CNBC recently reported that Bear Stearns has told investors in two hedge funds that speculated in subprime mortgages that the funds are now essentially worthless.

Hmm, while the final numbers still have to be compiled, essentially that means that the investors have lost their entire investments. Gone! 100% loss! Out the window! Down the drain!

This reminded me of an informal research project I did a few years ago among some of my 50 something friends and acquaintances. My goal was to find out about their biggest blunders when it came to investing—investing in any kind of asset.

The answer was surprising. It turned out that the biggest losses were not obtained by picking a bad stock and holding it too long, or selecting the wrong kind of mutual fund. On the contrary; the biggest losses came from investing in newly formed companies with the promise of an imminent IPO and the subsequent riches to be derived from that. Others invested in companies with a hot new product in the developing stages, which never materialized.

In other words, had these people invested in listed financial products on the stock exchanges, and not given up control of their money, they would have been in better financial shape at this time and most likely would have avoided losing 100% of their investments.

So, how much did they lose? Based on my computations, the average 50 something lost $125k on various ventures! While most of them were not hurt by these poor choices, it’s still a large amount to part with. If you had this money available and compounded it conservatively for 20 years, you’d have in access of $500k.

The lesson learned is that, if you’re on your way to investing for your retirement, and don’t have outright risk capital available, stick to the financial markets. Even making a mistake here and there may not nearly be as devastating as a 100% potential loss in an illiquid venture, where greed can easily overwrite common sense.

I am about 70% through reading Thomas Friedman’s book “The Word Is Flat.” It’s a fascinating research project about how the world has become a totally interconnected place where every businessman can utilize the resources and services of anyone else.

He specifically hones in to the special relationship the U.S. enjoys with India. I was astonished to learn how many businesses outsource services and tasks to Indian companies. That includes major banks, Wall Street firms, tax preparers, computer manufacturers and many others.

There are several reasons for this affinity. Bangalore, India has developed a massive infra structure of domestic Indian companies that are all set up to service U.S. based businesses. For example, if a Wall Street firm needs to have a presentation project done, they can simply upload the details at day end Eastern Time to a service in India specializing in that sort of thing and have it back in their e-mail inbox by the next morning.

Because of the time difference to India, they work while we sleep. Of course, there are many service firms that work 24-hour shifts to allow for simultaneous work interaction with the U.S.

The only reason this is possible is because India has an extremely well educated, bright and English speaking work force that is eager to work. The pool of resources, Friedman says, is absolutely enormous. Indians get paid a very good wage to work for an outsourcing company, and it is a well respected position.

For an American firm, it’s a no-brainer. You get an equivalent of an MBA or in some cases even a PhD, who will work for an hourly wage that is considerably less than what they would be paid here in the U.S.

To verify that information, I contacted some of the outsourcing firms Friedman mentions in his book. I found that administrative/marketing assistants will work from $8 to $15 per hour, while the services of a computer programmer range from $10 to $30 per hour.

When I grew up back in the former East Germany, I remember my parents always harping on me to “finish my dinner because there are starving people in India.” You may have heard that too, but recently I heard this quote being changed to parents telling their kids “finish your homework, because there is somebody in India who wants your job.”

It’s a fascinating book that describes the enormous impact of a continuously flattening world. It’s a must read for everybody because Friedman also explains the upcoming “Chinese revolution” in terms of what happens when their massive educated workforce, and soon to be English speaking, gets unleashed and involved in world markets. Among many other topics, he further elaborates what you must do to protect your job from being outsourced.

If you haven’t read it, I recommend it; it will do more for your understanding of how the world operates nowadays than the daily hyped up news barrage.

A few days ago, MarketWatch had a story featuring the editor of the Mutual Fund Strategist Newsletter, Holly Hooper-Fournier, saying that 16 of the firms 17 timing models are “currently issuing a buy signal.”

She further noted that, unlike some timing models, the ones used by her firm remain bullish on international and emerging markets investments.

Hmm; I find it hard to believe that any model would issue a buy signal at this juncture in the market given the run up we’ve had over the past 10 months. While I don’t speculate on future market direction, I think that, looking at the big picture, we are closer to a market top then a market bottom.

The danger is that the investing public (who reads stories like this) looking for a point to enter the market, might be tempted to throw caution to the wind and put all available investment dollars to work at once.

A smarter way would be to use my incremental buying process and only expose one third of the total portfolio at first and, upon a 5% gain, commit another one third increment and so on. This will help avoid to possibly buying in at the top of the market and, when used together with my recommended sell stops, will reduce the risk tremendously.

Just because a newsletter you follow issues a buy signal does not mean you have to jump in 100%. Commit a portion you are comfortable with and, if things go your way, add more. You’ll definitely sleep better at night.

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

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

The bears got the upper hand this week and pulled the major indexes off their lofty perch.

Our Trend Tracking Index (TTI) for domestic funds/ETFs is now positioned +4.58% above its long-term trend line (red) as the chart below shows:



The international index has now moved to +7.21% above its own trend line, as you can see below:



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

It’s no secret that new ETFs are being brought to the market as fast as sponsors can obtain regulatory approvals. I have touched on this before that having all these investment choices available does not mean you should jump on the band wagon and buy any new offering.

MarketWatch had a piece on the pitfalls and potential problems when investing in markets that are thinly traded. For one, if an ETF has trouble attracting enough inventors, you can be sure that the expense ratio will be higher. Additionally, the bid-ask spread may widen to a point where liquidating a position may turn a profit into a loss.

I for one will stick to using only well traded ETFs with heavy volume so that liquidating a large position won’t be a problem when the markets head back south eventually.

As I mentioned in my weekly updates, there always seem to be a variety of ever changing factors that have driven this market to its current highs. One, we have not touched on, is the increasing debt big and small investors are using to leverage their investments.

The WSJ reported that margin debt, jumped 11% to $353 billion at NYSE in May, up from nearly $318 billion in April.

For obvious reasons, I’m personally not in favor of using leverage to increase returns. However, this risky technique has enabled many large players (hedge funds) to leverage their buying power by not just acquiring more stocks but also swallowing up entire companies. This is simply an indication that rampant speculation is alive and well.

To make it easier to borrow money and reduce the chances of a margin call, the NYSE launched a pilot program with eight brokerage firms that allows them to assess the portfolio as a whole. So, if one part of the portfolio goes down but the other part goes up, the investor won’t necessarily get a margin call.

Under the financial industry’s old rules, investors who wanted both to buy shares in a company and use so-called options contracts on that stock, to guard against an unexpected drop in the value of those shares, would have to put up separate collateral for both the stock and the option. If the shares dropped in value, the customer might get a margin call, or request for additional collateral from a broker, to cover the price of the shares, even if the value of the option had increased.

With any type of leverage, a normal market correction can easily turn into disaster if many investors have to cover margin calls, which will accelerate selling and worsen the downside effect. The longer this goes on, the worse the eventual outcome.

That’s why you continuously hear me harping on the importance of following a sell stop discipline. When the market trend reverses, leverage will be a killer, while at the same time the exit doors will get very crowded.