Senior analyst Anand Chokkavelu demystifies Wall Street jargon a bit by explaining three of his favorite buzzwords. As luck would have it, all three words are synonymous with "bullpucky."
Hedge, VaR, and liquidity are each words the folks at Goldman Sachs
Hedge -- Wall Streeters hedge by using derivatives to lower the risk of losing money. Basically, they want you to believe that they can make huge money when the market goes up AND break even or make money when the market goes down. You heard this a lot during the housing bubble. Trillions in bailouts later, that myth is busted.
VaR -- Speaking of hubris, VaR, or value at risk, is a good example. Wall Streeters think they can use models and past volatility data to calculate exactly how much of their money is at risk on a given trading day. Two problems here: Models can't predict the complexity of Wall Street shenanigans, and the future is always different than the past.
Liquidity -- This term takes the cake. To be clear, liquidity is actually a good thing. It means you can easily buy or sell something. For example, you can sell shares of Coca-Cola much more easily than you can sell a house. Hence, Coca-Cola is more liquid than your house ... get it?
The problem is that Wall Street uses liquidity's inherent goodness as a weapon. Every new crazy product it trots out is defended by saying it will add liquidity to the market -- from auction-rate securities to collateralized debt obligations to credit-default swaps.
If you don't quite get their argument, you're not really supposed to.
See the video (complete with cheap visual aids) here:
Anand Chokkavelu doesn't own shares in any company mentioned. You can follow him on Twitter. Coca-Cola is a Motley Fool Inside Value pick and an Income Investor pick. The Fool owns shares of Coca-Cola. The Motley Fool's disclosure policy gets camera-shy.