Having been involved in financial analysis for nearly four decades, I have increasingly formed the view that there are some words and phrases used by company managements, analysts and commentators which investors should be wary of. Apart from being an abuse of the English language, they represent a combination of woolly thinking and a desire to disguise or divert attention from a problem.
Take Wal-Mart, the US-based retailer. In a recent results presentation the management used the term “leverage” no less than 80 times. Leverage has a legitimate meaning. It can mean to use a rigid bar to move an object. It can also mean the use of borrowing for finance which magnifies or "leverages" the operating results of a business.
It should not be used, as Wal-Mart did, to say, “Asda is a leader in online grocery delivery, and we’ve leveraged that experience in the US”. Copied, benefited or learnt from, but not leveraged.
It is probably no coincidence that this mass outbreak of Banned Word Syndrome (or BWS, as you must have a three-letter acronym) accompanied a set of results in which Wal-Mart revealed falling sales.
So this first category of words which shouldn’t be used, and which should raise your suspicions when they are, is words which are used for a meaning beyond their original purpose. Other examples include “runway” used to describe the scope for development of a product or service as in “there’s plenty of runway to develop sales for this product”. A runway is a strip on which an aircraft lands or takes off. You should only describe something as “key” if it relates to a lock, so no “key objectives”. “Footprint” should only be used in relation to feet or footwear, not the area of operations of a business.
Another category is words which are used in an effort to sound profound, when a much simpler word exists. You will often hear management and investment analysts talking about granular data or granularity. Detail is a perfectly good word.
Sometimes the word used is not intended to convey an impression of profundity but has a pejorative or critical tone. I have lost count of the number of failed bankers and CEOs whose pension “pot” has been the subject of critical reporting and subsequent rage. I wonder if they would have suffered the same fate if it was correctly described as a pension fund. A pot is a type of container.
There are also some expressions that you should be wary of. If someone tells you they are “reaching out” to you, you might ask how this is different to or better than contacting you. And, of course, be wary of anyone who begins a statement with “to be honest”, as it begs the question of whether they are normally dishonest. Always be wary of any organisation which is run by a “steering committee”. Would you ever steer a boat or a car by committee, and what do you think the outcome would be if you did? Organisations run by steering committees are unlikely to achieve any good results in my view.
Which brings me on to a type of expression for which I am laying claim to a new law – Smith’s Law: you should never use an expression if its opposite is so nonsensical that you would never say it. I have seen innumerable companies say they have a strategy of “select acquisitions”. Would anyone ever admit to a policy of indiscriminate acquisitions (although it seems that’s what many of them actually do)? The new Governor of the Bank of England, Mark Carney, has been struggling to get the markets to accept his “forward guidance” on interest rates. He might like to pause to think whether he would ever use backward guidance. If so, perhaps he would also be happy to “group together” (can you group apart?) and do some “forward planning” (what other sort is there?). Perhaps he would have more success if he just called it a prediction.
Be wary of management or commentators who engage in hyperbole. “Global” is a common example of hyperbole. Very few businesses are truly global. They may be international, but that is not the same. And when “global” is used in job titles it is almost always an example of status inflation. Whenever I am given the business card of a head of global sales I am tempted to ask how many globes he or she has sold. A newspaper this year ran a cycling event which it described in its advertising as “iconic”. The Tour de France is iconic, a ride around the Surrey Hills isn’t.
At Fundsmith we keep a banned word count for the companies we analyse because we think they provide an insight into their management. Our investment approach is about investing in good companies. They are best spotted by their good results – we do not need managements to tell us how good they are – but when we do listen to management, the straight talkers get our vote and our money.
A classic example is Domino’s Pizza, which began a turnaround in 2009 by publishing harsh criticism from its customers such as “Pizza was cardboard”. You only do that if you intend to change. Since then, shares have risen from $8.50 to $68. It has been one of our largest holdings since the inception of the fund.
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