When words don't mean what they should

A few days ago, I spoke with someone who had read that markets are expensive right now. Sensibly enough, they assumed this meant stock prices were high. In their mind, a share trading at Rs 100 was obviously more expensive than one trading at Rs 20. It took me some effort to clarify that when market commentators call stocks expensive, they're referring to valuation metrics like price-to-earnings ratios, not the actual rupee price. A Rs 20 stock can be far more expensive than a Rs 100 one if the fundamentals do not justify the price.

The equivalent confusion is even worse in mutual funds, something which I have written about earlier. People regularly assume that a fund with an NAV of Rs 15 is cheaper and therefore a better deal than one with an NAV of Rs 150. The reality is that NAV is just the per-unit price and tells you nothing whatsoever about whether the fund is a good investment or likely to grow. Yet this misunderstanding leads investors to make completely illogical choices, hunting for low-NAV funds as if they were bargains at a sale.

Suggested read: What not to do with stock prices

Should we blame these people for the confusion? Absolutely not. The fault lies squarely with those of us who work in finance. We've taken ordinary words that people use every day and given them a completely different technical meaning, and then we act surprised when ordinary investors misunderstand us.

This isn't an isolated problem. The financial industry is littered with words hijacked. Take the word 'dividend' in mutual funds. For years, I wrote column after column explaining that the funds that called themselves dividends were not, in fact, dividends. They were simply a return of your own money, a partial redemption dressed up to look like income. SEBI eventually fixed this by requiring funds to call them what they actually are – payouts or distributions – but the damage is done. People still think of fund dividends as bonuses or extra returns.

Suggested read: Dividends were never dividends

Consider the word 'liquid'. When you tell someone that a particular investment is liquid, what image comes to mind? Water, obviously. Perhaps they think it flows easily or that it's somehow fluid. The actual meaning is that the investment can be quickly converted to cash without significant loss of value. A perfectly sensible concept, but why did we choose a word that means something else entirely in everyday usage?

Another culprit is 'correction'. In normal English, a correction fixes something that was wrong. So when we say that markets have undergone a correction, the natural assumption is that something wrong has been put right, that prices have moved to where they should be. In practice, it means that prices have fallen. There's nothing inherently corrective about it. Markets can correct downwards when they're already low, and they can continue rising when they're already high.

Suggested read: …tough get going

Then there's the confusion around growth-oriented investments. To most people, growth means expansion, improvement, getting bigger and better. Naturally, they assume growth-oriented funds invest in companies that are growing. In a sense, they do, but the technical meaning is quite different. Growth investing refers to buying shares in companies trading at high valuations relative to current earnings, based on expectations (hope, actually) of future expansion. These companies might be growing, but they may never become good investments.

The tragedy of all this linguistic confusion is that it creates a barrier between ordinary people and financial understanding. It makes investing appear more complex than it actually is. The solution isn't to avoid investing or to assume you're not smart enough to understand it. The solution is to recognise that much of the confusion is artificial. Once you understand that expensive doesn't mean high-priced, that liquid doesn't mean wet and that correction doesn't mean fixing mistakes, the basics of investing become far more accessible.

However, I'm curious about what other terms confused you when you were starting out as an investor. What words or phrases did you misunderstand because finance had hijacked their everyday meanings? Write to me and share your experiences.

Also read: Numeracy makes for better investors