The most recent acronym popularized in the media and investment industry earlier this year was the TACO (Trump always chickens out) trade. It caught on as investors bet the U.S. president would back down before his policies caused significant pain to markets or the economy. (Photo by Kena Betancur / AFP via Getty Images)KENA BETANCUR/AFP/Getty Images
Every industry has its own set of acronyms that help make communication more efficient and easier – and investing is certainly close to the top of that list.
Some examples include DCA (dollar-cost averaging), TINA (there is no alternative) and BRICS (a group of 10 countries that includes Brazil, Russia, India, China and South Africa). Short forms like these are used to sum up investment themes or strategies.
“Acronyms are the jargon of the [investment] industry. Even on the trading floor, we use them. It’s important to have fun with what you do,” says Derek Benedet, portfolio manager at Purpose Investments Inc. in Toronto.
The catchiness of acronyms often adds to their allure and can create a sense of camaraderie, Mr. Benedet adds. Still, he cautions that acronyms can also “oversimplify or gameify” the risks inherent in investing.
“What I sometimes see is acronyms shaping behaviour,” he says.
An example is herd mentality, which is the tendency for people’s behaviour or beliefs to conform to the group. For investors, the risk is following what others are doing without conducting their own research or sticking to their own investment plan.
“It fuels crowding and complacency with investors. You let your guard down. You assume the crowd is right,” Mr. Benedet says.
The most recent acronym popularized in the media and investment industry earlier this year was the TACO (Trump always chickens out) trade, created as a joke by Financial Times columnist Robert Armstrong. The acronym caught on as investors bet the U.S. president would back down before his policies caused significant pain to markets or the economy.
Mr. Benedet warns that acronyms can fail to capture the current reality of the market and investments.
“All an acronym is doing is capturing a previous trade [or market trend] that’s done well – and that’s memorable. It really doesn’t have any wherewithal from an investment standpoint,” he says.
Coreen Sol, senior portfolio manager with Solinvest at CIBC Private Wealth in Greater Vancouver and behavioural finance researcher, says acronyms appeal to people’s natural tendencies to seek out efficiency.
Relying on acronyms can sometimes cause investors to miss the bigger picture, she says. That could be happening today with the “Magnificent Seven,” a term coined by a Bank of America analyst in 2023 to describe seven high-performing U.S. technology stocks: Alphabet Inc., Amazon.com Inc., Apple Inc., Meta Platforms Inc., Microsoft Corp., Nvidia Corp. and Tesla Inc.
“Because we’re grouping these seven companies together, there’s an assumption they all have similar growth processes, but they all have vastly different business models. We’re using a small amount of data and applying it to a bigger picture,” Ms. Sol says.
Some analysts say Tesla’s position in the Magnificent Seven should be reconsidered, arguing it’s more of a U.S. manufacturing company, while other stocks, such as Broadcom Inc. and Oracle Corp., continue to outperform the stock.
Mr. Benedet warns that relying on a group of stocks that have a fashionable acronym attached to them can lead to investors ignoring the bigger picture.
“People miss out on the fact that there are about 493 other investments on the S&P 500 outside of the Magnificent Seven,” he says. “Focusing on only those narrows your focus and reduces your playground.”
Other acronyms that have lingered in investors’ lexicon include the Nifty Fifty – a group of 50 large-cap stocks such as Xerox Holdings Corp., Polaroid Corp., and The Coca-Cola Co. that traded at high valuations in the 1960s and 1970s.
“They were once seen as untouchable. When growth slowed and valuations dropped, many investors were still convinced that this was the place to hold onto,” Ms. Sol says.
She adds that another risk with these types of acronyms is that they can create confirmation bias, which is the tendency for investors to seek and interpret selective information that supports their existing beliefs.
To avoid behavioural traps such as confirmation bias or herd mentality, Ms. Sol suggests passive investing as a way to make regular and consistent financial decisions that can expose investors to the broader market and potentially bypass biased decisions.
Mr. Benedet recommends investors focus on the fundamentals when considering companies to invest in, including growth trajectory, earnings, valuation, and the competitiveness of the companies.
“It’s okay to use the acronyms and have fun with the market, but you want to ensure you focus on the entire investment universe. Focus on the fundamentals and a good long-term plan,” he says.