It has been more than a year since we last visited the question of annoying financial clichés. I recently asked the Twitterati their least favorite finance phrases, and I was shocked at the overwhelming response. Why does this matter? Useless finance phrases have a pernicious effect on our psyche, leading us to blindly accept ideas that should instead receive critical analysis. It’s not just that catchy phrases are no substitute for actual thinking, they are often wrong.
Once again, let’s consider a new batch of the most meaningless phrases in finance:
1. “Don’t Get Complacent.” What, exactly, should an investor do with this bit of advice? How does a lack of complacency manifest itself in an investment portfolio? Should the recipients of this advice liquidate some or all of their holdings? Or should they merely be on the lookout for some heretofore unknown risk – as they always should?
“Don’t have a smug or uncritical satisfaction with oneself or one's achievements” makes for a nice sentiment in a high school valedictorian speech or a college paper on Epicurean philosophy, but it is not what street types describe as “actionable advice.”
As someone who is in the advice business, I like to offer specific and identifiable actions, as in “buy this and sell that.” To be fair, something like “Hey, you have had a great run during this rally. Be careful about getting overconfident” is not the worst advice one could get – it’s just squishy and hard to express in a trade.
2. “Profit Taking.” This phrase tends to appear anytime there’s been a run up in asset prices, followed by reversal. It is never a simple consolidation or just a break from a relentless buying spree. Instead, the claim is that buyers at lower prices are now sellers at higher prices, booking a profit. This is always proffered without evidence or explanation.
Ironically, the correction in the stock market that began toward the end of the summer – about an 11% pullback in the Nasdaq 100 Index following a 77% gain from the lows less than 6 months earlier – was very likely actual profit taking as a driver of the selling. And yet, the one time the phrase could have been used accurately, no one seemed to bother with it.
3. "More buyers than sellers." The problem with this phrase is in its truncation, making the shortened version nonsense. The actual phrase is “There are more buyers than sellers at this price level."
Look at the Nasdaq Level II quote for any stock. The bid/ask spread is there, but so too are all of the various bids below and asks above the current market price, along with the number of shares at each price level. Prices move higher or lower when there are more willing buyers or willing sellers at any given level.
Hence, the phrase “more buyers than sellers” only makes sense when referring to specific price levels, and not the actual 1-to-1 ratio of a buyer for every seller.
4. “The stock market hates uncertainty.” This could be the 2020 phrase of the year. It is not merely wrong, it reflects a fundamental misunderstanding of what drives markets. Buyers and sellers operate probabilistically, without certainty. If there was any certainty, who would ever take the opposite side of your trade?
Note that uncertainty isn’t the same as risk. As discussed previously, when the range of outcomes is understood, you don’t have uncertainty; you merely have an unknown future outcome.
The rare times when there is “certainty” are few and far between. A good example is late 1999, when everyone was sure markets had no limits, and again in March 2009, when everyone believed markets were going to keep crashing. It seems whenever there is certainty, the herd is wrong.