Can you speak "money"

As a 24 year old I was desperate to move away from my parents in California -- I was young and dumb and didn’t know what great weather I was leaving behind. I was good at programming and through some fluke I was handed a job at a then illustrious bank in the most exciting city in the world. Lehman Brothers, New York!

A few days later I was standing at the bottom of a very tall New York skyscraper in a full blown icy gale in a hastily bought very un-California “suit”. My lovely liberal stanford education had prepared me to debate economic theory, french film, and Plato but COMPLETELY failed to prepare me for the trading floor.

The number one problem --- Jargon…. ARBS, TUCS, ERMS, B2H,,.... the acronyms flew hard and fast and I was baffled beyond belief with no textbook to explain any of it to me.

In desperation to fit in I did what any highly efficient person does -- I turned to wikipedia.

Every time I heard a term, I would look it up and try to file away the definition in my head. I would be able to understand each acronym in it’s own tiny way but the context took years to form.

I thought I would take a stab at outlining the 4 most important definitions when it comes to investing… hopefully explaining jargon without using jargon.

  1. AUM - assets under managements

The golden goose for any investment company. The assets are initially in the form of YOUR cash but held as stocks, bonds etc. on your behalf in investments chosen by fund managers.

Investment companies want as many of your “assets” as possible and will use sales people to raise AUM from individuals like you and organisations like pension funds. So you give your assets to go under their management in the hopes they will grow larger under this particular manager or fund.

  1. BPS pronounced “bips" - basis points

Everything on Wall Street is attached to bips. These are percentage points that everyone is the city/ Wall street is paid with. This is the internal currency code of wall street whether you are paying for research or trading a stock. If you’re paying someone you want to pay out as few bps as possible. If you’re selling services you want to receive as many bps as possible.

Each 1% is divided into 100 basis points or bips for short. So you if you have assets under management and charge 0.5% of the assets as a fee, then your investing firm is being paid 50 bps per year. Bps roll down hill - the investment manager who gathers assets from you will pay for research or the use of an index and brokers all in the currency of bps.

  1. ALPHA This is the amount by how much your investments beat the stock market.

This is what all fund managers are hoping to make above the market. People charge you extra bps because they promise to make you more alpha.

  1. BETA

This is how much the market jumps up and down. The AUM expands and contracts a little bit each day. In the long term this is evened out… in the short term like this last month it makes investors really jumpy watching their portfolio lose weight. Investment managers have to worry about Beta a lot as they lose AUM when the markets go down or they are out of sync with the market.

Basically you want to grow your aum while maximizing alpha with the least amount of beta and paying the fewest bps to do so. There you go - a financial strategy in a sentence.

The jargon busting has been done for me by the novelist John Lanchester. While writing his brilliantly funny novel “Capital” about players in London’s financial markets, he realized that investing definitions were opaque and wrote the following book:

How to Speak Money: What the Money People Say--and What It Really Means by John Lanchester

Have a good week! Mallika