Whether you're looking for a great price on a new car or a haircut, there is strength in numbers.
Many retailers will lower their rates or prices for larger groups of customers, especially during a recession. Men's Wearhouse (MW: 17.84, -0.46, -2.51%), for example, will knock $20 off per person in a group rental, and American Airlines (AMR: 4.15, -0.07, -1.65%) will lower fares by as much as 15% for a group of 10 traveling from the same city. The logic: These businesses would rather sell one thing to 10 people than 10 things to one person because more unique customers increase the probability of repeat business.
Businesses worried about slumping sales and continued cutbacks in consumer spending are more amenable to offering group discounts, says Shweta Oza, an assistant professor of marketing at the University of Miami. “You're enticing them by bringing them in more business, which they're hurting for in today's economy,” she says.
You don't have to shop with nine other people at all times to take advantage of these rates. You can form your own buying group to get deals on the items and services you want, and in some cases, you never have to meet your fellow shoppers. “Group discounts have been around for ages, but people are realizing that they don't need to leave organizing them to big affinity groups, like their employer or AARP,” says Steven Cohen, a for-hire consultant who helps clients negotiate for better deals. In most cases, all you need are a few friends — the magic number is 10, but even a few will do for pricier purchases.
Thanks to the web, even shoppers going it alone can take advantage of group discounts. Try these four sites to exercise your collective shopping power:
Freelancers Union: A free national membership organization for independent contractors, Freelancers Union has the collective buying power to offer its members deals on a wide variety of services and products, including health insurance and office supplies, through partner companies. Members can save 15% on 1-800-Flowers orders and 10% off new T-Mobile (DT: 11.68, -0.09, -0.76%) activations, among other deals.
Groupon.com: An offshoot of collective-action site ThePoint.com (see below), Groupon offers a shot at a daily promotion from a local business in each of 10 major cities, including Dallas, Detroit and San Francisco. A recent deal in New York offered a $25 gift certificate to wine-and-cheese bar Casellula for $10 — a 60% discount. The catch: Customers only got the reduced price if at least 29 other people opted in within a 24-hour window (with eight hours remaining, 543 people had signed on). Groupon won't charge your credit card unless that collective buying power is achieved, and you can adjust or cancel your order while the deal is on the table.
ThePoint.com: Browse the site's “Group Discounts” channel for deal opportunities, or post your own to attract like-minded consumers. A sampling of what's currently available: a Chicago contractor promises a 43% discount on light installation if 20 consumers sign up by the end of July, and a Boston sailboat captain is offering half-price ticket pairs for a two-hour cruise if three people join.
Twangu: Users of social networking site Facebook can download this free application which allows you to set up new group buys, or join an existing group. You stipulate how much you're willing to pay for a given item, including shipping, and after five days the service sends out the bid to vendors who may compete for your group's business. A new listing is collecting consumers who want to buy a Nintendo Wii for $200.
Consumers in large groups with a common goal don't have to go online to find group deals. They can use their collective purchasing power in person at local retailers, many of which may be willing to bargain even if they don't advertise those kinds of deals. Once you have your group, here's how to negotiate:
Ask for a manager. Generally, they have the most leeway to offer discounts and can tell you if there's a group discount policy already in place, Oza says.
Plan ahead. Don't expect to walk into a hair salon with nine others and negotiate a group discount on the spot. Allow a few days to come to the deal, and give the business time to prepare. (For example, that salon might need to find time to handle a party of 10, and a retailer arranging a bulk purchase may need to special-order the products.)
Bring in new customers. Businesses may be more likely to work with you if most members of your group aren't already customers, says Robin Walker, a Chicago-based image consultant who routinely arranges group discounts for her clients. “A business doesn't want to give their existing customers a discount,” she says. “It cannibalizes their client base.”
Maintain some perspective. How many people you need will depend on the business you approach and what you're buying, Cohen says. A big-box electronics retailer might not be moved to give five people discounts on iPods, but the store may be more agreeable if the desired item is a washer-dryer combo. On the other hand, a local mom-and-pop electronics shop could be thrilled with five new customers who only want to play their MP3s, he says.
