This glossary of financial terms is inspired by Ambrose Bierce’s masterpiece The Devil’s Dictionary, which the great American satirist published sporadically between 1881 and 1906. (View free versions of Bierce’s text here or here.) Like Bierce’s brilliantly cynical definitions, the explanations presented here should not — quite — be taken as literally true. Some of these entries are adapted from articles published previously in Financial History, Money, and The Wall Street Journal.
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DAY-TRADER, n. See IDIOT.
DESIGNATION, n. A certificate and title vouching that a financial adviser has learned something or other; also, the initials standing for the program that awarded the certificate. Some — like the CFA, or Chartered Financial Analyst — are so rigorous they require years of detailed study and the equivalent of several college-level math courses. Others, like the CFP or Certified Financial Planner, require considerable preparation and knowledge. Many, however, require only that the adviser send in a check for a few hundred dollars and take an exam that the average cocker spaniel could pass.
There are hundreds of these things in the financial industry, with more being foisted on the public every month. It is a matter of time before financial advisors have business cards with the initials CBFD, or Certified Bearer of Financial Designations, after their name.
Whenever a financial adviser boasts of his designations, remember that it is not a graduate degree; it may well be the equivalent of the correspondence classes that used to advertise on the inside of matchbook covers. And ask yourself: Why would someone whose achievements, experience, and expertise are intrinsically impressive have to brag about a string of incomprehensible acronyms on his business card?
DODD-FRANK ACT, n. A financial-regulation law, enacted in 2010, intended to prevent financial institutions from becoming “too big to fail.” Unfortunately, the Dodd-Frank Act didn’t prevent itself from being too long to read, too complex to understand, and too convoluted to implement.
DOWNSIDE PROTECTION, n. A tactic put in place by a financial adviser to protect against whatever hurt the value of a portfolio last time. Unfortunately, it rarely turns out to protect against whatever will hurt the value of the portfolio next time.
DUE DILIGENCE, n. The diligence that investors must do before they commit any money to an investment.
But most investors refuse to engage in the intensive gathering of facts and marshalling of common sense that due diligence requires. Instead, their research might be more accurately called “undone diligence,” both because it is so seldom done and because investors who don’t do it almost always end up undone themselves.
A survey in 2007 of dozens of consultants, pension plans, family offices, funds of funds, and other SOPHISTICATED INVESTORS found that 19% relied very strongly on their gut feelings about the managers of a hedge fund or other alternative asset; 32% usually or always followed “an informal process” to select the fund even though a formal process would be more desirable; 29% didn’t always run background checks on the managers; 24% didn’t always analyze the fund’s financial statements; and 4% were willing to write multi-million-dollar checks without even reading a fund’s prospectus.
A few months later, Bernard Madoff’s Ponzi scheme was exposed, and “sophisticated investors” got a lot more sophisticated in a big hurry. Their newfound sophistication included plenty of due diligence — which was long overdue.
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