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8:30 AM EST Friday, February 29, 2008: I ask myself what have I've learned (if anything) from the tumult of the last several months? The one overwhelming lesson:

Before I invest in anything I need to ask: "What's the worst thing that can go wrong?"

The worst thing is losing 100% of my money.

If you and I focus on 100% potential loss, concepts of what is risky suddenly change dramatically from the conventional wisdom.

The ultimate reversal: In November I recommended everyone get out of equities. In the main I did. And I put the money in "safe" auction rate preferreds, which are backed by "safe" municipal bonds.

Had I stayed in equities I'd be down by maybe 8% -- I was heavily in index funds. Now I'm in "safe" in auction rate preferreds, I'm staring at 100% loss on my money.

Now I know in my heart of hearts that I have not lost 100% of money. When the secondary market for these things opens in March, I'm sure some smock will pay me 50% on my money.

To lose 50% on a "safe" muni bond investment versus 8% in the market makes me wonder if I'm not a total moron and a total panic merchant. (See Swensen article below).

The second thing I have learned: If you don't have control (i.e. it's not your business you have your money in), then you'd better be diversified. Diversification is the only way to protect your ars against black swans. (We've had a lot of them lately.) Fortunately, I'm still in commodities (gold, silver). Fortunately I'm still in Australian mining shares. Fortunately, I still own some emerging market index funds. Fortunately, I still own some good real estate. And fortunately, I've still got some cash.

So, the family's life style won't suffer. What will suffer is my psyche, as I berate myself for being an idiot and allowing my broker to put me into auction rate preferreds.

Sub-prime mortgage mess explained: By now you've seen the stick figure PowerPoint presentation on the sub-prime mess explained. If you haven't, you must. Click here. You'll need PowerPoint or a PowerPoint viewer. There's a free one on Microsoft's site.

Auction rate preferreds (ARPS) Owner Strategy: No solution yesterday. No progress. Every issuer -- from Nuveen to Eaton Vance to BlackRock -- is following their Vanishing Cream Strategy -- named after the teenage girl who rubs vanishing cream on her stomach hoping her pregnancy will disappear. The lawyers are circling the carcass. It's too early for them. Right now all of us who were sold this garbage need to follow Newton's Maximum Research, Maximum Noise, Maximum Pressure Strategy. To wit:

1. Get evidence. Get your hands on all the brochures that talk about these things being cash or cash equivalents. Good words include "Purchase or sale through weekly auctions" and "A place to park cash before choosing your next longer-term investment." Both these quotes came from a Nuveen brochure. You need to find words from your issuer and your broker. Copies of "evidence" were also on yesterday's site. When you find something, email me a copy, please.

2. Tell your broker you hold him responsible. And you expect him to apply pressure up and across the chain. Brokers are offering to lend their best clients money against their now locked-up ARPS. But the loans are largely unacceptable. They're usually for finite periods -- typically a year. And they make no provision for renewal. You could be up the creek without a paddle in 12 months -- owing your broker money and no way to pay it. Since he's only lending you 50%, but taking your entire ARPS security as collateral, he could grab your security and sell in a firesale for 50% of its alleged worth. And you'd have no recourse since that was the deal.

3. Tell your issuer you ultimately hold him responsible. I gave you a great Nuveen name in yesterday's column -- Tim Hurd. Email him your concerns if you own Nuveen stuff. Do your own research and find the big exec responsible at BlackRock, Eaton Vance, Van Kampen, etc. etc. Eaton Vance has conference calls next week on this stuff on this stuff. The first one is Tuesday March 4 at 3:00 PM EST. Call 1-866-562-3356. Use the access code 37152796.

When you call / contact / email your issuer, refer to their own marketing brochures and their own words that talk about the preferreds being like cash, being a "good place to park short-term cash" and all their other words. See yesterday's column for examples.