Think beyond cash. Not every group deal amounts to a discount. A restaurant manager might not give you 10% off for bringing in a party, but they may throw in two free trays of appetizers, Oza says.
Detail your group. “Retailers know the value of a given client,” Walker says. So if your group is likely to make more purchases in the future, letting the seller know can only help you. For example, Walker recently talked a cigar shop into offering her clients an informational seminar and store discount by identifying them as professional men who wanted to make informed buying choices that would impress business associates. The shop knew it had a good reason to keep these people coming back to the store.
Monday, July 6, 2009
Cash for Gadgets
In good times, you just threw stuff out. But in a recession, consumer interest in both buying and selling used electronics and other goods is thriving, with a whopping 63% of thrift and consignment stores reporting an increase in revenue this year. For those of us who don't have time to create an eBay (EBAY: 16.45, +0.11, +0.67%) listing, respond to all the auction queries and ship the item, there are easier ways.
Online Buyback Services. With these services, sellers complete a short questionnaire about their gizmo's condition and receive a value estimate and a prepaid postage label for mailing the item. Once the company inspects the device, it responds with a firm offer and a check. Of course, these services pay a fraction of what you'd get for selling the same device on eBay: A used second-generation 32GB iPod Touch fetches about $300 on the auction site, while the buyback services offer $70 to $210. Trade-in values vary widely from one site to another, so compare offers beforehand.
Of the major buyback sites, Gazelle.com may have the most convenient service. It sends a free, postage-paid box and will arrange to return your item if you're unhappy with the post-inspection offer. CExchange.com and EZtradein.com sometimes offer more cash but won’t send a box or return the item for free. And BuyMyTronics.com buys damaged goods the others may not accept; for example, it'll buy your cracked-screen iPod Touch for $44.
EBay Middlemen. There are thousands of eBay “trading assistants” who will auction items for a cut of the sale. Some will even retrieve it from a seller's home or mail a check.
Again, it’ll cost you. National franchise iSold It charges commissions ranging from 33% to 40% of the sale price, for example. Locate an eBay-screened middleman in your town at ebaytradingassistant.com/directory.
Trade-in Guarantees. For an upfront fee, you can lock in your trade-in value. Several retailers and web sites offer this, but TechForward.com is the only major seller that deals with most electronics (not iPhones) no matter where they were purchased. The site sells buyback contracts that offer a guaranteed 20% to 50% of what you paid. Its fee: $20 on a digital camera, $150 for a large flat-screen TV includes a prepaid mailing label and shipping materials. A Garmin Nuvi GPS, purchased in fall 2007 for $800 would yield $160 today if you had paid $20 for the guarantee. Note that if you lose or break the item, TechForward won't buy it or refund the fee.
Online Buyback Services. With these services, sellers complete a short questionnaire about their gizmo's condition and receive a value estimate and a prepaid postage label for mailing the item. Once the company inspects the device, it responds with a firm offer and a check. Of course, these services pay a fraction of what you'd get for selling the same device on eBay: A used second-generation 32GB iPod Touch fetches about $300 on the auction site, while the buyback services offer $70 to $210. Trade-in values vary widely from one site to another, so compare offers beforehand.
Of the major buyback sites, Gazelle.com may have the most convenient service. It sends a free, postage-paid box and will arrange to return your item if you're unhappy with the post-inspection offer. CExchange.com and EZtradein.com sometimes offer more cash but won’t send a box or return the item for free. And BuyMyTronics.com buys damaged goods the others may not accept; for example, it'll buy your cracked-screen iPod Touch for $44.
EBay Middlemen. There are thousands of eBay “trading assistants” who will auction items for a cut of the sale. Some will even retrieve it from a seller's home or mail a check.
Again, it’ll cost you. National franchise iSold It charges commissions ranging from 33% to 40% of the sale price, for example. Locate an eBay-screened middleman in your town at ebaytradingassistant.com/directory.
