[Infowarrior] - Helping to break the code of finance

[Richard Forno]

Helping to break the code of finance

Posted by
Suzanne McGee
Tuesday 17 September 2013

It's time to cut through the jargon and deluge of data and demystify finance for laypeople and professionals alike

http://www.theguardian.com/money/us-money-blog/2013/sep/17/helping-break-financial-code

It's unlikely that Albert Einstein was thinking about the worlds of personal finance and investing when he came up with one of his most frequently-cited bon mots. When he coined the phrase, "If you can't explain it simply, you don't understand it well enough," he wanted to describe scientists' inability to convey the essence of their ideas to laypeople successfully – but it always reminds me of why I've been a financial journalist for the best part of a quarter century.

Smart beta. Portable alpha. Leveraged ETFs. The efficient market hypothesis. I could go on and on; the jargon that the average financial citizen has to wade his or her way through these days makes a walk through a minefield look like a pleasant afternoon's jaunt. And the consequences of getting it wrong can be catastrophic for our goals: saving enough for retirement. Paying off debt. Putting kids through school. Buying a house. Having a better life.

Just ask those everyday investors who were caught up in the auction-rate securities debacle when the financial crisis hit in 2008.

The brokers who pitched these products to their clients, the SEC later noted, kind of "forgot" to emphasize their risks, which included the fact that clients might lose the ability to sell in the event of a credit crunch like we witnessed in 2008. The result? While some banks eventually – and reluctantly – bailed out their clients by buying back the securities, for a while investors had paper losses of 100%. At the time, it would have looked as if they lost every penny they had ever put in.

Only a minority of those who write about personal finance will be investigative reporters, digging into topics such as the allegations that Merrill Lynch and other institutions manipulated that auction-rate securities market. But too often, those investigations take place only after the fact. That may give you a sense of "closure", I suppose, but it's not going to help your portfolio recover from the hit it just took.

What a financial journalist can do is draw attention to corners of the market that are particularly complex: the targets of a lot of marketing on the part of financial institutions that develop investment products, or those that appear to be the focus of irrational exuberance or undue apathy. Ideally, what we choose to write about will help you cut through the jargon, and help you think critically, just the best financial professionals do. The hope is that you can soon pose tough questions of your own to anyone who suggests that Financial Product A or Stock B is a one-stop solution to your investment needs.

What none of us can or should do is to suggest that a given stock, investment strategy, product or idea is the right thing to do at any given time. So if you're looking for a list of "Five Stocks to Own This Winter!", you might want to move along in your quest for a pundit's quick advice.

Is that kind of general advice still needed in this day and age, when we all have access to so much information? Absolutely: after all, as Albert Einstein reminded us, "information is not knowledge."

A few years ago, I was asked to teach a group of creative professionals working for a company that I won't name, in a midwestern city, about how the financial services industry worked. In the three hours that I spent talking to about the 50 or so people who showed up, we didn't get very far, in large part because I spent the bulk of the time explaining the difference between a stock and a bond; how a mutual fund worked; what the data on their 401k statements meant; and the meaning of Morningstar's style boxes.

(In case you're not familiar with these, they give you a way to identify a mutual fund's focus by telling you whether its managers buy small or large-cap stocks, and whether their portfolios tend to have a bias in favor of value or growth.)

These individuals were quite capable of doing household repairs, changing a car tire, installing a complicated electronics system or managing a neighborhood event. They had instant access to all kinds of information that only two decades ago was hard to come by.

(One of my first jobs as a reporter for the Wall Street Journal included the tedious job of filling out earnings tables every quarter for the companies that I covered; these little tables once occupied several pages every day during earnings season, and have long since vanished.)

What they didn't have was someone they could turn to and ask what financial information means. Is it significant that Twitter is coming to market via the "secret IPO" process; should I care that LinkedIn's stock trades at 674 times trailing 12-month earnings – and what does "trailing 12 month earnings" mean, anyway?

It isn't just the ordinary investors who are being deluged with information and who are finding themselves with few resources to try and make sense of that data.

For instance, you might imagine that you're affluent enough to have a managed an account at a major wealth management firm, you're likely to know what it is. Not so, the former head of one of those divisions tells me: research at that person's firm revealed that 84% of survey respondents didn't know what it was that they owned or why it was good for them.

"The problem is that we have an industry that is communicating in code," this former private banker told me.

It's time to break the code.

• Suzanne McGee is a new columnist for the Guardian and will be writing twice a week for Money US.

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Just because i'm near the punchbowl doesn't mean I'm also drinking from it.