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The Language of Money

The Language of Money

Winston Churchill once quipped that America and England are two countries separated by a common language. We have often thought of this as our travels, and lives, keep us alternating between Wall Street and Main Street. On Wall Street, most everyone intuitively understands the need to define and manage risk to maximize returns. On Main Street, beating the benchmark is the ultimate definition of success.

But consider this: a portfolio manager we know, someone who has managed money at the world’s largest, and most respected, asset management firms and pension funds, said he would have a lot of explaining to do if he made a 30% annual return when his benchmark rose 15%. Why? The immediate bias would be that he took on far too much risk to make his money.

On Main Street, however, the manager’s results would be manna from heaven. The fund would likely get awarded with some superlative return score, the financial press corps would celebrate the manager’s market-beating genius, and money would pour in from everyone eager to invest with someone who has the Midas touch. Of course, we all know how this story tends to end.

Yet, this simple construct is essentially how Main Street approaches Wall Street. They come to the markets looking to make money, which is appropriate, but they are little prepared for what they find. They think they are long-term investors, but in reality, the only thing about them that is long-term is the amount of time they spend in markets. They often do not own stocks, or bonds, long enough to even benefit from the market’s natural cycles. This is an accepted fact at the highest levels of Wall Street, and it is part of the lubrication of liquidity that helps markets function. Advisors, who are the front line of the financial services industry, are left to deal with the consequences.

We propose a common language, a lingua franca, based on what really moves markets. We propose a focus on risk before return, and process before profit. We could focus on more than 2,000 investment factors that influence markets and portfolio, but we think understanding four key words are maximally effective: volatility, diversification, tail risk, and concentrated-stock risk. Anyone who understands the meaning of those words will understand markets – and their investment portfolios – in ways that are truly meaningful. Moreover, those words will help your clients understand what you do for them, and what they are doing, in a different light.

While those words are immediately familiar to you, and perhaps to some of your clients, everyone brings their own definitions. And so it is important to define terms, which is exactly what happens everyday, all day, when institutional investors meet to discuss market opportunities and realities.

This definitional exercise insures everyone is speaking about the same thing and is focused on the same thematic. Those common definitions can reduces misunderstanding. Also, this framework shows clients that there is much more to successful investing that just paying the lowest fee. It shows them that it is possible to define, measure and control risks. Once that happens, investors have a better chance of making time work for them, not against them. That will help break the perpetual boom bust cycle and even out the odds for your clients and you by hopefully preventing them from “greeding in” and “panicking out” of their investments. In other words, there are no guarantees on Wall Street except for risk. How much risk are you willing to take to realize your objectives? The answer is critical. Our proposal for a four-point common language can help you have conversation that matters.

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