Stock symbols have been around almost as long as stocks themselves. Today, stock symbols are used to trade things that aren’t even stocks because the convenience and acceptance of exchange traded stock symbols. So-called Exchange Traded Funds (ETFs) are the most common example of “stocks” with their own symbol that are not stocks but other things such as commodities, options, or groups of stocks.  There are a dizzying and growing number of such investments.

But, back to CUSIPs. If you are a bond trader, it’s all you got. To trade bonds, you use CUSIPs not something else that could cause confusion. Bonds aren’t typically traded by average investors, so the Pros haven’t created any system to make it easier to “market” them.

Wall Street’s Namespace

To make trading stocks easier Wall Street created the stock symbol. These are also registered along with its own CUSIP. Like any other marketing brand, stock symbols are important because they provide a means for potential investors to not only remember the company, but to communicate what the company is about.

Fortunately, stocks exchanges go to great lengths to keep stock symbols unique to eliminate confusion. In technology, this is a called a “namespace”, meaning that stock symbols are unique across the NYSE, NASDAQ, and AMEX exchanges. Overseas exchanges have their own namespace, so when you type a symbol, you may get more than one result to account for other exchanges. Often, the exchange itself is used as a namespace identifier. Here’s an example:

TSE:TD

NYSE:TD

Both of these stock symbols are the same bank, Toronto-Dominion Bank, just on different exchanges (the New York Stock Exchange and the Toronto Stock Exchange). So, when you want to invest in a company make sure you get the exchange right because many brokers today allow you to buy investments on other exchanges.

Fortunately, there is no stock symbol TD on the NASDAQ exchange! To eliminate any possible confusion, the namespace prevents this from happening, at least in the U.S stock exchanges.

Wall Street’s Waterfront Property

By far the most coveted symbols on the stock exchanges are the one letter stock symbols. Not only are there only 26 of them, but as mentioned above they are unique across the U.S Exchanges. Facebook just applied for an IPO, which will put the social network among the public sphere of stocks. Unfortunately for Facebook, it can’t have the stock symbol that would make the most sense (F). This one is already taken by Ford Motor Company (F). What will they select? It remains to be seen, I would guess something like FB. (I doubt that there will be a K in the symbol so that it doesn’t cause confusion with that famous four letter word!)

Wall Street’s Used Car Lot

There are a class of investments that have stock symbols, are registered but do not have a uniform symbol representation with brokers. I’m talking about preferred stocks. This is where CUSIPs come in handy because you can always contact your broker with the CUSIP to make sure you get the right investment (the CUSIP will be available from the company itself, in its prospectus or SEC registration – another place I go is to QuantumOnline for specific investment info).

Preferred stocks are stock/bond hybrid investments. Wall Street doesn’t know whether to consider these investments stocks (which have symbols), or bonds (which use CUSIPs to trade).

Here’s an example of confusion I had just this past week. I wanted to invest in the preferred stock, Health Care REIT, Inc. Pfd Ser D 7.875%. If you try to buy this on TradeKing, you will find that they have two different symbols depending on whether you research it or want to trade it!

Researching Symbol: HCN.PRD

Trading Symbol: HCN.D

Come on Wall Street, can’t you fix this so that they work like common stocks?!?

So, keep in mind that you can always use the CUSIP to find your investments.

I can argue that some things are bad advice, say, using a home equity loan to fund consumer purchases that might be open to legitimate question to others. But, I think there are some things that really are bad advice, no matter how you look at it. Here are a few things that I found from governments, no less, that are truly bad advice…

Lottery As A Retirement Plan

Lotteries are run by state governments. There are a few really big games which are multi state lotteries, MegaMillions and Powerball. The jackpots on these two games can get quite large because the odds of winning are so low. It’s because of these low odds that they frequently rollover creating the opportunity for a better than odds bet. I previously wrote about why you should take this bet when it occurs because it’s one of the few cases in legalized betting where you can get a better than odds bet (the payout is larger than the odds).

However, when you go to the MegaMillions website,  you see what I have copied here below. They offer up the lottery as a means to Save For Retirement or Buy a Dream Home, among other things! Are they kidding, does anyone actually think that the lottery is a means to achieve these goals?

I wonder if anyone actually believes this. I hope not. This is truly bad advice.

Social Security Is A Piggy Bank

You have to be a kid to get this advice, but no matter it’s still not only bad advice it’s an outright untruth. On the ‘KidsPlace’  at the Social Security website, they offer simple information to explain to kids what Social Security does, I’ve copied a sample of it below here.

This sounds great. It makes you think that when you send your FICA taxes to the Federal Government, they save the money in a ‘piggy bank’ with your name on it. This is a misrepresentation of how the program actually works. There is no piggy bank, nor is there even any kind of contract or asset backing up any future benefit. It’s a crap shoot, there is no ownership of any ‘piggy bank’, or the money in the piggy bank by the taxpayer.