Trade-in Guarantees. For an upfront fee, you can lock in your trade-in value. Several retailers and web sites offer this, but TechForward.com is the only major seller that deals with most electronics (not iPhones) no matter where they were purchased. The site sells buyback contracts that offer a guaranteed 20% to 50% of what you paid. Its fee: $20 on a digital camera, $150 for a large flat-screen TV includes a prepaid mailing label and shipping materials. A Garmin Nuvi GPS, purchased in fall 2007 for $800 would yield $160 today if you had paid $20 for the guarantee. Note that if you lose or break the item, TechForward won't buy it or refund the fee.
After Rocky Start, Dow Finishes Higher
News at a Glance
Numbers Game: Earnings season gets underway.
Stocks Inch Back: Makes for flat Monday.
Weak Outlook: Recovery may be delayed: World Bank.
Power Outage: Oil falls more than $2 a barrel.
The Lowdown
The holiday is over, the grind is back on Wall Street.
The grind returned to Wall Street on Monday, after stocks opened lower and traders braced for what's predicted to be another weak earnings season.
An afternoon rebound faded then revived near the end of the session for a low-volume, see-saw day. The Dow Jones Industrial Average opened low, swung back to positive territory and closed up 44 points at 8325. The Nasdaq dropped 9 points to close at 1787, and the S&P 500 gained 2 to close at 899.
Energy prices accelerated the post-holiday slide, as crude dipped more than $2 a barrel to close below $64. Energy prices across the board declined, with natural gas ebbing 14 cents to $3.48 per cubic foot. Smaller exploration and production companies such as Anadarko Petroleum (APC: 41.79, -0.98, -2.29%) and Devon Energy (DVN: 51.29, -0.93, -1.78%) took hits.
Earnings season kicks off more or less officially this week, when the first Dow component releases its second-quarter results. Aluminum producer Alcoa (AA: 9.26, -0.60, -6.08%) is expected to post its third consecutive quarterly loss on Wednesday in a report that threatens to leave the market deeper in the red. Of course, the price of aluminum has plummeted with a broader selloff in commodities, but starting the season with a big loss could weigh on traders.
World markets were broadly lower Monday after the World Bank said the global economic recovery could be more than six months away. 2009 "remains a dangerous year," World Bank President Robert Zoeillick said in a letter to Italian Prime Minister Silvio Berlusconi, whose country is hosting the July meeting of Group of Eight. "Recent gains could be reversed easily, and the pace of recovery in 2010 is far from certain," he said, Reuters reported.
In autos, General Motors inched closer toward a reboot. A U.S. judge approved the firm's bankruptcy sale, which will allow GM's most profitable divisions to emerge from Chapter 11 protection more than a bit slimmer.
Corporate News
Rio Tinto (RTP: 148.23, -10.26, -6.47%) agreed to sell its food packaging unit to Bemis (BMS: 25.50, +1.22, +5.02%) for $1.2 billion, the firm said. The sale of Alcan Packaging Food Americas brings Rio Tinto's divestment total to $3.7 billion for the year.
A U.S. judge approved General Motors's bankruptcy sale Sunday, allowing the company's most valuable divisions to exit Chapter 11 protection as a new company, without the burdens of its less profitable brands, production facilities and debts, Reuters reported. GM had argued that it would be forced to liquidate its assets if the sale were not approved.
Pepsi (PEP: 57.13, +0.78, +1.38%) and Pepsi Bottling Group (PBG: 34.08, +0.28, +0.82%) plan to invest $1 billion in Russia before 2013, Bloomberg reported. The world's second-largest soft-drink maker is banking on the projection that the country will emerge from the global slowdown still thirsty for its products.
The Economy
The Institute for Supply Management's June report on non-manufacturing business activity came in at a better than expected 47.0, ahead of the consensus estimate of 46.0. The services sector index came in at 44.0% in May. Economists predict a rise to a reading of 46.0% for last month. A reading below 50.0% suggests the services sector is contracting. REPORT
Numbers Game: Earnings season gets underway.
Stocks Inch Back: Makes for flat Monday.
Weak Outlook: Recovery may be delayed: World Bank.
Power Outage: Oil falls more than $2 a barrel.
