VALUE INVESTING
Nomenology

By Stephen Bland (TMFPyad)
February 8, 2002

We have some readers who believe that this subject – nomenology – is a load of old nonsense, like astrology or chartism. Not so in my view.

Originally, the science concerned itself with personal names. The idea that people with the same name share common characteristics. This is done on a statistical basis by which I mean that it is about trends shown by significantly large groups of individuals, whilst saying nothing about a particular individual. For example if you took a load of say Stephens, you would find certain shared personality traits but that does not mean that if you looked at any one of them, that this person would exhibit all or even any of the features typical to the group.

People sometimes make this elementary statistical error of assuming that trends demonstrated by groups of people or anything else such as shares, apply at the individual level. They do not. For example it is well established that high yield shares tend to outperform long term and my own experience bears this out. But that tells you nothing about any one particular high yield share which might just be the worst investment you could make and goes bust next week.

If you have any doubts about individual nomenology, then provided you know a number of people with the same name try it out yourself. Think about them and what they are like. You will likely find interesting commonality of some sort amongst them, more than would be expected by mere happenstance.

From that we move on to corporate nomenology and its relevance to value investing. As a rule you will find, and it is mentioned often on the value board, that value shares have basic, often old fashioned names. Frequently these are simply the names of the founding families of the business or perhaps the areas in which they originated. For example, over the last few days we discussed AG Barr (LSE: BAG), the Scottish makers of the legendary Tizer and Irn Bru soft drinks. Barr has a lot of value characteristics, not a full pyad share because it trades above book, but there is something there. With this company not only do you have its family name, but the brand names of the products themselves, all of which possess strong nomenology value characteristics.

Take another share, a blue chip this time, which I held for a time last year, Scottish & Newcastle (LSE: SCTN). This time we have nomenology based on place names. Scotland!, Newcastle!, what ace places after which to name a brewery share. Once you appreciate nomenology you know it has to be good almost without looking at the figures. It just oozes value.

Imagine if it was called Neasden & Harlesden. Just doesn't have the same power does it? Even worse imagine if some director in the company got carried away after perhaps imbibing too much of its products and had commissioned one of those ludicrous outfits that charge a fortune to come up with a new name instead of S&N. If this had been done at the height of the dotcom boom they would, for their fee of a half a million give or take, come up with something like Pink Pussycat Breweries. Bang, straight away the value would have evaporated overnight. Such is the power of names.

This sort of thing actually happens, I am not joking. Consignia, formerly the Post Office, is in desperate trouble. It is no coincidence that that this unbelievably daft name for which I expect very serious money was paid to some "consultant" was chosen only recently, shortly before the company's problems were made public.

Another example is BT's demerged mobile phone company mmO2. Surely one of the most pathologically loony names I have ever seen for a major public company and this after the collapse of the tech sector. This is the sort of name that might have existed during the boom but these dumbos go and use a name like that after the collapse. What would be wrong with BT Mobile or something equally clear, rather than a name which sounds like the formula for some compound created by a mad scientist in the chemistry lab?

Yet another is Marconi (LSE: MONI) , the rump of GEC. The latter had a huge cash pile, the former has the precise reverse, a huge debt pile. Uncoincidentally, in the no doubt highly skilled process of converting literally billions of cash into literally billions of debt and damn near ruining the business, it goes and renames itself after a side dish in an Italian restaurant. They never learn.

But we can. For whilst there is no limit to the crass stupidity of some company directors in naming names, we can take more care. Nomenology is not the most important tool in the value player's kit, but don't underrate it. If you are wavering about a borderline value share consider its name. Does it reek of value, inspire confidence, or is it naff?

Remember it is no coincidence that as a rule value shares have value names, and the reverse is also true. Not every time of course but as a generality.