So, don’t believe it when they tell you that there is an account with your name on it, there isn’t. Don’t plan your financial future on this benefit, it is prudent to reduce or eliminate it from your retirement planning because of inevitable changes (read lower benefits) that will be made in the future.

Even the personal finance site available from the Department Of Labor at usa.gov, which a good site on personal finance otherwise, doesn’t mention anything about Social Security in the retirement section. That says it all.

A Home Builds Wealth

At the Housing and Urban Development website, they offer the advice that buying a home is the ‘American Dream’ and that you will create wealth by making such a purchase. There are reasons to buy a home, but building wealth isn’t typically one that you should use. Most people buy homes that cost more than equivalent rent, which means that they are spending extra money that could be used to buy other assets that actually create wealth.

The quasi-government website FannieMae.com has good information, including a Rent/Buy calculator that can help you determine if your home purchase is better than renting (this is a case where buying can help to create excess cash to create wealth). And of course, this strategy will only work if you stay in the home long enough to get the benefits of the long term cost savings.

Some Good Sites

On the other side, there are some good websites and information available online. Personal finance is one area where there isn’t agreement about how to setup your own finances. There are some equally bad personal blogs and other private market sites that offer advice that either is bad or maybe should be qualified about who it applies to.

There are also good financial information sites available by various government agencies. These are a good source of general information in different areas. For the most part these offer specific details about each topic, but are lean in best practices or real world advice. Here are a few examples:

• Home Buying – FannieMae.com
• Personal Finance – USA.gov
• Investing – SEC.gov
• Starting A Business – SBA.gov

The best advice is to read information from many different sources and draw your own conclusions about what will work best for you.

For 2011, this imperfection led to outsized performance…

A weight by stock price means that IBM (stock price ~$180) gets a much larger share in the DJIA instead of ExxonMobil ($87) simply because the stock price is a larger number! ExxonMobil is a far larger company and one could make the case the its sector (energy) would necessarily be a larger and more important component of the economy than technology. But in the eyes of the DJIA, IBM gets the nod.

Dow Jones has made adjustments to the indexing methodology over the years. For example, if IBM decided to do a 3-1 split, this wouldn’t cause a drop in IBM’s weighting as this doesn’t affect the value of the company or its place in the index. So, Dow Jones has rightly updated its methodology to account for this. However, if IBM decided to spin off a large division this type of event does affect the valuation and likely would cause the index managers to consider adjusting IBM’s weighting for the portion of the company that is leftover. In some situations, the board could even decide to drop the company altogether if it felt the change affected the overall diversification of the portfolio.

The DJIA is overall pretty stable, changes don’t occur that often.

Seeds Of Out-Performance

The 2011 out performance of the index can be attributed to the smashing returns of the (3) largest components.

The top 3 companies in the DJIA, IBM, Chevron (CVX) and McDonalds (MCD) have large share prices and together make up almost 25% of the entire index. These (3) companies over the past year have handily beat the index average by a large margin (about 20-30% return for IBM and MCD and CVX – the 2011 DJIA return was about 5%, all returns do not include dividends).

But, wherever there are winners there are losers. Losers such as Alcoa (AA) and Bank of America (BAC) have been a major drag on the index recently (you could have easily beat the market last year simply by eliminating financials in your portfolio – my portfolio benefited as well). Since the “winners” have a much larger weighting and their returns were outsized, the DJIA has pulled away from the S&P500 Index. The S&P500 index uses market cap weighting, which puts ExxonMobil as No. 1, not IBM. McDonalds, at #3 isn’t even in the top10 of the S&P500 index. It’s over 30% return for 2011 really juiced the DJIA.

In 2011, the DJIA was up over about 5%, the S&P500 index was essentially flat at 0.0%.

The Outlook For 2012

Over long periods of time, the DJIA doesn’t perform that much different than other major market averages. The DJIA does have a head start over the S&P500 because it’s Dividend Yield is about 33 basis points higher. That doesn’t sound like much, but compare that to the 10 year U.S Treasury bond yield of 2.00% and a 1/3% difference is big.

No one can predict the future, but I would expect this out performance to end simply because 2012 could be the year that the U.S. gets some glimmer of real sustainable growth. It won’t take much, even a ‘whisper’ of potential growth will turn the beaten down DJIA components into winners. It’s already happening! The risk trade is on! Bank of America (BAC) and Alcoa (AA), 2011′s losers are the winners in January 2012, up 31% and 15% respectively so far in 2012 (Jan 24th)!

When these low price losers gain, this isn’t good news for the DJIA.

