Book review: The Devil’s Financial Dictionary by Jason Zweig

This book has a simple proposition. It aims to decode the language used by executives in financial markets that often confuses or blinds investors. The author, an experienced US financial journalist and Wall Street Journal columnist, takes the cynical view that every profession is a conspiracy against the laity and that language is a weapon used by each profession to exclude those who are not part of the guild.

As he notes, words like algorithm, proprietary and quantitative are meant to lull readers and listeners into a kind of befuddled surrender. Throw them together and you get proprietary quantitative algorithm – a phrase you can launch at a novice investor like a barrage of heavy artillery.

Luck, uncertainty and surprise are the most fundamental physical forces in the world of investing and Wall Street’s communication with the rest of the world is often designed specifically to deny the power of these forces, he says. The denser the jargon and the more polysyllabic the terminology, the more likely someone is hiding something from you.

Sometimes, it’s not so much a case of hiding but rather sugar-coating an otherwise unpalatable proposition. When we get to the body of the book, we see how the word “amortise” can be used.

Bargain price

“Yes, 5.75 per cent might seem like a lot to pay upfront for a mutual fund,” says a Chicago-based financial advisor, “but if you amortise that over the next 25 years, its only 0.23 per cent per year which is a bargain price for access to my advice for the next quarter of a century.”

More obscurely, while still on the letter A, we learn about so-called Alligator spreads. These are defined as trades in the options market that generate such carnivorous commissions that the person who places the trade stands no chance of making a profit. Related terms it seems are Acapulco spread, Midas spread and Cadillac spread, all nicknamed for their ability to fund lavish spending by the broker of fees earned from clients.

Backfill is an insider term for a method used to enhance the true performance of hedge funds. Hedge funds are not obliged to report their returns and often launch multiple funds. They can then wait to see which ones do well and report those to the various tracking indices. This return is tracked back to its launch. With good returns added back to the index over time and bad ones excluded, performance levels are made to look better than they are.

Then there's a cigar butt – a stock bought so cheaply that it should go up even if the underlying business struggles to produce any cash. Warren Buffett is a fan of these, suggesting that a cigar butt found on the street may have only one puff in it and therefore not be much of a smoke but the bargain basement nature of it will make that puff all profit.

Fat finger trade

Bulls, bears, dogs and dead cat bounces, all explained here, will be familiar terms to most investors but there’s plenty more in that vein in the lexicon. A fat finger trade is the equivalent of a multimillion dollar typo – an erroneous order originating on the institutional trading desk of a major bank or brokerage when an employee strikes the wrong key on a computer terminal. A channel check is a part of Wall Street research in which an analyst purports to visit warehouses, stores and other physical locations to verify that a company’s goods and prices match its official reports.

If the reliability of channel checks is any guide, analysts appear to conduct them in the comfort of their homes, checking that the channel they are watching on TV matches that on the remote control they are holding, the author muses.

This tone of irreverence and black humour peppers the book, making a potentially dull subject eminently readable.

There’s a serious purpose too. As Zweig wisely puts it, achieving financial success isn’t about defeating professionals at their own game. Instead it’s about achieving self-control so that you navigate an even course between the polar positions of euphoria and despair that grip financial markets every few years and the related commentary from so-called market experts.