Wednesday, November 29, 2006

The Ewwww! Factor

Let me toss a list your way and see if you can figure out the connection among these items:

* Michael Jackson
* Michael Richards
* The proposed O.J. Simpson book
* The Republican Party
* Pee Wee Herman

Quite simply, if you asked my teen-aged children or their friends about any of the above, one of the first words you'd be likely to hear is "Ewwww!"

"Ewwww!" is a very special term. It doesn't connote dislike. It expresses disgust. Complete and utter disgust.

Someone vomited on the school floor? Ewwww!

That kid who never used deodorant in junior high school? Ewwww!

The creepy teacher who looks at girls the wrong way? Double Ewwww!

The thing about "Ewwww!" is that, for all practical purposes, it is a final verdict. Once something is "Ewwww!", it never turns around and becomes "Cool" or "Cute".

In other words, once you've hit the "Ewwww!" point, you're toast.

Just ask the Republican Party in the wake of Congressional Page scandals or Michael Richards after his very un-Kramereque racial diatribe.

People can bounce back from dislike or even distrust. But not Ewwww!

Having spent years in Upstate New York, my wife and I were spoiled by shopping at the wonderful Wegman's grocery chain. Now, we live outside Chicago and dislike our area groceries. But we shop there. One day, however, we visited a store that had dirty floors and unkempt displays.


We left and never returned. And never will. That's the way it is with Ewwww!

You're probably wondering what this has to do with investing. My hunch is that it might be quite relevant.

You see, we are hard-wired to experience disgust. The facial expressions that express disgust in one culture are universally recognized in other cultures. And many of the things that disgust us also disgust people around the world: from feces to spoiled food.

It makes evolutionary sense. Memories of disgusting experiences keep us away from what is bad for us. Some of the earliest studies of single-trial learning in animals (i.e., learning that does not require repeated practice) tested memory for disgusting food. It appears that dogs and mice have their own versions of Ewwww!

What makes humans different is that they can attach disgust to social experiences, not just physical stimuli. That means that companies and their products can evoke the Ewwww! response. And that means that we have an interesting pairs trading strategy: short the Ewwww! stock and go long the correlated, acceptable company.

If I had listened to my kids and their friends, for example, I'd be short Wal-Mart ("Ewwww!") and long Target (see above). No one, but no one, among their peer group would be caught dead in Wal-Mart. But Target? Those Choxie candies are cute...and how about those flip-flops on sale?

Come to think of it, the Ewwww! factor would have long ago had me short the American autos ("Ewwww!") and long Toyota/Lexus.

And I'd have been short Dell ("Fire in my laptop??? Ewwww!") and long H-P.

The great thing about "Ewwww!" is that, because it's hard-wired, it doesn't turn around in a day, week, month, or even year. Sometimes it doesn't turn around ever.

I guess you could say the "Ewwww!" factor is the opposite of Warren Buffet's investment strategy. He would have you buy the companies you directly experience, understand, and really like. Trading by "Ewwww!" has you shorting what people absolutely can't stand and buying its favored alternative.

Just the other day, we stopped off at a local eatery known for its fresh fast food.

Earlier, we had passed a McDonald's, and I offered to stop. Daughter's verdict: "Ewwww!"

No longer cool to be part of the "fast food nation".

Another family trip, another investment idea percolating.