During my stint with a private equity fund, I once got into a hot debate with a colleague about a loss-making company we owned.
He was suggesting that this company launch a new product line. I asked him, “Why launch one more product line when the company is already losing money on similar products?”
He said, “Don’t you understand? The company can amortize its costs over one more business unit.”
In plain English, he was saying that we could pretend that some of the existing costs were on account of the new business. Presumably, that would make the existing businesses look more profitable on paper.
I replied, “How does it matter? If the incremental expense of the new business is more than the incremental revenue, why should we even be discussing it? The amortization is just accounting — it is not a real thing.”
But he remained adamant.
This is the danger of getting caught up in jargon instead of understanding things from first principles.
I have found that unlike, say, physics or neuroscience, the world of business is often simple. We deliberately complicate it by using big fancy jargon to sound pompous, and occasionally, to mislead others.
Never trust someone who can’t explain a business idea in simple English. Either they don’t know what they are talking about or they think you won’t.
Both are dangerous.
– Rajan