from The Wall Street Journal, Nov. 18, 2009. Adapted from The Little Book of Safe Money, by Jason Zweig. Copyright 2010 by Jason Zweig. Published by John Wiley Sons Inc.
Enjoy the language discussion as some light relief. Not that we don't have our ugly/tricky acronyms in education.
By Jason Zweig
Has Wall Street's alphabet soup given you investing indigestion?
No other institutionĂ˘€”with the possible exceptions of the government or the militaryĂ˘€”spews out acronyms and initials quite as prolifically. I call these products of financial engineering "WACronyms," because they tend to sound innocent when, in fact, many of them are full of wacky complications and incomprehensible risks.
They range all the way from ABS and ARMs; CARDS and DECS; CBOs, CDOs, CDS, CLOs, CMBS and CMOs; EIAs; ETFs; HLTs; IPOs; LBOs, MBOs and BIMBOs; MBS; PERCS; PIPEs; REMICs; RIBs; SAMs; SPACs; SPARQS; STRYPES and TANS; ELKS, LYONs, PRIDES, TIGRs and ZEBRAs; to NINAs, NINJAs and other nonsense.
While you shouldn't automatically refuse to invest in a WACronymĂ˘€”among others, some ETFs, or exchange-traded funds, may be worthwhileĂ˘€”these catchy abbreviations are always a signal that you should analyze the underlying investment with extreme caution. A WACronym is a sure sign that somebody is trying to sweet-talk you into buying something you might never invest in without the cutesy come-on of the shorthand name.
In peddling WACronyms, Wall Street's marketers are exploiting a quirk of the human mind that psychologists call "fluency," or our tendency to find familiar or easily processed ideas more appealing than unusual, cumbersome ones.
Ă˘€Â˘ What Maxwell Perkins knew. How much would you want to read a book titled "Trimalchio in West Egg"? You're likely to ask yourself three immediate questions: Who's Trimalchio? Where (or what) is West Egg? And who cares? But when the same book is called "The Great Gatsby," F. Scott Fitzgerald's masterpiece sounds far more appealing. Fortunately, Fitzgerald's editor, Maxwell Perkins, rejected the great author's inept title and replaced it with his own brilliant choice.
How eager would you be to buy a prescription for a drug called 1-[[3-(6,7-dihydro-1-methyl-7-oxo-3-propyl-1Hpyrazolo[4,3-d]pyrimidin-5-yl)-4-ethoxyphenyl]sulfonyl]-4-methylpiperazine citrate? To any nonchemist, that sounds intimidating, scary, perhaps even toxicĂ˘€”like something you might pour into a clogged sink to burn through the gunk that's clogging the pipes. But once the same drug is renamed "Viagra," it seems natural and appealing.
On average, the more often you see or hear something, the less likely it is to be dangerous. (If it were deadly, it would have killed you on the first or second go-round.) Because whatever our ancestors encountered frequently was less likely to be harmful and more likely to be worth approaching, we have evolved to favor the familiar. Anything that reminds us of common things makes us feel comfortable.
So the easier something is to perceive, remember or pronounce, the safer it will make us feelĂ˘€”regardless of its actual risk or benefit. A name like Viagra, with its hints of life and vigor and waterfalls, sounds fluent and familiar even when we hear it for the first time.
In a classic psychological experiment, people were shown a series of fictitious names of food additives, all with 12 letters. Some, like Magnalroxate, were fairly easy to pronounce; others, like Hnegripitrom, were a cumbersome mouthful. Asked to imagine that they were reading the names as ingredients on food labels, people rated how safe each additive was likely to be. The unpronounceable additives were, on average, rated 29% riskier.
The psychologists also presented people with the names of amusement-park rides. Some were short, catchy and pronounceable, like Chunta. Other names were hard for most people to say, like Vaiveahtoishi. With no information about the rides other than their names, people rated the unpronounceable rides an average of 44% riskier and more likely to make them sick.
That's why Wall Street peddles "CMOs" instead of collateralized mortgage obligations, "HLTs" instead of highly leveraged transactions, "LBOs" instead of leveraged buyouts, SPACs instead of special-purpose acquisition companies, and "SPARQS" instead of stock participation accreting redemption quarterly-pay securities. In fact, investment bankers put a great deal of energy and effort into coming up with product names that can somehow be reduced to a catchy WACronymĂ˘€”because Wall Street knows that a fluent name automatically makes investors more comfortable with risks they do not understand.
"Collateralized mortgage obligations" is an intimidating 11-syllable mouthful that sounds like something a debt-collection agency might try extracting from you while an ex-wrestler named Bruno dislocates your thumbs. A "CMO," on the other hand, sounds short, cool, snappy and familiar, like a fast-food restaurant, a sports statistic, a videogame, a type of sneaker, a new-model car. You would never guess that by late 2008, some CMOs were worth only a tiny fraction of the original prices at which Wall Street foisted them onto "sophisticated investors."
Ă˘€Â˘ Tickers that click. The same effect extends to stock tickers, the trading symbols that serve as shorthand for identifying which shares you want to trade. Stocks whose tickers are readily pronounceable or evoke positive images (like BUD, KAR or LUV) outperform those with clumsy, meaningless tickers like PXG or BZHĂ˘€”at least in the short run.
Knowing this, companies eagerly stake their claim to a catchy ticker. In August 2006, Harley-Davidson Inc., the manufacturer of heavyweight motorcycles, announced that it would change its stock ticker from HDI to HOG. (Motorcyclists have long nicknamed Harleys "hogs.") In its first two days of trading under the memorable new ticker, Harley's stock gained 5%.
* BIMBOs: Buy-In Management Buyouts
* PIPEs: Private Investments in Public Equity
* PRIDES: Preferred Redeemable Increased Dividend Equity Securities
* RIBs: Residual Interest Bonds
* SPARQS: Stock Participation Accreting Redemption Quarterly-Pay Securities
* STRYPES: Structured Yield Product Exchangeable for Stock
The same is true for the full names of stocks. Researchers recently came up with a set of fictitious names for stocks; some were easy to pronounce and recognize, like "Tanley" and "Vander," while others were much less fluent, like "Xagibdan" and "Yoalumnix." In a psychology lab, dozens of people looked at the list of companies and, with no information other than the names, predicted the returns of their stocks over the coming 12 months. The average forecast: Stocks with easy names would go up 4%, while those with cumbersome names would go down 4%.
In the late 1990s, when the boom in Internet (or "dot-com") stocks was in full swing, firms that changed their corporate name to include ".com," ".net" or "Internet" outperformed other technology stocks by a blistering 89% over the two months surrounding the name change. Even in conservative Switzerland, investors believe that stocks with fluent names like Emmi, Swissfirst and Comet will earn higher returns than those with clunky monikers like Actelion, Geberit and Ypsomed.
Ă˘€Â˘ It's as easy as ABC. In the ancient world, people well understood that the act of naming something is a way of asserting power over it. Adam's very first act, after God creates him in the Book of Genesis, is to name each of the animals, thus fulfilling God's wish that man would have "dominion" over "every living thing that moveth upon the earth."
So it's vital for investors to remember that Wall Street takes control over investments from the start, through the simple act of naming them. By giving an ugly investment a cute little name, Wall Street can fool many people into thinking it's a cute little investment.
Don't be one of those people. Confronted with any investment that's named with a catchy WACronym, you must fight back with your own acronym. Being on your guard is as easy as ABC: Always Be Cautious. Ask what the WACronym stands for. If you can neither pronounce nor understand the terms the abbreviation stands for, don't invest in it.
Write to Jason Zweig at IntelligentInvestor@wsj.com