hey_it's_that_dog
benevolent sexism
Not that you're biased
How about a variation on the phone text entry model? Use the analog stick to point to 12346789 (centred is 5) and just press A 1,2 or three times to enter a letter. You have the benefit of a recognisable interface (phone keypad), a familiar input method (text message entry), and only one action button so you arent trying to decode what colour does what
Personally, I absolutely hate pressing a key multiple times to scroll through even a small selection of characters to input.
Also, you don't have to think about color at all with Valve's solution, you can just think about position. I don't see what could be more easily processed, especially for an experienced gamer, than that.