Motley Fool featured an article titled “Beat the Eggheads at Goldman Sachs,” which shed some light on how the quantitative approach to investing works. It’s entertaining reading especially once you realize that top pros in the business were getting slaughtered in August.

Yes, August was a difficult month with the markets pulling back, but the main reason things went so bad for the quant folks is the use of extreme leverage to enhance returns/losses. Sure, you may have used enhanced ETFs (up to 200%) yourself, but I am willing to bet that you only had a portion of your portfolio exposed and that you watched your position very carefully by having an exit point in place.

As the article states, some of the “quants” used 6 times leverage on 100% of the portfolio, apparently with no stop losses, so even small market fluctuations had a huge impact on gains and losses alike. If you want to find out how not to invest, this article is for you.

Morningstar re-launched its Stewardship Grades for Mutual Funds a few days ago designed to reward the industry’s best stewardship practices. So far, it has shown Clipper funds (CFIMX) to be a standard bearer for corporate governance.

OK, I am all for improvements in this area, but I don’t select a fund just based on these new criteria. Take a look at CFIMX, which has net assets of over $3 billion. Year-to-date (as of 8/31/07) it has a negative return of -1.09% according to Yahoo Finance.

Hmm, let’s assume for a moment that the average investor has $50k invested in this fund. That means, with over $3 billion in assets, there are about 60,000 investors who are exposed to a fund with A1 corporate ethics, whose portfolios have gone down in value.

Comparing this fund with the S&P 500, and one of our current holdings, WLGYX, and you can clearly see that this is, to say it politely, not a fund you want to own. Take a look at the chart:




To be clear, out of 117 Large Blend funds in my data base, this one ranks in the bottom 5. The top ones show a YTD return of around +19%.

My point is simply that it is noble to support causes you believe in. However, it is important to distinguish between being engaged in worthwhile endeavors and making decisions which may jeopardize your portfolio growth along with your future retirement.

With Monday’s great up move to start the final quarter of 2007, I have updated the ETF Master list with yesterday’s closing prices to give you more recent data to work with. You can download the file at:

http://www.successful-investment.com/SSTables/ETFMaster100207.pdf

Despite the modest pullback yesterday, the uptrend remains intact with our domestic Trend Tracking Index (TTI) now having advanced to +6.46% above its long-term trend line while the international TTI jumped to +5.10%.

Whenever markets pull back, as they did yesterday, I look at my data base to see which no load funds/ETFs go against the grain by staying even or actually going up.

In the name of diversification, I always like to own positions that are following an uptrend strongly, yet have the ability to resist sell offs. Sure, it’s what every investor is looking for. It worked for us yesterday, as most of the super stars of the recent past gave back some gains, but our position in XBI (Healthcare) actually gained a strong 1.73%.

I have noticed a reoccurrence of this over past few months, as the S&P 500 pulled back, XBI advanced. Take a look at the chart:

Just about after the August sell off, a “disconnect” between the S&P 500 and XBI occurred, which was just about the time we entered this position. While no one knows if this will continue, it has worked well for my clients’ holdings over the past couple of months.

This is not a recommendation for you to follow suit and jump in, but merely a suggestion for you to do your own research to see if this ETF makes sense to you.

MarketWatch had a feature story titled “Some managers know how to let you sleep at night,” which identified 5 no load funds that allegedly capture much of the gains in good times without suffering devastating losses in down markets.

It’s likely you have heard of most them, and I have even used some when appropriate. They are good performers, not necessarily in the top, but very solid when used at the right time. The article makes you believe that these 5 can be held without regards to market direction, which, of course is a fallacy. Additionally, some have not been around during the past bear market, so they are not necessarily battle tested.

Take a look at a long term chart:

As you can clearly see, the performance varies widely with FAIRX leading the pack. My point is that these funds could be worthy of your consideration (neither I nor my clients have currently any positions) when the market gets out of the doldrums and the trend heads back up.

However, if we are crossing into bear territory, I suggest, as I always do, that you get out of your positions and move to the safety of the sidelines (money market). The simple fact is that in a bear market all equity funds will decline, some more some less. As many have learned during the 2000 to 20003 disaster, there is no safe haven other than cash.

The Labor Day weekend always has a special meaning to me. Tomorrow, it marks the day I arrived in the United States 34 years ago, as a 24-year old with a Masters degree in engineering eager and ready to take on the world.

It took a few years to get acclimated and integrated into a society that is unique in many aspects. No doubt, I had my struggles with language, work and trying to find my own way. I encountered nothing but helpful and encouraging people that assisted me in getting used to a lifestyle far different than what I was used to.

Back then, as a newcomer, I remember a few things that struck me as being very different from the society I grew up in. Here are a few that stuck with me, but there are many more.

One, the lifestyle that many people had by owning their own home at a fairly young age as well as the latest cars that everyone drove. A little later, I learned the secret word to such immediate worldly possessions: Credit. Contrary to my upbringing, the idea here was immediate gratification as opposed to save first and buy later.

Two, the incredible flexibility the job market offers. It allows people at any stage in their lives to change gears and get involved in a different profession if they so chose. Contrast that to Europe, where your professional direction is chiseled in stone the moment you finish an education. Changing gears in mid-life is to this day extremely difficult.