As of this writing on Jan 24th, the S&P500 is winning! 4.5% gain for the S&P500 index versus 3.8% for the DJIA.

We’ll see how it works out over time.

How To Buy The DJIA

You might be thinking, how can I invest in the DJIA? S&P500 index funds are a dime a dozen. One way to invest in the DJIA is to buy so-called ETF Diamonds or the SPDR Dow Jones Industrial Average ETF (ticker symbol: DIA) by State Street Global Advisors.

The neat thing about DIA is that is pays dividends monthly! None of the other major market index ETFs that I found pay out dividends this way.

The biggest threat to your portfolio is giving in to the temptation that you need to do “X” (whatever it is this week) because its the newest “trend”, will get your awesome returns, and the story is “developing”. There are so many things you could invest in, some of them will be great ideas while many won’t be great ideas. Or if it is a good idea, you need to confirm that you (and not someone else) can actually make money with it.

So, my wisdom today is to keep your focus on a few good investing ideas and stick with them. You don’t need too many because it isn’t possible to master all of them. Don’t feel like you are missing out on anything, remember there is plenty of money to be made in a few ideas, if you pick them carefully. My investment ideas were developed using a very scientific methodology: I tried investing in different things and the ones that I understood the most and made money won! Losers were dropped. It took me years to figure this out but you can learn about it in 5 minutes reading this article.

If you are an ETF or mutual fund investor, I’ve included an ETF alternative for each investment idea.

Here are my investment ideas for 2012. Actually, these are the same as last year, the year before…

TOBACCO

Tobacco is the one investment idea I would pick if I only had one to pick. Tobacco has been around forever and will never go away. Lawyers, governments, doctors have tried to kill it to no avail. Paradoxically, the more government tries to regulate and kill tobacco the stronger these companies get because regulation limits competition and taxes create revenue dependency by government. Governments and the FDA, for example, really want to kill Menthol cigarettes (they have banned other types of flavored cigarettes already) but they can’t because its 30% market share would impact government taxes and fees too much.

The best performing S&P500 stock of the last 50 years was…surprise! Altria (NYSE:MO), formerly known as Philip Morris. Today, Altria is near a 52 week high and an all time high. The other major tobacco companies have performed equally well. Why?

It is because of a confluence of traits that make this investment yield outsized performance (I say this not only about Altria, but the whole industry)

• First and foremost, commitment to shareholder return. There probably isn’t a industry more committed to shareholder return than the tobacco industry.
• A business model or product, that famed investor Peter Lynch would say ‘…operates in a boring, or preferably, disagreeable sector‘. This has over time created pockets where tobacco companies have been undervalued, increasing dividend yield.
• A high dividend yield, combined with growth plus eternal undervaluation that supercharges dividend reinvestment. This is the reason why Altria beat every other stock over the last 50 years, not because it grew the fastest.
• Excellent balance sheet and business management. By buying back stock, managing costs and good product management have enabled tobacco companies to increase earnings in almost any economic environment.

ETF Alternative: Consumer Staples Select Sector SPDR (ETF) NYSE:XLP

ENERGY PIPELINES

Energy pipelines, typically structured and referred to as Master Limited Partnerships are a relatively new kind of investment only first appearing in the 1990′s. They are a new kind of investment because you become not a stockholder, but a unit holder in a partnership. This type of ownership does make it more cumbersome to handle from a tax point of view, but there are ways around this if you still want exposure to this industry.

Like tobacco, fossil fuel energy is thought to be a dying industry, though for a different reason. Because the supply is finite and at some point we will reach ‘peak oil’, which refers to the moment when depletion starts to occur. Recent discoveries in North America and elsewhere suggest otherwise. Finding new energy plus innovation in accessing previously inaccessible energy has increased supply over time.

In North America, there is a supply of natural gas that will last 100s of years. The issue for the energy industry isn’t finding the oil or natural gas, but how to get the energy to market efficiently. You may note that there are typically two prices quoted for crude: Brent and Texas. The difference in spot prices for crude can be attributed to the inefficiency of moving crude to market. This is where energy pipelines come in.

• Energy pipelines make money transporting and storing energy. Most of these companies do not have a lot direct exposure to commodity prices, they are simply a ‘toll bridge’.
• MLPs do not pay taxes, they offload that responsibility to the unit holder. Due to large depreciation, the distributions are largely not taxable (‘return of capital’) in the year you earn them, they are taxable when you sell your investment.
• Because of their unique structure (they are formed as partnerships not corporations), they are under owned by funds, even income funds. The individual investor also under owns them. The infamous K-1 filing also scares investors away due to additional complication in tax filing.
• There are multiple ways to invest: MLPs that pay cash divdiends, MLPs that automatically invest dividends into new shares as well as General Partners that pay cash dividends. The General Partner company structure is a way to get exposure to the industry in a typical corporate company stock. (Examples of these three are the Kinder Morgan companies, respectively, KMP (NYSE:KMP), KMR (NYSE:KMR) and KMI (NYSE:KMI)).

