore new information or wildly overreact to it, regardless of how relevant it is. Even so, that doesn’t make beating the market easy, because you must still outsmart tens of millions of other investors without incurring excess trading costs and taxes. As behavioral economist Meir Statman puts it, “The market may be crazy, but that doesn’t make you a psychiatrist.”

FINANCIAL ADVISOR, n. Often, someone who cares deeply about being prudent, diligent, competent, and honest, in which case his or her services will be priceless; sometimes, someone who cares only about being a BIG PRODUCER, in which case you are in for big trouble.

FORECASTING, n. The attempt to predict the unknowable by measuring the irrelevant; a task that, in one way or another, employs most people on Wall Street.

Because the human mind hates admitting the truth that the world is largely random and unpredictable, forecasters will always be in demand, regardless of their futility. Wall Street follows what marketing professor J. Scott Armstrong has called the seer-sucker theory: “For every seer there is a sucker.”

In the real world, as with weather forecasts or predictions about who will win a sporting event, those making the projections typically estimate the likelihood that they are correct. Wall Street forecasts, on the other hand, almost never have probabilities attached. As decision scientist Baruch Fischhoff wrote in 1994, “When both forecasters and client exaggerate the quality of forecasts, the client will often win the race to the poorhouse.”

IDIOT, n. See DAY TRADER.

IRRATIONAL, adj. A word you use to describe any investor other than yourself.

LOAD, n. In the real world, a heavy burden, often so weighty that only donkeys could carry it; on Wall Street, the sales commission on a MUTUAL FUND, ranging up to 5.75% of the amount invested. The two meanings are different, but only slightly.

MUTUAL FUND, n. A fund that is not mutual: its investors share all risks equally, whereas its managers share all fees exclusively.

OPTION, n. The right to buy or sell a financial asset at a fixed price on or before a specific time, from the Latin optio, “I choose”; a boon for stockbrokers whose clients don’t understand how options work and generate a fortune in commissions as they attempt to learn.

$ Explained Hugh Askin-Mee, a client of the brokerage firm Bourne, Rich Howe: “I put two children through Harvard by trading options. Unfortunately, they were my broker’s children.”

Perhaps the earliest recorded options trade, according to Aristotle, was made by Thales of Miletus (ca. 624-547 B.C.), one of the “Seven Sages of Greece,” who put down deposits on all nearby olive-oil presses one winter when his knowledge of astronomy purportedly told him that the next year would bring a good olive crop. Thales paid almost nothing and profited hugely when the abundant harvest created high demand for presses — thus making him one of the first individual investors to make more money trading options than his brokers did. He was also one of the last.

POTENTIAL CONFLICT OF INTEREST, n. An actual conflict of interest.

PRODUCT, n. A term added to the word investment, as in “We’ve just introduced this investment product,” to cloak complexity or to create the illusion of sophistication. Just as a “wine product” is wine adulterated with water, sugar, or fruit juice, and a “cheese product” contains such substances as calcium phosphate, sodium alginate, and apocarotenal, so an “investment product” often has risk additives or structural oddities, as well as high fees, that can surprise the unwary.

$ “This product is designed to provide downside protection while still giving you plenty of upside when the stock market does well,” said Wyatt Hertz, a financial advisor at the brokerage firm of Butcher, Cooke, Boyle, Frey Baker. “And, thanks to the innovative fee structure, my interests will be aligned with yours for years to come.”

SAFE, adj. A term used to promote any investment that is about to explode.

TAX SHELTER, n. A complicated investment that will possibly protect the investor’s income from high taxes but will certainly expose it to exorbitant commissions.

UNCONSTRAINED BOND FUND, n. A mutual fund, specializing in bonds, that places no limits on the number of ways in which it can provide disappointing results to its investors.

 

Source: Jason Zweig’s ‘The Devil’s Financial Dictionary’