For all of us language is an essential tool. Most of us have to write reports or give oral presentations all the time. You can gain a competitive advantage by using language well. I ran the Columbia Acorn funds for 35 years, and spent a lot of time writing quarterly reports. I tried to make the reports interesting and humorous, and developed a favorable reputation and a marketing advantage by doing so. Part of my success was due to competing in an easy league; the number of mutual fund shareholder letters that are interesting to read is a small number.

Language is constantly evolving. Words about computers and the Internet are being added to the dictionary, while obsolete words disappear. If you had to read Moby Dick, you saw the word “flensing” used by whalers, but nobody flenses now like they did in the good old days. Although “liposuction” comes close.

New technology means new words, and new acronyms, and if you are following energy stocks you better know the difference between a jack-up and a semi-submersible, and what MWD means. But my complaint in this essay is about the misuse of words.

Realtors are nice folks, many of whom are going through hard times now, due, of course, to the bear market in housing and commercial real estate. Sometimes realtors can be a nuisance by trying too hard to get business, but what bothers me is their misuse of language. For many years they have inverted the simple terms “bid” and “offer.” We all know the dictionary definition that is universal in financial markets; a buyer “bids” and a seller “offers.” Realtors invert this and tell potential purchasers, “I think if you offer $600,000 for the house we can buy it.”

That misuse of the language pales compared to the latest stupidity using the well-defined term “short-sale” to refer to something else altogether, essentially a “sale at a price lower than the mortgage balance.” Make up a word for that if you like, but don’t steal a word that means something else altogether.

Our own colleagues are not immune from sloppy word usage. One example is “health inflation.” (“CFA Institute Financial News Brief,” March 23, 2010.) There is no question that health care spending rises every year. Productivity in health care has risen enormously. As an example, cataract surgery, fifty years ago, was a difficult surgery that required a lengthy hospital stay in which the patient’s head was immobilized. The surgery was not done frequently because of the cost, discomfort, and high failure rate. Today, cataract surgery is an outpatient procedure, and three million cataracts are treated every year in the U.S. The cost per operation has dropped dramatically, while the total cost of all cataract surgery is probably a lot higher than fifty years ago. Calling this “health inflation” is an imprecise word. Fifty years ago, almost no financial analyst worked with a computer while today we all do. So we spend a lot of money on computers and data feeds. Fifty years ago, we didn’t. None of us call that “computer inflation.”

Lots of people, some of them CFA’s, use technical words from science or mathematics that sound fancy – but the words are used with meanings that are very different from the original. One such is “exponential,” by which most users mean “a whole lot more than before.” What the word really means is “changing by a constant percentage.”

The formula can be written x=a(1+g)^t where a is the original value, perhaps “sales in 1990,” t is the number of years, in this case 20, x is “sales in 2010,” and g is the “growth rate.” If g is a substantial positive number, say 15% (.15), then over 20 years sales will have grown 16.4 times, a spectacular increase. However, if g = .05, sales will only be 36% of 1990 levels, a disaster, but still an exponential change. So “exponential” really means “steady,” not “huge.” If you want to describe a large increase in sales, the short and clear word is “big.”

“Parameter” is a peculiar word. Most people remember high school geometry and remember the word “perimeter” (that means the sum of the lengths of all the sides of a polygon), so they use “parameter” to mean “boundary.” A parameter is actually a quite technical term that describes something that is in between a constant and a variable. For instance, if you are using a dividend discount model to predict the return on a group of stocks, you could make a spreadsheet with a risk premium of 3% and get an answer. Then you could re-run it with a risk premium of 4%, then 5%. You are using risk premium as a parameter. Since so few people know that, you are better off not using the word “parameter” at all.

“Quantum leap” or “quantum jump” today means an unusual and important transition. This is the exact opposite of the original meaning. Great physicists such as Max Planck and Albert Einstein discovered the quantum at the beginning of the 20th century. Scientists of the time were working on the problem of smallness – if you cut something in half, such as a flask of hydrogen or a beam of light, you get a smaller amount of hydrogen or energy, but its essence is unchanged. If you keep chopping, will it be a smaller amount indefinitely, or is there a limit where eventually it can’t get smaller? In 1900, this was a lively question, but over the next decade the atom and the quantum were proved to exist. In the case of hydrogen, you eventually get down to a single atom, and if you try to chop the atom (not so easy), you get some particles that are no longer hydrogen. The same idea works for energy; if you split a beam of light repeatedly, you eventually get down to a single piece of energy that cannot be sliced, and this very tiny thing was named a “quantum.” A quantum jump happened when an atom absorbed a quantum of energy in its electron shell. The excited electron then has another quantum jump as the quantum is radiated away. This absorption and radiation of quanta is the smallest event that occurs in the universe and also the most common, so there are God-knows-how-many trillions of quantum jumps in our sun every second. Is it not amazing that in common speech the word for the smallest and most common event that exists is now the name for an important and rare event?

Some words don’t get completely reversed by misuse but get altered. There is a fine old Chicago slang use of the word “clout.” The rest of the country started using it to mean “the ability to get something done.” There is already a perfectly good five letter word that means “the ability to get something done.” The word is p-o-w-e-r. “Clout” was designed by Chicago politicians to describe something subtler. Clout means “access to power with the ability to get the fellow with the power to do you a favor.” An example: “I want you to meet my buddy Charlie. He has clout with the property tax assessor; I think he can fix your problem.”

So, when you write, try to avoid misleading words, clichés, and ambiguous phrases. Humor has its place if you are not good at humor, cut a cartoon out of a magazine and paste it into the report. Your report is wasted if the target reader hits the Delete Key half-way through because your document is too boring.

Ralph Wanger, CFA, Senior Advisor,
Wanger Investment Management, Inc.