The Lowdown
The holiday is over, the grind is back on Wall Street.
The grind returned to Wall Street on Monday, after stocks opened lower and traders braced for what's predicted to be another weak earnings season.
An afternoon rebound faded then revived near the end of the session for a low-volume, see-saw day. The Dow Jones Industrial Average opened low, swung back to positive territory and closed up 44 points at 8325. The Nasdaq dropped 9 points to close at 1787, and the S&P 500 gained 2 to close at 899.
Energy prices accelerated the post-holiday slide, as crude dipped more than $2 a barrel to close below $64. Energy prices across the board declined, with natural gas ebbing 14 cents to $3.48 per cubic foot. Smaller exploration and production companies such as Anadarko Petroleum (APC: 41.79, -0.98, -2.29%) and Devon Energy (DVN: 51.29, -0.93, -1.78%) took hits.
Earnings season kicks off more or less officially this week, when the first Dow component releases its second-quarter results. Aluminum producer Alcoa (AA: 9.26, -0.60, -6.08%) is expected to post its third consecutive quarterly loss on Wednesday in a report that threatens to leave the market deeper in the red. Of course, the price of aluminum has plummeted with a broader selloff in commodities, but starting the season with a big loss could weigh on traders.
World markets were broadly lower Monday after the World Bank said the global economic recovery could be more than six months away. 2009 "remains a dangerous year," World Bank President Robert Zoeillick said in a letter to Italian Prime Minister Silvio Berlusconi, whose country is hosting the July meeting of Group of Eight. "Recent gains could be reversed easily, and the pace of recovery in 2010 is far from certain," he said, Reuters reported.
In autos, General Motors inched closer toward a reboot. A U.S. judge approved the firm's bankruptcy sale, which will allow GM's most profitable divisions to emerge from Chapter 11 protection more than a bit slimmer.
Corporate News
Rio Tinto (RTP: 148.23, -10.26, -6.47%) agreed to sell its food packaging unit to Bemis (BMS: 25.50, +1.22, +5.02%) for $1.2 billion, the firm said. The sale of Alcan Packaging Food Americas brings Rio Tinto's divestment total to $3.7 billion for the year.
A U.S. judge approved General Motors's bankruptcy sale Sunday, allowing the company's most valuable divisions to exit Chapter 11 protection as a new company, without the burdens of its less profitable brands, production facilities and debts, Reuters reported. GM had argued that it would be forced to liquidate its assets if the sale were not approved.
Pepsi (PEP: 57.13, +0.78, +1.38%) and Pepsi Bottling Group (PBG: 34.08, +0.28, +0.82%) plan to invest $1 billion in Russia before 2013, Bloomberg reported. The world's second-largest soft-drink maker is banking on the projection that the country will emerge from the global slowdown still thirsty for its products.
The Economy
The Institute for Supply Management's June report on non-manufacturing business activity came in at a better than expected 47.0, ahead of the consensus estimate of 46.0. The services sector index came in at 44.0% in May. Economists predict a rise to a reading of 46.0% for last month. A reading below 50.0% suggests the services sector is contracting. REPORT
Nothing Always Works, but Here Are 3 Market Truths
Three Market Truths
Even after trading for more than a decade, I still haven’t figured out any market maneuver that always results in a guaranteed profit. From “Don’t Fight the Fed” to the January Effect, markets are littered with a long list of “surefire” tips that don’t always turn out.
It’s a reality lost on many new investors looking for a quick score. Simply put, nothing “always works.” When inefficiency develops in a competitive and open marketplace, opportunistic investors are quick to capitalize. This is what makes markets function.
So I don’t know of an asset class, a time period, an investment style or an approach that always mints money. And if I did, I certainly wouldn’t write about it online.
Turns out the truisms that always work have less to do with the markets than with the technique we use to approach them. This is congruent with our overall philosophy at Tradecraft -- that it’s how you trade that has a much bigger impact on your results than what you trade. What follows are three market truths that speak to the importance of solid technique.