4. Write letters to your local attorney-general and governor. Some are already investigating. Some need to be prodded. But these people need to know that our April 15 tax monies are tied up in these ARPS. If you personally know people in power, contact them directly. Explain to them that this does not need a government bailout. It needs government pressure and some bending of government rules. After all, according to the same Nuveen brochure, "every dollar (of my investment) is backed by at least twice that amount of fund assets." The assets are there. They just need to be loosened up. There are a zillion solutions, including the issuers offering to buy back our shares, just as mutual funds do every day.

5. Call your financial editors. I'm in touch with Jim Stewart who wrote that recent piece on ARPS in the Wall Street Journal. He wrote the piece called,"Risks of a 'Safe' Investment Are Found Out the Hard Way." And he explained, "They were sold as a liquid, safe, slightly higher-yielding, tax-exempt alternative to money-market funds. I should know, since I bought some. For several years I've been parking a good part of my cash in auction-rate preferred shares."

Every owner of ARPS I've spoken with (and there are many) is staggered that our plight has attracted so little attention in the financial press. This morning I emailed Mr. Stewart,

We need to keep writing about these things. Without pressure, Wall Street will never solve this. There are enormous consequences right through the economy - from homes that won't be bought, from businesses that suddenly have no working capital for seasonal needs, from businesses that won't be bought, from taxes that won't be paid, from personal bankruptcies that will be filed, to job losses (my Goldman salesperson got canned two days ago). But frankly, the worst part is the loss of confidence in "the system." There is a myth that these things were only for rich people - not for working stiffs (like you and I). We need to keep writing and encourage others to also.

6. Send me an email explaining your plight. . Include your phone number. Every conversation I have produces more evidence, more strategies, more ideas. Obviously, I'll keep your name strictly confidential. Believe me, we're in this together. And together we're going to have to solve it. I have $4.5 million of Nuveen ARPS. I'm motivated. I didn't work over 40 years to have my money lost because of Wall Street arrogance, laziness, incompetence and irresponsibility.

P.S. A good place to read investor comments is on SmartMoney's web site. Stewart's piece also appeared there. And a bunch of investors dropped notes.

Keep It Simple, Says Yale’s Top Investor. In February 17's New York Times, reporter Geraldine Fabrikant, ran an interview with David Swensen, one of the world's top investors.

David F. Swensen manages investments for the $22.5 billion endowment at Yale

Her article is worth reading as a piece of sobriety in today's turbulent markets.

IT has been a time to worry even the savviest investors. The credit markets have been in a crisis, the domestic stock market has been shaky and overseas markets haven’t been much better.

What should an individual investor do?

Don’t try anything fancy. Stick to a simple diversified portfolio, keep your costs down and rebalance periodically to keep your asset allocations in line with your long-term goals. That is the advice of David F. Swensen, who has run the Yale endowment since 1988, relying on a complex strategy that includes investments in hedge funds and other esoteric vehicles. The endowment earned 28 percent in its last fiscal year, which ended June 30, beating all other endowments. It finished the year with $22.5 billion.

For most people, he recommends a very basic approach: use index funds, exchange-traded funds and other low-cost instruments, and stick to your long-term asset allocation — even when the markets are in tumult.

Don’t be distracted by market forecasts, he said. “You have to diversify against the collective ignorance,” he said. “I think nobody is in a position to react to these big macro-issues. Where is the dollar going to be or what is G.D.P. growth going to be in China? For every smart person on one side of the question, there is another smart person on the other side.”

For most individual investors, he said, copying the strategies of institutions like Yale is virtually impossible: big investors have access to fund managers and arcane strategies that are beyond the reach of most people.

“The only people who should get involved are sophisticated individuals who have significant resources and a highly qualified investment staff,” Mr. Swensen said.

“Most people do not have the resources and time to pick market-beating managers” of hedge funds, private equity funds or funds of funds, he said. And he said that the techniques used by hedge funds often result in higher taxes than those of index funds.

