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Sunday, 18 October 2009
What weasel words of investment truly mean
The investment world is full of weasel words designed to mislead investors, or maybe just accentuate the positive. This produces confusion, which hopefully will be diluted by this guide to some of the most common misnomers employed out there.
The investment world is full of weasel words designed to mislead investors, or maybe just accentuate the positive. This produces confusion, which hopefully will be diluted by this guide to some of the most common misnomers employed out there.
Amortisation It is found in company accounts and, strictly speaking, means a method of depreciating a proportion of the cost of a fixed asset until it has been “written off” - or when the full cost has been amortised over a number of years. But this makes arbitrary assumptions about the value of the assets and allows firms to write off goodwill which is, of course, hard to quantify. This can be a method of burying costs and distorting the value of a business.
Balanced Fund managers and investment advisers tend to use this term to suggest an objective standard for balancing an investment fund. In reality it is a subjective term expressing a view of how balance can be achieved. For example, a fund split into bonds and equities can be said to be balanced. But this is meaningless because bonds underperform equities. So other than ensuring that one half of the portfolio will perform worse than the other, it is hard to discern what purpose balance is serving.
Below the line Another accounting term that should be straightforward but is not. It can refer to expenses incurred in making a sale, such as marketing costs, but in practice this is where listed companies bury all manner of nebulous expenses.
Bills receivable Strictly speaking, this refers to the value of bills of exchange before they mature, but it has entered the lexicon as a term for money owed to firms that can be classed as assets. In reality, some or all of these sums may never be paid.
Cash Sounds simple enough, but isn’t because what is described as cash often means money held in easily or maybe not-so-easily liquidated instruments, such as foreign currency or time deposits. In the investment world, cash cannot be assumed to be folding notes.
Commissions It seems straightforward, but it is remarkable how often the term appears in tiny print and is substituted by euphemisms such as “considerations” or maybe “additional charges”. In practice very few transactions are commission-free, but it’s hard identifying the amounts of money involved.
Dollar cost averaging A special concept for fostering delusion. The idea is that instead of considering the profit or loss on a share by comparing its current price with the price at the time of purchase, investors are encouraged to buy the same share at different times - averaging out the cost and then comparing that to the prevailing price. This is a great wheeze for those who think there is something wrong with simplicity and prefer tricks of the mind to investment reality.
Going forward Investment analysts, in particular, seem determined to show their ignorance of simple language, and use this term as a way of expressing the future tense. Thus you hear such nonsense as “going forward we see the market performing ...” The words are superfluous, but these doyens of verbiage think them impressive.
Gearing and leverage Sellers of investment products are loath to use the ugly words “borrowings” or “debt”. So they use euphemisms, which suggest that they are ever so sophisticated and dealing in products that somehow maximise profits - without highlighting risks.
Intangible assets It may be argued that this is synonymous with “not worth the paper it’s written on”, yet there the term is in most company accounts, denoting assets that are hard to pin down, such as goodwill or patents. This offers considerable scope for abuse by companies.
Independent directors Rules require listed firms to have these people on their boards, and “independent” suggests that they are there to protect the interests of minority shareholders. In Hong Kong, so-called independents have a dismal record of performing this task, mainly because they tend to be closely connected to the families of the majority shareholders.
Independent financial advisers A concept already much discussed on these pages, where considerable doubt has been cast on the word “independent” and the quality of advice given. With honourable exceptions, most of these people are glorified salesmen for investment funds, earning very high commissions for pushing investors into largely useless regular savings products which demand high penalties for early redemption.
Low risk and high risk Here’s a mirror pair of concepts that in reality are value judgments often dressed up as descriptive terms. The result is that investment fund sellers cobble together packages of financial products which supposedly match these descriptions, but are rarely tailored to the investor’s needs, because one person’s definition of high risk is another’s concept of low risk.
New Most products described as new are nothing of the kind. Financial derivatives have been around for at least a century. Investments based on borrowings are also not new. And as for so-called new markets, in most aspects they are highly familiar.
Paper profits Also known as unrealised profits. In essence profits made from investments that have yet to be realised because the holder has not sold the investment. Be very wary of anyone who tells you they have “made a profit” when in reality no transaction has taken place. This is up there with dollar cost averaging because the harsh reality is that money is only made when it’s made not when it might be made.
Shareholder’s interests A much-mentioned term that means very little in Hong Kong, where most listed companies remain tightly held by majority shareholders who run public companies largely for their own benefit, paying only lip service to the interests of minority shareholders.