1. The shorter the time horizon, the more difficult it is to make money.
There’s a fantasy, especially among new traders, that markets function as some sort of ATM machine to which you can roll up and make a withdrawal whenever the feeling strikes you. In reality, the shorter the time horizon, the more difficult it is to make money. That’s why so many day traders fail miserably after even a few weeks time.
Traders in such an immense hurry forget the biggest wins come from buying and holding over a sustained move, not trading an investment away the minute it shows a gain.
2. Winning trades usually start out as winning trades.
Another truism holds that, more often than not, winning trades are profitable right from the start. Of course, it doesn’t mean XYZ never goes a point against us, but that winning investments have a tendency to show a profit — even a modest one — within the first few days after having taken the position.
Where traders often fall off the track is that they take a position and hold on, even as it falls sharply below their initial purchase price. Of course, because of the mathematics involved, they end up digging themselves a hole out of which it’s nearly impossible to climb. For Citigroup (C: 2.79, -0.09, -3.12%) to get back to the levels it was at two years ago, the stock needs to climb some 1,600%.
3. Avoid buying stocks solely because they are cheap or boast good dividends.
Finally, experienced investors know to avoid buying a stock or fund solely for cosmetic reasons — namely, because it's either low-priced or has an attractive dividend. Low-priced stocks, as we’ve covered in this space before, are the lottery ticket of the market world, albeit probably with worse odds. With a small handful of exceptions, low-priced stocks are low priced for a reason — and it’s not because they’re poised to make a miraculous comeback. Penny stocks, the pink-sheet-listed companies that trade for a few cents a share, should be avoided altogether.
Similarly, don’t be fooled into buying a stock simply because of an attractive dividend, a common error, especially among older investors looking for income. The problem with picking a stock solely for the dividend is that not only can it be cut at the company’s whim, but that the payout always ends up paling in comparison to the price action of the security itself. Just witness the performance of San Juan Basin Royalty Trust (SJT: 13.74, -0.31, -2.20%) or Provident Energy Trust (PVX: 4.53, -0.20, -4.22%): Even double-digit dividends couldn’t help overcome the losses from holding shares as they fell with energy prices. Same goes for high-yielding REITs. Even a 10% dividend yields means nothing when the stock falls 25%.
Let the Music Play
Michael Jackson’s songs are piling up the profits for Dutch pension fund Stichting Pensioenfonds ABP, whose Imagem Music Group subsidiary, as reported by Bloomberg, owns the rights to Jackson hits including “You Are Not Alone,” “Dangerous” and “Remember the Time.”
Music royalties aren’t an easy asset to buy. But the individual investor with a risk appetite and taste for illiquid assets might check out shares of Mills Music Trust (MMTRS.OB), a music royalty trust on the OTCBB based on a collection of songs with copyrights established prior to 1964. Highly speculative and thinly traded, the trust now yields approximately 13%. But unlike Jacko’s catalog, Mills Music is rather undiversified: Seven of the top 50 songs account for approximately 65% of the earnings attributable to the 50 songs. The good news? The earliest copyright expiration is 2024.
Even after trading for more than a decade, I still haven’t figured out any market maneuver that always results in a guaranteed profit. From “Don’t Fight the Fed” to the January Effect, markets are littered with a long list of “surefire” tips that don’t always turn out.
It’s a reality lost on many new investors looking for a quick score. Simply put, nothing “always works.” When inefficiency develops in a competitive and open marketplace, opportunistic investors are quick to capitalize. This is what makes markets function.
So I don’t know of an asset class, a time period, an investment style or an approach that always mints money. And if I did, I certainly wouldn’t write about it online.
Turns out the truisms that always work have less to do with the markets than with the technique we use to approach them. This is congruent with our overall philosophy at Tradecraft -- that it’s how you trade that has a much bigger impact on your results than what you trade. What follows are three market truths that speak to the importance of solid technique.
1. The shorter the time horizon, the more difficult it is to make money.
There’s a fantasy, especially among new traders, that markets function as some sort of ATM machine to which you can roll up and make a withdrawal whenever the feeling strikes you. In reality, the shorter the time horizon, the more difficult it is to make money. That’s why so many day traders fail miserably after even a few weeks time.
