10 Terms Investment Pros Use to Raise Money
- Joshua M Brown
- September 30th, 2013
You are easily dazzled by words that sound more sophisticated than they really are.
You are totally aware of this – and yet you remain susceptible.
Using hundred-dollar words where a five-dollar word will do is a time-honored, traditional selling tactic on Wall Street and in the hedge fund / asset management world as well.
Wall Street knows that you already want to buy, but it also knows that you won’t make a purchase decision merely because it feels good. It knows that you must first satisfy yourself that you’ve read up on the specs and the technical details. This is a psychological trick the willing buyer plays on his or herself so that the decision can be rationalized by facts, not just feelings. And in order for this process to take place, there must be what seems like high-level terminology in the mix.
Here are ten words or terms that are proven wallet-openers even if (or especially if) the potential customer has no idea what they mean:
10. Risk Parity – “Well, parity means balance, and risks should be balanced, so…okay!” This is a fancy way of talking about a portfolio allocation structured not by asset class weightings but by risk weightings. Since most of a portfolio’s risks come from stocks, the typical risk parity strategy will own a higher proportion of bonds but will leverage them to amp up the yields or potential upside. This doesn’t work so well when a portfolio’s source of volatility switches from stocks to bonds themselves, but I don’t want to ruin anyone’s fantasies of reward without risk.
9. Delta-hedging – “Yes, sir. I definitely want all my deltas to be hedged. Gotta be careful with those deltas.” Delta, in this case, can be described as the difference between the expected value of a security from its actual value in the markets. When a corporation issues warrants, convertible bonds, preferreds and stocks, there will often be mispricings between how these securities relate to each other, aka deltas, which can be hedged by selling one instrument against a long position in another. This is big boy stuff, for pros only. If this is what you think is necessary for your retirement portfolio, you’re probably already in big trouble.
8. Smart Beta – ” Duh, if it’s smart, it’s gotta be better than that plain old dumb beta. More please!” There’s not really any such thing as “smart” beta, there is just beta (raw market performance). But there are smarter ways to index a portfolio which do outperform raw market performance – passive portfolios consisting of higher book-to-market value, higher earnings growth, etc typically crush a traditional cap-weighted index over decades. This so-called “smart” style of indexing typically works well thanks to the small-cap and value bias present whenever one uses factors to weight stocks as opposed to just “who has the highest valuation” like the S&P 500. But it can cost more than it’s worth – and it usually does.
7. Institutional-class – “Not too shabby! Look at me moving up the world! I’m institutional-class now!” This is the investment biz equivalent of putting a wristband on a girl at the club and having the bouncer walk her behind the velvet ropes of the VIP section. Bottle service begins and the aphrodisiac properties of exclusivity take effect immediately.
6. Absolute Return – “F*ck yeah I absolutely want returns! Absolutely!” Benchmark-agnostic strategies that seek to gain no matter what the markets are doing around them are highly popular in a flat- to down-tape. Try talking someone off the ledge, however, when you’ve only made them 7% on an absolute returns strategy while the S&P is galloping up 10% a quarter.
5. Upside Capture – “Yes! I want to capture upside! Daddy! Mummy! I want it now! Capture it for me!” Unfortunately, the term typically refers to the fact that the strategy is not getting all of the potential gains a given market has to offer, it is only seeking to capture a portion of the upside. Which is fine, but don’t think of the word capture as having an aggressive connotation in this context.
4. Uncorrelated – “Yay! Uncorrelated! I’ve always been worried about my correlations.” Well, fine, diversification is great, and having assets that do not necessarily move together is what proper portfolio construction is all about. But lest we forget, nobody wants to be uncorrelated to a bull market, number one. And number two, in a panic – a la 2008 – everything you once thought was uncorrelated becomes re-correlated in a hurry. Stocks, bonds, large, small, sovereign, corporate, international, domestic, commodities, VC, PE, etc. Non-correlation can’t always shield you from the worst the market has to offer.
3. Market-Neutral – “Yes! Neutralize my enemies for me, BlackRock!” Be careful what you wish for, are you absolutely certain you want to be neutrally-postured against a market that goes up on an annual basis 75% of the time? Do you want a net-zero exposure to a market that has never had a single rolling twenty-year period of negative returns? This type of thing may make sense for an institutional investment mandate carrying hyper-specific objectives, but does that characterize your situation?
2. Tail Risk Protection – “Hell yes I want my tail protected! Why wouldn’t I?” Okay, great. Of course you do – everyone does, especially on the heels of a huge crisis. But the key to keep in mind is that these types of major adverse events rarely occur in close proximity to each other, even though the Recency Effect makes everyone feel as though “the next shoe to drop” is just around the corner. So ask yourself how much opportunity cost is involved with protecting that tail, and how much actual cost? Are you expending hundreds and hundreds of basis points each year on long-dated put options and eating into your potential upside?
1. Intrinsic – “Oooooooooo, intriiiiiinsiiiiic…” The word intrinsic is, as Kenny Powers would say, the ultimate panty-dropper. Nine out of ten investors don’t know what the word intrinsic means but twelve out of ten are impressed if it appears in the name or description of a fund or strategy. The actual definition, when used in concert with a word like value, means that the truth worth of a given thing is embedded within that thing, the implication being that it will eventually be brought out. For example, despite the gooky makeup and horrible clothing Charlize Theron wore to play a female truckstop serial killer in the 2003 film ‘Monster‘, there is an intrinsic hotness that she possesses, which was virtually impossible to disguise.
I’ll tell you the single most intrinsic aspect of investing – one that cannot be disguised for long by any fancy jargon or technical terminology: The less you do, and the less it costs you to do it, the better off you are. Not just financially, but mentally and spiritually as well.
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The Reformed Broker is a blog about financial markets and the economy. Joshua Brown is a New York City-based investment advisor for high net worth individuals, charitable foundations, retirement plans and corporations... More.