What is it, really?
March 6, 2018·0 comments·rabbit hole
The financial industry speaks one language while investors understand another. A stock is called an investment in ownership, but it is really a speculative bet on what others will pay for a fractional claim on future cash flows. A strategy is called "passive" when it's actually an active concentration bet on a single market. The terminology works well enough for communication until it doesn't, and by then the gap between what people think they own and what they actually own has become dangerous.
• Professional definitions and investor understanding have drifted so far apart that they're speaking past each other. When investors say they want "passive" management or "simple" stocks, they mean something entirely different than what the terms technically represent. Yet everyone nods and proceeds.
• Complexity and risk have become disconnected in how investors evaluate investments. A centrally cleared credit default swap might be far safer than an S&P 500 index fund, but investors rank them oppositely because familiarity feels like safety. The financial industry has learned to exploit this confusion.
• The industry profits from maintaining these misconceptions. Benchmark arbitrage, risk layering, and multi-benchmarking strategies all depend on investors not understanding what they actually own or what risks they're actually taking on.
• Even intelligent people systematically underestimate how much financial innovation is really just rebranding and fee extraction. A Harvard endowment proposal dressed up as "efficient passive management" would have massively increased concentrated risk. The financial media didn't catch this because they don't actually understand what they're covering.
• Until investors ask what something really is beneath the terminology, they remain vulnerable to having their misunderstandings weaponized against them. The danger isn't the terminology itself. The danger is treating terminology as truth.
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