So he advocates another approach, which he outlined in the book “Unconventional Success: A Fundamental Approach to Personal Investment” (Free Press, 2005). He proposes a portfolio of 30 percent domestic stocks, 15 percent foreign stocks, and 5 percent emerging-market stocks, as well as 20 percent in real estate and 15 percent each in Treasury bonds and Treasury inflation-protected securities, or TIPS.

The real estate investment can be made through real estate index funds. Though the real estate market has declined and your portfolio is below its target allocation to it, he said, don’t try to time the market. Go ahead and rebalance because no one really knows where the market’s bottom is.

Diversification will buffer a portfolio from declines in specific asset classes. For example, he said: “If the dollar declines dramatically, you have foreign and emerging-market equities. And a declining dollar may well be associated with inflation, but a diversified portfolio would include TIPS,” to provide a hedge. “That means if any of these scenarios play out, an investor has sizable chunks of his portfolio that protect against them,” Mr. Swensen said.

When possible, he said, rebalancing should be done in a tax-sheltered account, like an I.R.A. or a 401(k), to avoid tax liabilities. “When you are putting fresh money to work,” he said, “you put it in an asset class where you are underweight and take money out of a class that is overweight.”

He says it is fruitless for individual investors to pick stocks. “There is no way that an individual can go out there and compete with all these highly qualified and compensated professionals,” Mr. Swensen said.

HE criticized the approach of Jim Cramer, the CNBC host, who encourages investors to trade stocks in strategies that Mr. Swensen says cost heavily in commissions and taxes.

“There is nothing that Cramer says that can help people make intelligent decisions,” Mr. Swensen said. “He takes something that is very serious and turns it into a game. If you want to have fun, go to Disney World.”

Brian Steel, a spokesman for CNBC, responding on behalf of Mr. Cramer, said Mr. Cramer “had a long history of success as a trader and fund manager.” He added that Mr. Cramer is a proponent of long-term investing and thorough research.

Mr. Swensen says investors should forget market timing entirely. Once an individual sets up a program, it should be rebalanced quarterly or semiannually, he said, “but it should be disciplined.”

When the markets decline, try not to pay attention, he said. “Let yourself off the hook,” he said. “If you pursue the sensible long-term policy, look at it over a 5- to 10-year period. Don’t look at five months.”

If all this makes sense to you, you should pick up a copy of the new book "The Dick Davis Dividend." Davis' focus is index funds and he argues strongly for them. I like his book. There's some excellent advice in it. And, to his credit, he even quotes me on occasion, proving he's smart enough to know I respond very positively to flattery.

Drinking with a Redneck Girl
A Mexican, an Arab, and a redneck girl are in the same bar. When the Mexican finishes his beer, he throws his glass in the air, pulls out his pistol, and shoots the glass to pieces. He says, 'In Mexico, our glasses are so cheap we don't need to drink with the same one twice.'

The Arab, obviously impressed by this, drinks his beer, throws it into the air, pulls out his AK-47, and shoots the glass to pieces. He says, 'In the Arab World, we have so much sand to make glasses that we don't need to drink with the same one twice either.'

The redneck girl, cool as a cucumber, picks up her beer, downs it in one gulp, throws the glass into the air, whips out her 45, and shoots the Mexican and the Arab. Catching her glass, setting it on the bar, and calling for a refill, she says, 'In America we have so many illegal Mexicans and Arabs that we don't have to drink with the same ones twice.'

Last night's Black Swan.
After a long night of making love, The guy notices a photo of another man,

On the woman's nightstand by the bed. He begins to worry. 'Is this your husband?'

'No, silly,'

She replies, snuggling up to him.

'Your boyfriend, then?'

'No, not at all,'

She says, nibbling away at his ear.

He inquires, hoping to be reassured.

'No, no, no! You are so hot when you're jealous!' She answers.

'Well, who in the heck is he, then?'

She whispers in his ear

'That's me before the surgery.'

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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