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The Complexity of Investment Jargons

Don’t think higher of something that is more complex, especially in investments, says Dhirendra Kumar

A few days ago, I was talking to some friends about what, expressed in simple terms, was the root of the credit crisis. "Let's say that you promise to pay me a hundred rupees," said one of them. "Now if I go to a third person and say that someone is going to give me a hundred rupees then that third person will treat me as if I actually have those hundred rupees. In a manner of speaking, money has been created. Suppose later, for some reason, the third person stops believing that the hundred rupees will actually be paid. If this happens then for all practical purposes, money has been destroyed. The money was never there to begin with. There was instead a mutual belief that the money was there. When that belief was shaken, the money effectively vanished."

Upon hearing this, another person who was listening said dismissively, "You just mean that the velocity of money will go down." Regardless of the correctness or otherwise of the comment, I found it notable that most of us are in a frame of mind that we consider jargon to be superior to plain English.

A few days back a colleague received a phone call from a small-time mutual fund distributor who wanted to know if my company did technical analysis of mutual funds. Asking a few more questions revealed that the poor fellow had been reading and watching all kinds of investment publications and TV channels and had found that technical analysis was the one thing he found impossible to figure out. From this he came to conclusion that whatever technical analysis was, it was the most crucial gap in his financial education. And so he set out to rectify this problem.

I think this is the most common function that jargon of all kind serves for its perpetrators. It enables meaningless drivel to be dressed up as knowledge. The ordinary person, when faced with things he and she don't understand, assume that it must be deep knowledge. Soon they get mentally tuned to assume that anything they don't understand must be knowledge.

Effectively, the modern consumer has been trained to have a mindset composed of the following beliefs: The world is too complicated for me to understand. I need experts to help me make decisions. Since experts understand complicated things, they need to speak in a complicated language. Therefore, anyone who speaks in a complicated language must be an expert.

This is obviously a tremendously useful tool for marketers who are looking to fool us. From the 'super area' of property salesmen to the PMPOs and bio-rays of consumer electronics companies, the borderline between jargon and lies has been firmly erased.

The jargonisation of financial products is also well on its way. Once upon a time, mutual funds were launched on the simple premise that since the investor doesn't have the time and the experience of researching stocks, the fund manager will do it for him. Now, it's been a while since any fund has been launched whose reason for existing can be explained without a 30-slide presentation and perhaps ten graphs.

But in investing at least, the cure is simple. If you face any financial product which you cannot understand with your current level of knowledge, then you don't need it. The fact that you can't understand it is not your problem, it's the sellers'.

The great investor Warren Buffet said recently that all he had needed to succeed was addition, subtraction, multiplication and division. If something more had been required, then he wouldn't have made it.