Traders in such an immense hurry forget the biggest wins come from buying and holding over a sustained move, not trading an investment away the minute it shows a gain.
2. Winning trades usually start out as winning trades.
Another truism holds that, more often than not, winning trades are profitable right from the start. Of course, it doesn’t mean XYZ never goes a point against us, but that winning investments have a tendency to show a profit — even a modest one — within the first few days after having taken the position.
Where traders often fall off the track is that they take a position and hold on, even as it falls sharply below their initial purchase price. Of course, because of the mathematics involved, they end up digging themselves a hole out of which it’s nearly impossible to climb. For Citigroup (C: 2.79, -0.09, -3.12%) to get back to the levels it was at two years ago, the stock needs to climb some 1,600%.
3. Avoid buying stocks solely because they are cheap or boast good dividends.
Finally, experienced investors know to avoid buying a stock or fund solely for cosmetic reasons — namely, because it's either low-priced or has an attractive dividend. Low-priced stocks, as we’ve covered in this space before, are the lottery ticket of the market world, albeit probably with worse odds. With a small handful of exceptions, low-priced stocks are low priced for a reason — and it’s not because they’re poised to make a miraculous comeback. Penny stocks, the pink-sheet-listed companies that trade for a few cents a share, should be avoided altogether.
Similarly, don’t be fooled into buying a stock simply because of an attractive dividend, a common error, especially among older investors looking for income. The problem with picking a stock solely for the dividend is that not only can it be cut at the company’s whim, but that the payout always ends up paling in comparison to the price action of the security itself. Just witness the performance of San Juan Basin Royalty Trust (SJT: 13.74, -0.31, -2.20%) or Provident Energy Trust (PVX: 4.53, -0.20, -4.22%): Even double-digit dividends couldn’t help overcome the losses from holding shares as they fell with energy prices. Same goes for high-yielding REITs. Even a 10% dividend yields means nothing when the stock falls 25%.
Let the Music Play
Michael Jackson’s songs are piling up the profits for Dutch pension fund Stichting Pensioenfonds ABP, whose Imagem Music Group subsidiary, as reported by Bloomberg, owns the rights to Jackson hits including “You Are Not Alone,” “Dangerous” and “Remember the Time.”
Music royalties aren’t an easy asset to buy. But the individual investor with a risk appetite and taste for illiquid assets might check out shares of Mills Music Trust (MMTRS.OB), a music royalty trust on the OTCBB based on a collection of songs with copyrights established prior to 1964. Highly speculative and thinly traded, the trust now yields approximately 13%. But unlike Jacko’s catalog, Mills Music is rather undiversified: Seven of the top 50 songs account for approximately 65% of the earnings attributable to the 50 songs. The good news? The earliest copyright expiration is 2024.
'Second Derivative'? Why Market Jargon Is Evil
Wall Street has always sounded strange to outsiders. Swing trades, naked calls, silent partners and straddles seem like they belong in Hugh Hefner’s memoirs, not an investment guide.
Don’t fault a practitioner for saying "straddle," though. It’s a short, old word (the kind Churchill said are best) used to describe a complicated thing that few people need to know about (but if you must, it's an option strategy used to bet on a big stock move without specifying the direction). Save your scorn for those who do the opposite — use complicated words to muck up simple, important financial ideas. They puff themselves up but confuse beginners who, be assured, can ill afford more confusion.
Half of Americans don’t know what a subprime mortgage is. Two-thirds don’t know how much of 8 is left over after taking away 25%. Half can’t say what the Dow Jones Industrial Average is — even when given a handful of choices. (This is according to surveys conducted over the past year by the Center for Economic and Entrepreneurial Literacy, a nonprofit.) Chuckle at these people, but weep for yourself, since financial ignorance has a ripple effect. Credit card defaults and house foreclosures hit record highs this year. Both cause bank losses which in the extreme become government losses. Those are paid by us through higher taxes if we’re lucky and devalued money if we’re not.
