More on the Current Dow Frenzy and "Cute" Tickers

Today I have two Wall Street-oriented topics to address. One involves the recent fervor over whether the Dow will post a new all-time high. The other is about a recent article in the Wall Street Journal regarding 'catchy' ticker symbols.

My puzzlement over the Dow level revolves around the mistaken impression by so many analysts, market observers and pundits, that the precise level of a composite index matters over so long a time, to individual investors.

Among the more bone-headed, indefensible comments uttered in the last few days is that, now that the Dow may rise above its prior high, some unnamed investors, who apparently had their prior holdings frozen in time, will promptly unload all of their holdings, to finally book a gain.

Run that one by me again, please? Just because the Dow hasn't risen above its prior high of some 5-6 years ago has no relationship with how each individual equity, or even mutual funds, performed. Let alone what investors did with those positions.

Is it reasonable to believe that most investors have been hanging onto the same portfolio they owned 5 years ago? That's the only way that a new Dow high would actually unleash a flood of sell orders to finally rescue distressed equities that were underwater all of this time.

It just seems too absurdly foolish for anyone to think this way, but Mark Hanes and several others articulated just that view in the past few days.

A composite index is, admittedly, a function of its component parts. In the case of the Dow, that's only 30 industrials. So what about, say, the other 470 that are part of the S&P500 (I haven't checked, but I'm reasonably sure the Dow is a proper subset of the S&P), let alone the other 3000+ equities with liquidity in the market these days?

That's why I think the exact level of the Dow or S&P is mostly moot. Rather, the rate of change of an index is more useful in suggesting how investors may react, as they view a steady, or unsteady, progression of monthly returns of "the market," as narrowly represented by the Dow, or, more broadly, by the S&P500.

The other financial topic which caught my eye this week appeared in yesterday's WSJ. Entitled, "Does Stock by Any Other Name Smell as Sweet," it cited 'research' purporting that certain stock tickers, simply by virtue of their 'name,' cause, or are associated with, higher average returns, than other stock tickers.

The tickers in question, such as YUM, HOG, BID, and EYE, are thought to trigger more awareness in investors' minds. According to the article, researchers Adam Aiter and Daniel Oppenheimer claim to have found that pronounceable tickers which were bought and held on their first day of trading earned $85.35 more, on a $1,000 portfolio, than other tickers. Further, Pomona College's Gary Smith alleges that portfolios formed from "clever" tickers, from 1984 to 2004, had a return of 23.6%, against 12.3% for a 'hypothetical index of all NYSE and Nasdaq stocks.'

In neither case does the article mention average returns, or standard deviations, or the significance level of the stated performance differences.

What's more, both 'studies' suffer from a more glaring error. By using only one predictive variable, and measuring the difference in returns, or stock prices, they implicitly assign all performance differences, or their variances, to the stock ticker 'pronounceability' or 'cleverness' variable.

Does anyone truly believe this? Would you drop all of your other equity strategies right now, and invest in one of these two?

More reasonable would be a study in which the authors included a set of commonly-used predictive variables, and the stock ticker variable. Then the variance in performance of stocks, or portfolios, could be allocated to each predictive variable, or the predictive variables themselves could be factor analyzed, to assess shared association.

Either, or both, of these approaches would yield more believable, defensible, and useful conclusions to the question of whether the 'cuteness' of a stock ticker actually adds to its return potential.

It's disappointing to me that the Journal even printed this piece, let alone without much in the way of critical commentary on them. It did include one remark by an obscure finance professor from the University of Utah, who did at least suggest controlling for, rather than actually assessing the predictive power of, other predictive variables.

After all that, the article concludes by noting that the researchers themselves do not "recommend that people make trading decisions based on our findings."

What, then, was the point of this piece? Just entertainment? That would seem to be the Personal Section, would it not?

Have a great weekend!