Step 1: Intro
Step 2: Get the Materials
The ink is a dry magnetic ink that's used to print checks and other documents that use magnetic character recognition (check out the wikipedia article at http://en.wikipedia.org/wiki/Magnetic_ink_character_recognition if you want to know more about this awesome technology). You can get a box of it on ebay for about thirty bucks (search for MICR or magnetic ink), and you can also get it at http://www.expresstonercartridges.com/okidata.htm. It's going out of style, so you'll have to poke around a little bit to find it. It's important to remember that you don't want a toner cartridge--just the toner.
Step 3: Mix It!
Step 4: Play With It!
Step 5: What Other People Do With It
You can make brakes with it by putting some fluid between a wheel's axle and hub. The wheel will spin freely as the fluid acts just as a liquid lubricant, but if you apply a magnetic field, you're suddenly putting a lot of friction of the wheel's rotation.
The good folks at the Univeristat Der Kunste Berlin made a ferrofluid display that can play Nibbles: http://www.digital.udk-berlin.de/en/projects/winter0405/main/hauptprojekt/snoil.html
I'm building on-the-fly braille translators and tactile interfaces by sensing if people are moving the fluid: http://www.artiswrong.com/ffb
(just pictures and movies, no explanation/writeup yet....)