I’m fascinated by all the different things people love and enjoy. Some people love classic cars. Some people enjoy fantasy football. My wife has a strong bent towards skincare, and my close colleague has developed an eye for high-end wrist watches. There’s so much this world has to offer.
Me? I love words.
Drop me off at a good bookstore or library, and I could be there for days. I enjoy a great speech, lecture, or sermon in the same way some people enjoy a music concert. I’m not much of a podcast guy, myself, but having a little Theo Vonn in my life is a guilty pleasure. When speaking of a woman he disliked, Theo said, “If I had a spare missile, I would throw it at her.” I’m stealing that one for sure.
The Word Nerd’s Curse
But having a taste and craving for something often comes with quirky baggage. A love for wine not only rules out two-buck-chuck from Trader Joe’s, but it also makes you more discriminating about the high-dollar bottles. As a word-connoisseur, I’ve developed a palate and sensitivity to the way they are used, misused, and abused. I notice the mouth-feel and the acidic balance or imbalance. Pairing the right words for the right occasion is a true art form.
I wrote that last paragraph with the self-awareness that I am more of a word-critic than word-artist. I consume far more words than I create. And when I do put my word-brush to a blank canvas, my own vernacular is guilty of being occasionally pretentious and opaque. Mea maxima culpa.
Sanity over Snootiness
To be clear, I’m not advocating for snootiness. Loving language isn’t about being erudite or fancy. I’m almost willing to put Yogi Berra on equal footing with G.K. Chesterton. Yogi’s enduring insight that “A nickel ain’t worth a dime anymore” is evergreen financial wisdom. Milton Friedman never described inflation so succinctly.
I’ll give you an example of a buzzy word that annoys me. Edging out “charcuterie boards,” for the win is the word “curate.” When someone says they have “curated” _________ (fill-in-the-blank), I can’t help but scoff. If you’re putting together a Civil War artifacts exhibit at the Smithsonian, then you can curate away, my museum-working friend. But if you went to Anthologie at the mall to “curate” the throw pillows on your couch, you’re a cartoon character in my book.
The word-shenanigans get exponentially worse in the world of finance. We’re talking Grey Poupon mustard-in-a-limousine level activity, minus the European accent.
Jargon Isn’t the Problem
I understand that every discipline has its jargon and acronyms – short-hand ways of saying long-hand things. So we might say something like, “CAGR” (pronounced, “cay-guhr”) instead of saying, “Compound Annual Growth Rate.” And that is legitimate. We’re not going to say, “Return On Investment,” when saying the letters, “R,” “O, “I,” is shorter and cooler to say. My argument isn’t with jargon or acronyms, per se. Who doesn’t love a good acronym? Everyone wants to aura-flex their “AUM” (assets under management).
My beef is mostly with certain acronyms and phrases that range from deceivingly murky to turning up the collar on your pastel-colored preppie Polo shirt while wearing sockless suede loafers. I love to hate them. They can project a faux air of sophistication that rubs me the wrong way. As my Texan uncle used to say, “Don’t call a spade a spade – call it a black da** shovel.”
A Ten-Dollar Word List
In that surly cowboy spirit, let’s jump right into a brief exposé with commentary. I hope you find this as healing and cathartic as I do:
EBITDA: We’re coming in hot with one of the most standard words in the biz. It stands for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” (Say that one five times fast.) No one wants to utter all these words together, so we pronounce it, “EE-bit-dah.” The stress is on the “EE,” and that is important. If you stress the “bit” or the “dah,” you will sound like an ignoramus.
Saying “EBITDA” does not have the same flair as “R.O.I.,” but that ship has sailed. I’m afraid we’re stuck with it. But the problem isn’t the length of the acronym – it is the abuse. And not just abuse from overuse. It is an abuse of being misleading.
Finance bros will often highlight a good EBITDA number as if it is something you can count on in your analysis. But as Warren Buffett has said, “Trumpeting EBITDA is a particularly pernicious practice. Doing so implies that depreciation is not truly an expense, given that it is a ‘non-cash’ charge. That’s nonsense.” He has gone even further and said, “We won’t buy into companies where someone’s talking about EBITDA. If you look at all companies, and split them into companies that use EBITDA as a metric and those that don’t, I suspect you’ll find a lot more fraud in the former group. Look at companies like Wal-Mart, GE and Microsoft — they’ll never use EBITDA in their annual report.”
In other words, EBITDA is often a high-sounding sleight-of-hand that removes supposed “non-cash” expenses from earnings to make them look better. I don’t know about you, but interest payments and taxes put a damper on my bottom-line cash position. When someone touts EBITDA, your spidey-senses should start tingling. Think of it as an invitation to dig deeper into the financials.
Fungible: You might be thinking there is some connection between money and mushrooms. But you would be wrong. This has nothing to do with fungus, which is Latin for “sponge.” The etymology is the Latin root, “fungiblis,” which means “to perform,” or “to take the place of.”
