At this point, we hope that we’ve sowed some seeds of doubt in your mind regarding the phrase “value investing.” Even then, you might still wonder: What’s the big deal in calling investing value investing? Isn’t this all just semantics? Who cares!

There is a real problem though. By calling investing “value investing,” room was created for other types of investing. More specifically, it made it much easier for speculation to be sold under the guise of investing. This is the best thing that could have happened to the people selling speculative instruments (think crypto). If you are on the buy-side, however, you wouldn’t be so lucky. You end up buying crypto (or similar) thinking you are investing. A part of your brain whispers “safety,” which is the concept you associate with investing; this makes your intuition correct because investing is all about safety. However, there is absolutely no safety to be found when you are buying speculative ”assets.” Simply put, you are at the mercy of finding a greater fool.

Remember our stance: Definitions are everything. We are convinced that this particular definitional issue, not establishing consensus on the definition of investing, is the biggest culprit for almost everything that is wrong with 21st-century finance. We feel a responsibility to drive this point home, whatever it takes.

So, we wrote a tale. It may not make it into *One Thousand and One Nights*, but if it helps you understand an important piece of finance, we'll take it:

*Image Courtesy of Wikimedia Commons*

Once upon a time, there was a country where the Sultan started hearing complaints about math. He summoned his Grand Vizier to understand the problem and to formulate a solution.

Grand Vizier: My Sultan, the kids don’t understand math, we must do something about it.

Sultan: What is the issue? What subject specifically?

Grand Vizier: Geometry. Squares and rectangles. Kids confuse them for some reason.

Sultan: Hmm. Let me think. Doesn’t a square have four equal sides?

Grand Vizier: Yes, of course, my Sultan.

Sultan (snapping his fingers): All right. From now on, let the teachers of all our schools call a square an equal-sided square. Calling it that should make it crystal clear that all sides are equal. It’s in the name. They will keep repeating it, so they will learn it.

Grand Vizier: Brilliant, my Sultan! Consider it done.

Ten Years Later…

Grand Vizier: My Sultan, my Sultan…

Sultan: Yes, Vizier, Is this about geometry again?

Grand Vizier: Yes, my Sultan, unfortunately. The kids are confused.

Sultan: Really? Is this about squares? What could possibly have gone wrong? We made it easier for them, didn’t we?

Grand Vizier: I know! The kids are talking about irregular squares. Non-equal-sided squares. They came up with all these different kinds of squares.

Sultan: What do you mean by non-equal-sided squares? What does that even mean?

Grand Vizier: A square whose sides are not equal.

Sultan (looking puzzled): What? By definition, a square has four equal sides. What makes them think such a thing even exists?

Grand Vizier: They are saying that because there are equal-sided squares, there must also be other squares, such as non-equal-sided squares. They say, otherwise, there wouldn’t be a need to call a square an equal-sided square.

Sultan: I see. Our kids are smart. They are saying the phrase “equal-sided” is redundant. ALL squares have equal sides. We MISLED them.

Grand Vizier: But you were trying to help, my Sultan.

Sultan: I was. My intentions were good. I didn’t mean to confuse them, but that’s exactly what I ended up doing.

Grand Vizier: What are we going to do?

Sultan: Simple. We’ll call a square a square. Nothing else needs to be said. Give it enough time, and everybody will understand that a square, *by definition*, has four equal sides. Period. There are no other types of squares.

Grand Vizier: What about rectangles? You may recall, my Sultan, that we had this issue because kids were confusing squares and rectangles.

Sultan: Yes, I remember that. From now on, let the teachers of all our schools call a square an equal-sided *rectangle*.

Grand Vizier: Brilliant, my Sultan! Consider it done.

Let’s compare the Sultan’s original recommendation with his latest one. Equal-sided squares vs. equal-sided rectangles. A difference of merely one word! One word can make a significant difference in the outcome, however, so it's important that we choose our words wisely. Which one is it? Equal-sided squares? Or, equal-sided rectangles?

The latter is the correct description. The second word, rectangles, is the universe we are operating in, and the qualifier “equal-sided” narrows down the universe to a specific type of rectangle, namely squares. Squares are a *strict* subset of rectangles. They are not the only rectangles; there are other rectangles that are not squares. In other words:

All squares are rectangles, but not all rectangles are squares.

So, what does all this have to do with finance and investing? Turns out, quite a lot. Tune in for the next post - we’ll explicitly connect this tale to the fallacy of “value investing.”