The informative part of this post is that in response to a reader, I have begun a dictionary for the blog. This reader asked for a way to keep all the different words and acronyms straight. I hope to have it posted either in the PAGES section under DEFINITIONS. If you want anything added just e-mail me at AddingAlpah@Consultant.com.
You will notice that I used footnotes and at this point, the only source I have used is a great book, called Options AS A STRATEGIC INVESTMENT. This book is known as the Bible for Options Traders. It is straightforward and easy to understand. Although we currently use only one strategy, for those of you who want to know more than we offer I strongly suggest getting this book. It is fabulous. Additionally, about 16 years ago, I attended a multi-day options training course in Chicago. It was fabulous and I highly recommend doing this either individually or with your friends or family. Everyone I know has come back thrilled and full of knowledge.
Back onto the topic of words in the investment industry. Among the greater mysteries that concern me, like why do we have fruit fly’s in our house if we do keep fruit, is why do finance people use bizarre nomenclature as part of their work? Terms like alpha, beta, tranche, etc., have invaded the world of finance like fruit flies. They are everywhere without any rhyme or reason. Perhaps it is a form of professional protection. I have always understood that when professionals talk their professional talk to each other things get done. Lawyer to lawyer or doctor to doctor direct talks always produce immediate results. Personally, I like to keep things simple. When I smash up the car the auto body people tell me that the car has dents and damage, not contusions and abrasions. The world of investments and finance is exciting. Perhaps to make it more interesting, odd words have been interjected to make it more exclusive.
The investment industry seems to be is full of silly words that come from other places that attempt to make the person using them seem smart. Granted with the Greek alphabet, it most likely can be traced to some statistics class. We all know how much fun that was. If everybody tried to simplify their speech we could all get along. Then along comes someone using terms like tranche – from Wikipedia’s discussion referring to structured finance: “often misspelled as traunch or traunche”. Funny, the origin of the word is from old French. I liked it better when it meant slice, like slice of a coffee cake. Anyway, I’m guessing that some person with a modest knowledge Greek or statistics and some level of inferiority or paranoia coined these terms.
We discussed duration in an earlier blog on risk. It is one of the hardest concepts I have ever heard anyone explain. Listening to the experts talk reminds me of trying to explain baseball to a European. It just does not work. Of course, the best explanation I have ever herd was my own. Many years ago while I was slaving away as an analyst by day and studying graduate level accounting at night, I was trapped with a client in a closed conference room with an extremely well educated, credentialed, pompous and egotistical Senior Partner who attempted to explain duration. “Let me explain in a way you people who are less knowledgeable in such matters will understand. It is like a spring being pulled apart, then let go,” he said in his Thursten Howel III (TH3) voice. “See it is pretty easy to understand is it not?” Fortunately, his secretary came to our rescue with an urgent phone call he had to take outside the room. When he left I turned to the client and asked if he understood. “No,” he answered dejected and feeling as stupid as I did. “I didn’t understand a word either and I know this stuff,” I told him. It dawned on me at that moment that duration was like depreciation. Understanding the client was trained in accounting I heard the angels singing. “Duration is like depreciated life of an asset. Once you’ve reached the depreciated or book life of an asset. Once this life is achieved the asset still has value and remains useful. Duration is analogous to the depreciated life. It is the time period it takes to capture the original cost of the asset.” A light rose above his head and a quiet calm set about him as he softly said, “now, I understand.” For those who need reminding - TH3 link to Forbes: http://www.forbes.com/lists/2005/fictional/09.html
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