Mind Your Decisions

A Failure to Communicate

I believe many financial misconceptions arise from poor writing.

The SEC shares this view and in 1994, Arthur Levitt, the SEC Chairman, talked to the National Press Club about the SEC’s campaign for consumer education.

He gave one example of how financial prospectuses are difficult to understand. Here is a passage from a prospectus, followed by a translation into plain English by Warren Buffet.

Original

Maturity and duration management decisions are made in the context of the average maturity orientation for each Fund, as set forth in the Prospectus. The maturity structure of each Portfolio is adjusted in anticipation of cyclical interest rate changes. Such adjustments are not made in an effort to capture short-term, day-to-day movements in the market, but instead are implemented in anticipation of longer term, secular shifts in the levels of interest rates (i.e., shifts transcending and/or not inherent to the business cycle). Adjustments made to shorten portfolio maturity and duration are made to limit capital losses during periods when interest rates are expected to rise. Conversely, adjustments made to lengthen maturity are intended to produce capital appreciation in periods when interest rates are expected to fall. The foundation for the Adviser’s maturity and duration strategy lies in analysis of the U.S. and global economies, focusing on levels of real interest rates, monetary and fiscal policy actions, and cyclical indicators.

Warren Buffett revision

We will try to profit by correctly predicting future interest rates. When we have no strong opinion, we will generally hold intermediate-term bonds. But when we expect a major and sustained increase in rates, we will concentrate on short-term issues. And, conversely, if we expect a major shift to lower rates, we will buy long bonds. We will focus on the big picture and won’t make moves based on short-term considerations.

Buffett’s revision is amazing: it keeps the main point while cutting out half the words.

Levitt’s talk has other great examples, like how two-thirds of people thought mutual funds sold through banks were FDIC insured even though mutual funds carry substantial investment risk and are never FDIC insured.

Though the SEC has been pursuing its consumer education goal for about 13 years now, I’m not sure financial information is any easier to understand. And this failure to communicate is one of the greatest motivations for the mind your decisions blog.