Investment perspectives: The language of the crisis

10th November 2011

Over recent years there's been a storm of language that strives to describe, but often clouds, the strange new financial world we're in.

Sites such as Mindful Money aim to help show the way through the storm – to explain, and delve into ‘the story behind the story'. What is, say, ‘stagflation', ‘hyperinflation', or a ‘toxic asset' for that matter, and how will they impact investors?

The media has been forced to try to make sense of some of the words frequently slotted into news reports and features through their own dictionaries; for example, here the BBC attempts to define some of the ‘jargon' commonly used. The current financial crisis may have thrown terminology from the business pages onto the front pages of newspapers – but this is not the only change it has prompted.


The use of hyperbole

Media coverage often sensationalises events. During the financial gloom, terms such as ‘market crash' are frequently touted, adding to the heady emotions resulting from the financial state of today. Headlines promulgate the use of hyperbole to create emphasis and grab readers – so not only are we left feeling we need to swot up on the English language with its new financial terms, but emotionally drained from its impact.


Going deeper into language – Specifically, use of the word ‘crash'

Ryan Dewey, blogger at SportLinguist, and graduate in Cognitive Linguistics, comments on the use of words relating to 'force dynamics': "The term "crash" exhibits what cognitive linguists call force-dynamics." He likens the use of the word to a type of 'naive physics'. There is a barrier to the economy/markets moving along their trajectory, just as there would be to a car crashing into something. "Interestingly we never reverse this pattern; we don't typically conceive of actual car crashes as economic collisions. However, we readily think of the economy crashing because of the forward motion of the economy towards the barriers of financial markets."

"This leads to a second point, that metaphors and force dynamic patterns easily lend themselves to conceptual blends like "Stagflation" (i.e: "stagnation" meets "inflation").  Stagnation has a sluggish static meaning to it, whereas inflation has a highly dynamic meaning. The mental space for stagnation places our focus on wages, and the mental space for inflation places our focus on prices: only in the blend of "stagflation" can we see that wages and prices are in a sort of traffic gridlock."


So where does this leave investors?

The images and impact of language, therefore, often leaves investors rushing for the exit – cashing in their holdings in fear of a further slump and feeling green around the gills on the rollercoaster of stock market volatility.


Commenting on the impact of language on investor behaviour and their own pockets, Dr Stephen Thomas, Professor of Finance at Cass Business School, says: "We know that investors generally trade too often, burning up unnecessary spending on transactions' costs; we also know that investors respond to news stories and emotive headlines by buying and selling securities, fearful of losing money if markets fall and of losing out if markets rise; anything that makes investors trade more often is almost certainly going to cost them money."


But the likelihood of the media changing its terminology is minimal, adds Mindful Money's resident psychologist Kim Stephenson.

He says: ""If you're a journalist (or novelist), you're trying to make impact with your words.  Do you want to use simple nouns or – heaven forefend if you are a journalist – use lots of adverbs or adjectives?  So do you want to say, "global crisis", or "high degree of concern worldwide"?  And do you want to use literary figures, such as litotes – "there was not a little concern", or a Wodehousian personification "the Chancellor smoked a worried cigarette", or do you just say – "crisis" preferably in headlines three feet high?"

Turning to the choice for investors, and what they take from the language used, he adds: "You can look long term – look at fundamentals, management team, balance sheet, business plan, gearing etc.  You're basically betting on the general upward trend in equities over time and trying to pick the companies that will take most advantage of it.  The downside is that you have to wait to be proved right, and you might, in the end be proved wrong – although if you do it right you should come out ahead…Or you can listen to the headlines, hyperbolae, hot tips etc. and try to dive in and out of the market at the right time."

But he adds: "Warren Buffet doesn't bother about the headlines and daily news, I'm not sure I'd be keen to try to out invest him."

So while headlines may shout ‘market crash', this could also be simply a ‘market move', or a period of volatility during which investors should remain calm and sit it out.


Beware being swept up in media hype

Simon Ward, chief e
conomist at Henderson
, says on his Mindful Money blog: "Anyone reliant solely on media economic reporting to form a view of markets would be mystified by the 12% rally in world equities since early October (MSCI World index in US dollars). The commentariat, as usual, has chosen to focus obsessively on negative developments – in this case, the interminable Eurozone crisis – while ignoring important supports for the global economy and asset prices…"


Andrew Lyddon, UK equity fund manager at Schroders, adds: "Market volatility, of which it hardly needs saying there is currently a great deal, tends to get investors very worked up. Shares are either rising 10% in a day, which excites people because it looks as if large gains can be made very quickly, or else they are falling 10% in a day, which is unnerving to say the least.

"As an investor, detaching yourself from that noise and the volatility it creates in the market is hugely difficult. But while it is only human to fear this volatility, if you have a long-term investment horizon – the three-year, five-year or longer timeframe that as value investors we would say you should – then extreme volatility on a daily basis shouldn't really worry you. If you are looking to realise investment returns over the long term, then do you really need to be worried about what is happening to share prices on any given day?

Corporate balance sheets remain strong and Lyddon adds: "…As we have said many times before, well-managed companies with strong balance sheets should be able to ride out most scenarios thrown at them. Provided one buys shares with attractive valuations that can deliver a good absolute investment return over, say, a five-year horizon, then what those shares do in between isn't something you need to be too worried about."


More from Mindful Money:

Market crash: The secret to investment timing

Market crash: The illusion of knowledge

Market crash: Headlining and tweeting our way to volatility

Alternative investment tools – break away from the herd

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