Needlessly nerdy financial words cost all of us, you might say, to the extent they keep our neighbors too intimidated to learn. Those of us who use them (neither I nor my favorite writers are blameless) must break the habit. In the schoolyard, pomposity used to have a quick remedy — a sharp, upward tug of the back elastic of the offender’s underpants, called a wedgie. Legally, I can’t recommend that you use it to punish those who use the four self-important terms below. That said, if you hear someone use one of the terms, and if you happen to be standing behind them, and if you love America and you’re not holding a dangerously hot coffee at the time (or if it at least has a lid), I think we both know what needs to be done.
1. Second derivative
This one’s newly fashionable. Factiva, a subscription news database, shows that financial publications mentioned it 100 times in the past three months, vs. no mentions during the same period two years ago.
Someone who says the second derivative of a financial measure is improving means things are getting worse, but at a slower pace than before. The term comes from calculus, the study of change. In the tidy exercises presented in business school course books, second derivatives show when graphs are nearing maximum and minimum points. In the messy real world, where changes in things like the unemployment rate and level of consumer confidence can’t be calculated into the future, second derivatives don’t explain much of anything, beyond what’s obvious to anyone looking at a chart.
Note that "second derivative" seems to be part of a binary jargon system, often accompanied in use by "green shoots." I haven’t studied agriculture formally, but green shoots seem like an even brighter sign than an improving second derivative, since they suggest something is moving in the right direction (albeit almost imperceptibly) as opposed to moving in the wrong direction (albeit more slowly).
2. Alpha, Beta
Mutual fund managers love to promise to find "alpha" for their customers. Studies have long shown that four out of five of them don’t. Financial mathematicians long ago decided that each stock’s return is directly related to its risk, which is an innocent enough assumption until we try to define risk. In one common but flawed approach, a stock’s risk is defined by its past trading volatility. The measure is called beta, and knowing a stock’s beta alone is supposed to help us predict its returns. (It doesn’t.) Alpha is any return achieved beyond that predicted by beta. Someone who boasts about producing alpha is saying they secured good returns given the level of risk their math model says they took. Congratulate them heartily on this theoretical accomplishment.
3. Equities
I’m not going to search my story archives for this one for fear I’d have to hoist my own elastic. Factiva shows the word used more than 8,000 times over the past three months in stock market stories. There’s no harm in using "home equity" to describe the portion of a house that is owned free and clear. "Private equity" is fine for referring to ownership stakes in companies that aren’t traded on exchanges. For stocks, though, there’s a better word. It’s stocks. Also, shares.
Note that the ugliness of "equities" is compounded when it’s used with bad words for other asset classes. A young saver hearing that equities tend to outperform debt over long time periods must wonder how all of it relates to the stock and bond funds available in his retirement account.
4. Bips
Not all short words are good. A basis point is one-hundredth of a percentage point, or 0.01%. The term "basis points" is abbreviated bps. People speaking the abbreviation over the years have somehow inferred the extra letter to yield "bips."
Bond traders are busy, informed people. It’s OK for them to say "thirty bips" to each other. High-fiving, goatee-wearing pundits with their shirt sleeves rolled up at the financial channel news desk are, despite appearances, not too busy to say "thirty basis points." Then again, fewer than one-third of respondents in a survey conducted by AARP Financial knew what a basis point is. Maybe our excitable pundits should slow things down even further and say "three-tenths of a percentage point." That way, Joe Public won’t have to learn a second language to figure out what might become of his adjustable rate mortgage.
This list is only a start. Kindly add the ugliest financial jargon you can think of to the comments section below.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
Don’t fault a practitioner for saying "straddle," though. It’s a short, old word (the kind Churchill said are best) used to describe a complicated thing that few people need to know about (but if you must, it's an option strategy used to bet on a big stock move without specifying the direction). Save your scorn for those who do the opposite — use complicated words to muck up simple, important financial ideas. They puff themselves up but confuse beginners who, be assured, can ill afford more confusion.
