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.

With my upcoming annual trip to Germany (Oct. 7 – Oct. 21), some readers have asked how I manage my business affairs when abroad. Thanks to the advances in technology and communications, especially over the past 7 years or so, I am able to conduct business from any location as long as I have internet access.

My first step to freeing myself from being tied down to one office and becoming mobile was the addition of a high speed duplex scanner, which I invested in a few years ago. As a result, my office became 100% paperless, which allowed me to travel and have instant access to any and all client documents and files.

My laptop computer represents an exact duplicate of my desk top, so that placing buy/sell trades and producing the weekly StatSheet can be done effectively even from a dial-up connection. New account applications arriving at my office during my absence are being faxed to me for review.

With the 9-hour time difference, my responses to e-mails will be a little slower and a day late as will be the posts to my blog. During that 2-week period, I discourage phone calls and prefer e-mail communications.

Having done this trip for over 30 years, my biggest fear recently has always been a potential failure of my laptop. I have addressed that problem by signing up with gotomypc, which allows me to access and work on my office computer from any PC anywhere.

In a way, planning for my yearly trip is not unlike investing. You figure out what your goals are, select your investments and provide for contingencies in case the market goes against you.

The picture above shows some of the special plugs, converters and cables that will be my companion so that I can function in a world of different electrical standards.

Recently, a reader mentioned that he was using my M-Index to pick bottom of the barrel ETFs, namely real estate related beaten down indexes. My personal preference is to buy ETFs that are on the way up and not trying to catch the proverbial knife.

Especially, real estate appears to be the next super bubble, which may take many years to unwind. Case in point is the Chicago Mercantile Exchange’s (CME) extension of the futures market on the S&P; Case-Shiller Home Price Indexes from one to five years. Now, futures investors can make bets on where home prices will be as far out as 2011. Matthew Hougan of Index Universe featured the gloom and doom tables along with their estimated percentage change in real estate prices on the most recent futures sale on the CME:

Matthew makes 2 important points:

1. Read that chart carefully. Over the next 12 months, traders expect prices to fall in each of these cities by 5-13%. By November 2009, prices will be down more than 10 percent in every city save Chicago. By November 2010, prices will be down 20% in Miami and San Francisco, and 15%+ in San Diego, Las Vegas and Washington, D.C. It gets worse in 2011.

2. As a point of emphasis, remember that these are priced in actual dollars and do not take into account inflation. Factor in 3% annual inflation and the real value of these homes falls a further 11.5% by 2011, putting prices in Miami and San Francisco down 37% and 36% respectively on a real-dollar basis. Who said house prices never fall…

Of course, there is no guarantee that this will actually happen to the exact degree, because traders are notorious for being wrong. However, my feeling is that there is certainly some validity to this down trend given what happened with the dot com bubble, which took years to unwind.

My latest No Load Fund/ETF Tracker has been posted at:

http://www.successful-investment.com/newsletter-archive.php

The markets inched higher this week supported by a benign inflation report and positive consumer spending numbers.

Our Trend Tracking Index (TTI) for domestic funds/ETFs has moved to +5.47% above its long-term trend line (red) as the chart below shows:



The international index moved sharply higher to +3.87% above its own trend line, keeping us safely on the buy side.



For more details, and the latest market commentary, as well as the updated No load Fund/ETF StatSheet, please see the above link.

As a regular reader of my weekly StatSheet, you will have noticed the wide discrepancy in performance especially now that all funds and ETFs are ranked based on my M-Index.

Currently, the 2 top performers out of over 1,700 funds/ETFs are FXI (China) and SLX (Steel sector), which have been on an absolute tear not only over the past 4 weeks, but YTD as well. Take a look at a chart comparing the two:



Over the past 4 weeks, FXI and SLX have advanced a strong +13.24% and +19.86% respectively. YTD they are up +55.46% and +68.12%.

Is there more upside potential? While no one has that answer, in my advisor practice we have added both ETFs to our holdings within the last month in conjunction with our clearly defined exit strategy, in case the market turns against us. I invested about 10% of portfolio value each, and I am using a trailing sell stop point of 10%.

That means my risk is, if either ETF declines 10% immediately after my purchase, it will affect the portfolio by a negative 1%. Obviously, this did not happen, and we’re ahead at this moment.

My point is that you can take a position in a strong performer late in the game as long as you identify your exit point at the time of purchase and can live with the consequences if this trade goes against you. It’s a simple risk vs. reward equation.

To give you more current data to work with, I will occasionally publish a mid-week update of the ETF Master List. This one features all updated momentum figures through Tuesday:

http://www.successful-investment.com/SSTables/ETFMaster092507.pdf

Even though the markets paused yesterday, the lack of selling to me is an indication of underlying strength. Even on slow days, some ETFs will move up in the rankings while others will move down.