I just finished reading Jason Zweig’s new book “The Devil’s Financial Dictionary” and boy is it good. If you’ve ever been overwhelmed by all the jargon used in finance and economics then this is right up your alley. Jason offers up a witty, brilliant and most importantly, useful collection of honest definitions. It’s a collection of all the things most people think about these words, but are too afraid to actually say. For instance:
ACCOUNT STATEMENT, n. A Document from a bank, brokerage, or investment firm that is designed to be incomprehensible to the CLIENTS, thereby preventing them from asking impertinent questions like “Who set my money on fire?” You might be able to recognize your balances and recent transactions on an account statement, although that will be easier if you earn a PhD in cryptography first.
EFFICIENT MARKET HYPOTHESIS, n. A theory in financial economics believed only by financial economists. In theory, the market price is the best estimate at any time of what securities are worth; it immediately incorporates all the relevant information available, as rational investors dynamically update their expectations to adjust to the latest events. In practice, however, investors either ignore new information or wildly overreact to it, regardless of how relevant it is. Even so, that doesn’t make beating the market easy, because you must still outsmart tens of millions of other investors without incurring excess trading costs and taxes. As behavioral economists Meir Statman puts it, “The market may be crazy, but that doesn’t make you a psychiatrist.”
FEE, n. A tiny word with a teeny sound, which nevertheless is the single biggest determinant of success or failure for most investors.
Investors who keep fees as low as possible will, on average, earn the highest possible returns. The opposite may be true for their financial advisors, although that is still not widely understood.
As the popular financial journalist M.T. Head recently wrote:
“We think 1% a year is a very reasonable fee, given how hard we work for our clients,” said wealth manager Bill Muchmore of Adenauer Doe & Co. Asked why the sound of waves breaking on a beachfront seemed to be audible in the background during our conversation, Mr. Muchmore hastened to explain that he was walking back to his office from lunch and several city buses had just passed by him.
FINANCIAL ADVISOR, n. Often, someone who cares deeply about being prudent, diligent, competent, and honest, in which his or her services will be prices; sometimes, someone who cares only about being a BIG PRODUCER, in which case you are in for big trouble.
Awesome stuff. You can buy it here.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.