Half of Americans don’t know what a subprime mortgage is. Two-thirds don’t know how much of 8 is left over after taking away 25%. Half can’t say what the Dow Jones Industrial Average is — even when given a handful of choices. (This is according to surveys conducted over the past year by the Center for Economic and Entrepreneurial Literacy, a nonprofit.) Chuckle at these people, but weep for yourself, since financial ignorance has a ripple effect. Credit card defaults and house foreclosures hit record highs this year. Both cause bank losses which in the extreme become government losses. Those are paid by us through higher taxes if we’re lucky and devalued money if we’re not.
Needlessly nerdy financial words cost all of us, you might say, to the extent they keep our neighbors too intimidated to learn. Those of us who use them (neither I nor my favorite writers are blameless) must break the habit. In the schoolyard, pomposity used to have a quick remedy — a sharp, upward tug of the back elastic of the offender’s underpants, called a wedgie. Legally, I can’t recommend that you use it to punish those who use the four self-important terms below. That said, if you hear someone use one of the terms, and if you happen to be standing behind them, and if you love America and you’re not holding a dangerously hot coffee at the time (or if it at least has a lid), I think we both know what needs to be done.
1. Second derivative
This one’s newly fashionable. Factiva, a subscription news database, shows that financial publications mentioned it 100 times in the past three months, vs. no mentions during the same period two years ago.
Someone who says the second derivative of a financial measure is improving means things are getting worse, but at a slower pace than before. The term comes from calculus, the study of change. In the tidy exercises presented in business school course books, second derivatives show when graphs are nearing maximum and minimum points. In the messy real world, where changes in things like the unemployment rate and level of consumer confidence can’t be calculated into the future, second derivatives don’t explain much of anything, beyond what’s obvious to anyone looking at a chart.
Note that "second derivative" seems to be part of a binary jargon system, often accompanied in use by "green shoots." I haven’t studied agriculture formally, but green shoots seem like an even brighter sign than an improving second derivative, since they suggest something is moving in the right direction (albeit almost imperceptibly) as opposed to moving in the wrong direction (albeit more slowly).
2. Alpha, Beta
Mutual fund managers love to promise to find "alpha" for their customers. Studies have long shown that four out of five of them don’t. Financial mathematicians long ago decided that each stock’s return is directly related to its risk, which is an innocent enough assumption until we try to define risk. In one common but flawed approach, a stock’s risk is defined by its past trading volatility. The measure is called beta, and knowing a stock’s beta alone is supposed to help us predict its returns. (It doesn’t.) Alpha is any return achieved beyond that predicted by beta. Someone who boasts about producing alpha is saying they secured good returns given the level of risk their math model says they took. Congratulate them heartily on this theoretical accomplishment.
3. Equities
I’m not going to search my story archives for this one for fear I’d have to hoist my own elastic. Factiva shows the word used more than 8,000 times over the past three months in stock market stories. There’s no harm in using "home equity" to describe the portion of a house that is owned free and clear. "Private equity" is fine for referring to ownership stakes in companies that aren’t traded on exchanges. For stocks, though, there’s a better word. It’s stocks. Also, shares.
Note that the ugliness of "equities" is compounded when it’s used with bad words for other asset classes. A young saver hearing that equities tend to outperform debt over long time periods must wonder how all of it relates to the stock and bond funds available in his retirement account.
4. Bips
Not all short words are good. A basis point is one-hundredth of a percentage point, or 0.01%. The term "basis points" is abbreviated bps. People speaking the abbreviation over the years have somehow inferred the extra letter to yield "bips."
Bond traders are busy, informed people. It’s OK for them to say "thirty bips" to each other. High-fiving, goatee-wearing pundits with their shirt sleeves rolled up at the financial channel news desk are, despite appearances, not too busy to say "thirty basis points." Then again, fewer than one-third of respondents in a survey conducted by AARP Financial knew what a basis point is. Maybe our excitable pundits should slow things down even further and say "three-tenths of a percentage point." That way, Joe Public won’t have to learn a second language to figure out what might become of his adjustable rate mortgage.
This list is only a start. Kindly add the ugliest financial jargon you can think of to the comments section below.
Jack Hough is an associate editor at SmartMoney.com and author of "Your Next Great Stock."
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