Three, I have encountered people from all walks of life while being involved in my favorite activity, namely tennis. I’ve played in private clubs and on public tennis courts and I’ve noticed a phenomenon that you will not very likely see in Europe: No separation of classes. I have played with multi-millionaires and unemployed construction workers, it did not matter; it was about the game and not your financial net worth.

Four, money does not equal education. This topic comes up at times when I talk with family in Germany. You can rest assured that for the most part a wealthy individual in Europe is also very educated by having a couple PhDs and maybe a doctorate. It’s the way that society works: You have an education and better job opportunities are available. There is no way that you can become the CEO of BMW and not have a doctorate. This is in obvious contrast with the United States where opportunities abound for everyone no matter what the educational background. It’s entrepreneurship at its finest and there is no place like it anywhere else.

Sure, just like any other country, the U.S. has its problems as well. Some will be addressed some won’t; it’s just how it is. However, I am sick and tired or listening to people complaining how bad things are. My standard answer for 34 years has always been “If you don’t like it here, you are free to move someplace else. Try another country. I bet you won’t make it for a year.”

There is a reason that a lot of foreigners want to move to the United States. It’s still the best game in town because there is no place like it anywhere else.

Recently, MarketWatch featured a story titled “Muni bond funds hit by perfect storm.” There is no better way to describe that during August’s credit crisis all income investments along with tax free muni funds were affected.

The sudden rise in yields caused many large and well known muni bond funds (and CEFs) to drop in price and become another fallout victim of the subprime debacle. Contributing to that down turn was the fact that some Hedge funds engaged in a strategy called muni arbitrage during which the traders try to take advantage of price differences between muni bonds and other type of debt such as Treasuries and corporate bonds.

While that in itself may not have created too much of a problem as prices went against the traders, using leverage was again the culprit that magnified the negative outcome. It’s too early to tell if there is more bad news to hit this sector.

While income investments are designed to be held long-term, there is a point when action needs to be taken if prices slip too much. Why? Because you simply don’t know if a turn around is on the immediate horizon or if prices will continue to deteriorate.

For my clients (and for myself), I liquidated those positions that had performed the worst and kept those that had held up reasonably well. While this puts us in larger cash position than I would like, I feel that prudence is more important than feeling like you’re living on the edge. We may jump back in if those markets calm down.

My point is that market volatility has now also spread to conservative income investments. This means that there is virtually no investment orientation, other than cash, that is immune from sharp price changes caused by unpredictable and uncontrollable factors.

I think Al Thomas was the one who recently said that “sometimes it is better to be out of the market wishing you were in than being in the market wishing you were out.” Truly words of wisdom.

You may think that investing in the wide variety of ETFs available like iShares, HOLDRs, SPDRs and others is all the same, but there are differences which can affect you long term.

It may not matter to you if you manage your own money, because you will find out any limitations as you place your order. For example, you can buy any odd number of shares when investing in iShares or SPDRs, but you can’t purchase odd lot shares (less than 100) when using HOLDRs. It has to be a minimum of 100 shares or a multiple thereof.

A problem can occur when you are using an investment manager. How?

He will usually purchase shares based on a percentage allocation of your portfolio. To start, he will place a block trade to purchase a total number of shares for all of his clients that he wants to be invested in a particular HOLDR ETF. He then allocates as per percentages. For example, from the block trade he decides to allocate 10% of portfolio value to your account. Let’s say that represents 187 shares. No problem there.

Let’s assume that you leave this investment manager to continue handling your own investments. One day you decide to sell the 187 shares of the HOLDR ETF. Unfortunately, you will find out that you can’t. To be clear, you can sell 100 shares, but since odd lots are not allowed you will be stuck with the remaining 87 shares.

How do you get around this? Be sure to have your investment manager liquidate any HOLDR ETFs in your portfolio before you depart. He will want to do that anyway, because otherwise, he will be stuck with an odd number.

It pays to know the rules to avoid any unpleasant surprises.

With Wall Street’s big guns having returned from their summer vacations, it was time again to push the buy and sell buttons. Today, despite low volume and short covering, the sentiment was bullish.

Our Trend Tracking Indexes (TTIs) are now positioned in regards to their long term trend lines as follows:

Domestic TTI: +3.65%
International TTI: +2.51%

I can no longer ignore the fact that the international TTI has now moved solidly above the line so, effective tomorrow, Wednesday, I will move back into that market. Depending on portfolio size, I will use an allocation to broadly diversified international funds/ETFs of anywhere from 15% to 30%.

As always, I will set my trailing sell stop at 7%.

Continued bad housing news, and lingering credit problems along with dimmed hopes for an interest rate cut, pulled the major market indexes lower. Our Trend Tracking Indexes (TTIs) retreated as well but are remaining above their respective trend lines as follows:

Domestic TTI: +3.34%
International TTI: +1.59%

Today, I ventured back into broadly diversified international funds, as announced yesterday. Because of the proximity of the International TTI to its trend line, I will use the 7% sell stop point of my new fund holding as my exit strategy. This will allow me to give the market some room to move and will hopefully avoid a whip-saw signal in case the International TTI heads south again.

I will keep you posted as to any changes.