Two Princeton University psychologists, Adam Alter and Danny Oppenheimer, have shown that a stock’s performance might be linked to — of all things — its name.

This psychologist team did a study of initial public offerings on two major American stock exchanges. Their results show that people are more likely to purchase newly offered stocks that have easily pronounced names. This effect also applied to how easy it was to remember a stock’s symbol.

“This research shows that people take mental shortcuts, even when it comes to their investments, when it would seem that they would want to be most rational,” said Oppenheimer. “These findings contribute to the notion that psychology has a great deal to contribute to economic theory.”

Who would have thought that there is a link between a stock’s name and its performance?

According to ScienceAGoGo.com, “the relationship was very strong — regardless of the researchers’ attempts to manipulate the… interpretations. The researchers then moved beyond the lab and investigated the relationship between the variables in two large U.S. stock markets — the New York Stock Exchange and the American Exchange. They found that the effect held in the real world as well: the more “fluent” a stock’s name or symbol, the more likely the stock was to perform well initially.”

Does this phenomenon affect small-caps differently? Alter says, “We looked at intervals of a day, a week, six months and a year after IPO. The effect was strongest shortly after IPO. For example, if you started with $1,000 and invested it in companies with the 10 most fluent names, you would earn $333 more than you would have had you invested in the 10 with the least fluent. We thought it was possible that larger companies might both adopt more fluent names and attract greater investment than smaller companies. But the effect held regardless of company size. We also showed that the effect held when we controlled for the influence of industry, country of origin, and other factors.”

It seems like a cute ticker symbols also help a stocks performance. Just look at the performance of these stocks — they all have cute, cleverly crafted ticker symbols:

As you can see from the chart above, it helps to have an easy to remember stock symbol. The stocks in the list (with the exception of BABY) all bagged triple-digit gains over the past five years. During that period, the S&P gained just 3.67%.

Even BABY, our only loser on the “cute name” list gained 566.67% between January 2003 and January 2006.

Single alphabet stock symbols are unique as well. As you can see, United States Steel with a single letter symbol went up 214.3% in the past 5 years. These symbols are all the more special because there are only 26 of them!

In fact, in 2002 when United Airlines filed for bankruptcy, some people were very excited. That’s because United had the coveted single-letter symbol of U. If the company were de-listed, this symbol would be freed up. (The stock was de-listed, but the stock symbol is still up for grabs.)

“Single-letter stock tickers are the vanity plates of the New York Stock Exchange,” said Michael Goldstein, a professor of finance at Babson College in Wellesley, Mass., who was once a visiting economist at the NYSE. The symbols are coveted by companies because “they’re easy to remember,” he said.

Go to any website that gives stock quotes and type in the symbols I or M. No stock will come up. There has been long running speculation that the NYSE has been reserving these two symbols for technology heavyweights Intel and Microsoft in the hopes that they can be lured away from the Nasdaq to trade on the NYSE!

Whether it’s a single letter symbol or a stock with an easy-to-remember ticker, it is no substitute for an investor’s due diligence and thorough analysis before investing. But as the Princeton researchers have found, there certainly seems to be a link between a stock’s name and its performance.

“Don’t laugh,” says trader and market expert Charles E. Kirk. “I’ve made plenty of money through this stupid strategy!”

Regards,

Sala Kannan
June 23, 2006

Penny Sleuth Contributor

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