2 comments:
What weasel words of investment truly mean
Some terms are more than a little misleading
Stephen Vines
18 October 2009
The investment world is full of weasel words designed to mislead investors, or maybe just accentuate the positive. This produces confusion, which hopefully will be diluted by this guide to some of the most common misnomers employed out there.
Amortisation It is found in company accounts and, strictly speaking, means a method of depreciating a proportion of the cost of a fixed asset until it has been “written off” - or when the full cost has been amortised over a number of years. But this makes arbitrary assumptions about the value of the assets and allows firms to write off goodwill which is, of course, hard to quantify. This can be a method of burying costs and distorting the value of a business.
Balanced Fund managers and investment advisers tend to use this term to suggest an objective standard for balancing an investment fund. In reality it is a subjective term expressing a view of how balance can be achieved. For example, a fund split into bonds and equities can be said to be balanced. But this is meaningless because bonds underperform equities. So other than ensuring that one half of the portfolio will perform worse than the other, it is hard to discern what purpose balance is serving.
Below the line Another accounting term that should be straightforward but is not. It can refer to expenses incurred in making a sale, such as marketing costs, but in practice this is where listed companies bury all manner of nebulous expenses.
Bills receivable Strictly speaking, this refers to the value of bills of exchange before they mature, but it has entered the lexicon as a term for money owed to firms that can be classed as assets. In reality, some or all of these sums may never be paid.
Cash Sounds simple enough, but isn’t because what is described as cash often means money held in easily or maybe not-so-easily liquidated instruments, such as foreign currency or time deposits. In the investment world, cash cannot be assumed to be folding notes.
Commissions It seems straightforward, but it is remarkable how often the term appears in tiny print and is substituted by euphemisms such as “considerations” or maybe “additional charges”. In practice very few transactions are commission-free, but it’s hard identifying the amounts of money involved.
Dollar cost averaging A special concept for fostering delusion. The idea is that instead of considering the profit or loss on a share by comparing its current price with the price at the time of purchase, investors are encouraged to buy the same share at different times - averaging out the cost and then comparing that to the prevailing price. This is a great wheeze for those who think there is something wrong with simplicity and prefer tricks of the mind to investment reality.
Going forward Investment analysts, in particular, seem determined to show their ignorance of simple language, and use this term as a way of expressing the future tense. Thus you hear such nonsense as “going forward we see the market performing ...” The words are superfluous, but these doyens of verbiage think them impressive.
Gearing and leverage Sellers of investment products are loath to use the ugly words “borrowings” or “debt”. So they use euphemisms, which suggest that they are ever so sophisticated and dealing in products that somehow maximise profits - without highlighting risks.
Intangible assets It may be argued that this is synonymous with “not worth the paper it’s written on”, yet there the term is in most company accounts, denoting assets that are hard to pin down, such as goodwill or patents. This offers considerable scope for abuse by companies.
Independent directors Rules require listed firms to have these people on their boards, and “independent” suggests that they are there to protect the interests of minority shareholders. In Hong Kong, so-called independents have a dismal record of performing this task, mainly because they tend to be closely connected to the families of the majority shareholders.
Independent financial advisers A concept already much discussed on these pages, where considerable doubt has been cast on the word “independent” and the quality of advice given. With honourable exceptions, most of these people are glorified salesmen for investment funds, earning very high commissions for pushing investors into largely useless regular savings products which demand high penalties for early redemption.
Low risk and high risk Here’s a mirror pair of concepts that in reality are value judgments often dressed up as descriptive terms. The result is that investment fund sellers cobble together packages of financial products which supposedly match these descriptions, but are rarely tailored to the investor’s needs, because one person’s definition of high risk is another’s concept of low risk.
New Most products described as new are nothing of the kind. Financial derivatives have been around for at least a century. Investments based on borrowings are also not new. And as for so-called new markets, in most aspects they are highly familiar.
Paper profits Also known as unrealised profits. In essence profits made from investments that have yet to be realised because the holder has not sold the investment. Be very wary of anyone who tells you they have “made a profit” when in reality no transaction has taken place. This is up there with dollar cost averaging because the harsh reality is that money is only made when it’s made not when it might be made.
Shareholder’s interests A much-mentioned term that means very little in Hong Kong, where most listed companies remain tightly held by majority shareholders who run public companies largely for their own benefit, paying only lip service to the interests of minority shareholders.
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