In other words, if something is fungible, it is interchangeable with something else. As much as we like to deride crypto “currency,” when people say that it is “fungible,” it means it can be exchanged into cash. A certain amount of one thing can be swapped for a certain amount of another thing. Crypto is fungible.
But what would be non-fungible? The Mona Lisa is non-fungible because it is almost impossible for anything to take the place of that painting. The same goes for Liberace’s piano or the cape of Elvis. They have worth and value, but they are not easily fungible. Wearing that cape would be amazing, though.
Your challenge this week is to find a way to say “fungible” in normal conversation. Good luck.
Mezzanines, Waterfalls, and Capital Stacks: The first time I heard an M&A (mergers and acquisitions) guy talk about structuring mezzanine financing and waterfalls within the capital stack, I was impressed. Darn impressed. I came away with the strong impression that there was architecture involved, and I was curious to see the conceptual drawings. I was especially interested in the water features.
Imagine my disappointment when I learned that a capital stack is just the various debt and equity instruments used in combination to finance a business project. And worse, that there was no beautiful mezzanine with large windows and slabs of polished marble – just a hybrid debt-equity layer of the “capital stack.”
Adding insult to injury, I came to understand that a waterfall is how future monies will flow through the layers and investors in the capital stack. It might hold its own kind of financial beauty, but I feel like “waterfall” might be over-selling it. It is awfully fun to say it, though.
When you hear these terms in close succession, you can be impressed. But not too impressed. Now you know.
Rightsizing: I love to hate this word. After all, who doesn’t want something to be the right size? Some of the bathing attire I see on people at the beach… could use significant adjustment. There seems to be a mismatch between body types and the amounts and placement of fabric. Rightsizing sounds like something we all need and want.
But what does it mean? Well, it usually means taking a dysfunctional budget and cleaning it up with aggressive layoffs, cost-cutting measures, and painful reorganization. That doesn’t make rightsizing nefarious. It is probably very good and necessary. But if I tell my wife I would like to rightsize her Amazon purchases, the euphemistic camouflage falls short of the mark.
This hilarious attempt to sanitize unpleasant business necessities lies adjacent to its close cousin, “value creation.” When you hear this phrase uttered by private equity folks – especially in combination with “rightsizing,” perhaps you can share a sardonic chuckle with me about the reality of the matter. Uncomfortable reorganization lies ahead, but no one wants to say it that way in a PowerPoint preso deck.
Leverage: Industry jargon normally exists to shorten or abbreviate long words into short ones. But in this case, things run in reverse. We take a one-syllable word, “debt,” and replace it with a three-syllable word, “lev-er-age.”
When you hear, “The company has over-leveraged its balance sheet,” it means they got over their skis and took on too much debt. They simply borrowed too much money – nothing more complicated than that.
In truth, I’m being slightly unfair. Leverage is a concept we learn in high school physics. The point is that by applying a lever against a fulcrum, we can use less force to move an object. In finance, that means that the right kind of loan can go a long way in getting financial projects underway. Real estate investors generate better returns when they can use leverage in lieu of their own cash to secure a property.
Think about it. Let’s say you buy a $1 million property that you eventually sell for $1.5 million. Would you get a better return on your investment if you initially paid $1 million in cash upfront or $100,000 upfront with a $900,000 loan? Well, which sounds better – making $500,000 using $100,000 or using $1,000,000? That’s not just debt. That’s leverage.
Optionality: I almost didn’t include this because the truth is… I love to say it. But when I say it, I know it is quasi-performative (I will never abandon the awesome modifier, “quasi.” Like ranch dressing, it works with almost everything.)
“Optionality” is not about trading options. It isn’t about complicated derivatives. It just means – you have flexible choices. But why would we say that when we can say, “optionality?” Just try it – you’ll see.
Like when I ask my wife where she would like to go to dinner on Saturday for date night, she has many possible choices. She can pick a type of food, or a specific location, or even stay at home. That’s optionality.
But why do we say it in finance? Well, because some strategies and situations severely limit your flexibility. Imagine a scenario where someone needs cash, but they don’t have emergency savings and all their investments are in residential real estate holdings that are highly leveraged. That person and plan do not have optionality. They are stuck in a tight corner.
So when financial planners are helping put together your plan, we like to stress-test it to make sure you have margin-for-life, as our esteemed Director of Planning, Matt Gregory, likes to say. We want to make sure you have optionality.
Final Thought: Pass the Mustard
Ah – I feel a bit lighter now. It was nice to get that off my chest. We could do many more ten-dollar finance words, but I think you get the idea. Don’t be intimidated by this stuff. In fact, when you encounter this foreign vocabulary, I encourage you to lean in and get ready for a little chuckle. “Do you have any Grey Poupon? Why yes, I do.”
Brett Bonecutter
Private Wealth Advisor
