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May 8, 2006 7:40 pm

James Altucher: Tune up your mind, relax and float downstream

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Let’s forget about stock prices, interest rate rises, oil shocks and the like for a second. We’ve got Mothers Day and Memorial Day coming up and then, after that, summer, beaches, family, and relaxing.

If you are worried about doing such a thing, remember the truism “sell in May and go away”. (The British add: “Come again on St Leger Day” – the day of a big horse race, which suggests they have other pursuits in mind). Is this a simple enough rule to follow it blindly in order to protect your money?

The reality is that the period from May to October usually does make money but not as much as the other six months. Since 1966 the S&P 500 has gone up 62 per cent of the time in those six months as opposed to 77 per cent in the other six months. In the past 15 years the S&P has gone up every year during the summer except for the bear market years 2000-02 and the LTCM crisis summer of 1998 (when it was down just 1 per cent from May to the end of October). But you can still reassure yourself that this implies we are due for reversion to the mean and stick to plans for a relaxing summer.

For now, more important than the stock markets is another critical summer activity – soundly defeating your friends and family in popular summer pastimes, such as Scrabble, poker, and chess. All of which have lessons for investors.

First, Scrabble. You want to dominate so fiercely that people think you have memorised the dictionary. Here are a few tips. Most important, know the 96 legal two-letter words, from aa to ut. (See below). And be prepared to just rattle off upon intense questioning, “well, of course I know what ‘xu’ means, it’s a form of Vietnamese currency” or “you don’t know that ‘ai’ is a three-toed sloth?” And, the icing on the cake, to guarantee you win every game, don’t forget qat, qanat, qaid, and qoph are all legal scrabble words.

In other words, most Scrabble players think their vocabulary is great (and most casual investors think they are good stockpickers – a key factor for any contrarian or value investor who wants to invest against the time) so doing a little basic homework is enough to get a strong edge. Oh, and don’t forget that “cwm” is a legal word.

Everyone wants to play Texas Hold ’Em these days, thanks to the popularity of poker on television. But while your friends and relatives are trying to imitate the greats on TV, you will be taking their money. The trick is – don’t ever bluff. Everyone wants to have fun. And poker is not a fun game when played properly. With correct play, only two to four hands an hour are usually playable. But if you only have a single evening to play with your friends then most people want to play many hands, and that involves bluffing. Only play hands you think are the best, bet your fullest, and watch as your bluffing friends bet until the end and lose all their money. If you have a pair of nines and they raise – save your money and just fold.

Similarly, in the stock market you should avoid putting all your hopes on an earnings call, or a court ruling or one customer deciding to stick, and so on. Stick with companies that have great balance sheets, strong cash flows and potential for growth instead of the stocks that can live or die on one FDA trial.

Chess is a hard one – I wasted many years in my youth mastering this game. The one simple trick if you are playing buddies who don’t take the game too seriously is – every move make sure all your pieces are protected by at least two other pieces. This was approximately the ultra-defensive technique of 1960s world champion Tigran Petrosian, who was famous for rarely losing a game. For the stock market, find stocks that have a “back door” if your initial investment thesis didn’t work out. For example, if you are buying a stock based on a merger arb deal make sure if the deal falls through that the company has enough asset value to still support its current stock price or higher.

FTWealth Web Special: The legal two-letter words in Scrabble are:

AA AW DO FA IT MY OP SH WE AD AX EF GO JO NA OR SI WO AE AY EH HA KA NO OS SO XI AH BA EL HE LA NU OW TA XU AI BE EM HI LI OD OX TI YA AM BI EN HO LO OE OY TO YE AN BO ER ID MA OF PA UN AR BY ES IF ME OH PE UP AS DA ET IN MI OM PI US AT DE EX IS MU ON RE UT

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