ETF Alternative: Alerian MLP (ETF) NYSE:AMLP

Real Estate Investment Trusts (REITs)

Within the financial sector are a class of real estate investments called Real Estate Investment Trusts (REITs). REITs have become popular over the years due to their high and consistent dividends and relatively easy to understand business model. My interest in REITs however isn’t focused on their equity but their debt. REITs need access to capital markets to function because their business requires huge inlays of capital to purchase properties. Companies that need capital can issue equity or debt depending on the costs associated of each at any given time.

The highest quality companies typically either do not need to issue debt (their initial equity was enough to fund the business – Microsoft, e.g.) or when they do issue debt they sell corporate bonds (not accessible to the average investor).  This is where REITs come in, all of them, even the best ones need to issue debt. They issue debt using preferred stock, which is a debt/stock hybrid that is accessible to the average investor. I use this debt as a substitute for bonds or money market funds (where you want a stable consistent yield at a higher rate than typical cash investments).

My favorites in this space are Realty Income (O-D), Health Care Reit (HCN-D), and National Retail Properties (NNN-C).

ETF Alternative: iShares S&P US Preferred Stock Index Fnd (ETF) NYSE:PFF

Summary

So there you have it! These are my investing ideas. What are yours?

It was just a few years ago that you could earn enough interest on cash that you could call it an ‘investment’. Today, that’s no longer true, cash investments are providing very low returns.

Managing cash means putting the money in instruments that are designed to protect principal. There are many options here plus a bunch that you may think protect principal but don’t. Here are your options plus a few that are not cash.

First, Physical Currency

In my mothers generation, physical currency was a means to save money because there was a leftover distrust of banks from the Great Depression. Today, deposits are insured by the FDIC/NCUA. But probably the larger change is that banks today generally are not allowed to fail, they are merged or taken over by other banks before they fail by government regulators. So, bank runs have largely been eliminated.

Physical currency has a few downsides. You earn no interest and owning it bears no legal ownership (it can be stolen, lost, etc).

Bank/Credit Union Accounts

Cash at banks and credit unions provide various accounts that are FDIC/NCUA insured. While interest rates are low, you will at least earn something while keeping your principal intact.

• Savings/Checking Accounts, 0.10%

To earn a little more interest involves putting your money away in a Certificate of Deposit (CD). Since we are likely near the bottom of the interest rate curve, keep your terms short (a year or less) so that you can quickly take advantage of interest rates when they eventually go up.

• 1 year CD, 0.75%

A simple option is to “go long” and buy a 1 year CD. The rates for one year CDs are about the same as a MMF. You can get higher rates if you go longer, but this makes the money less liquid (which is one of the main benefits of a MMF).

• Money Market Funds, 0.85%

Money Market Funds (MMFs), those higher interest accounts offered by banks and credit unions are offering piddling yields due to the low interest environment created by the Fed. It wasn’t that many years ago (maybe 2006), when these MMFs could earn 5.0% per year. That was a pretty good return for taking minimal risk with your principal.

Banks and credit unions put some restrictions on these accounts to offer the higher rates (though they are stil more liquid compared to CDs). For example, my credit union has a substantial minimum deposit amount to garner a 0.85% MMF interest rate. In this rate environment, this is considered a pretty good interest rate! Also, as a savings account, these accounts also have the “Section 204.2(d)(2) of Regulation D” restriction from the Federal Reserve Board which limits these accounts to 6 ACH (electronic) transfers per month.

So, be prepared to keep your money immobile to get this “high” interest rate!

Money Market Mutual Fund

So called Money Market Mutual Funds (MMMFs) offer higher rates, but there is no free lunch here. These funds are typically found at your broker or in your retirement accounts. The SEC is proposing to regulate MMMFs to create transparency in their pricing. Some of the funds juice their returns by using derivatives which if correctly valued may necessarily mean that they “break the buck” in their valuation. This doesn’t mean that they are bad or risky, but they are in fact more risky than other funds. Also, keep in mind that these investments are not FDIC/NCUA insured as savings/checking/MMF accounts at credit unions or banks.

For the cash in my retirement accounts, I use these MMMF, or similar Stable Value funds. Where the Cash is in your 401(k).

Treasury Savings Bonds

The U.S. Treasury offers two products that protect principal and offer either a consistent rate of return, or one based upon inflation. These products differ from MMFs in that these are longer term investments (minimum 1 year holding period and no penalties if you cash in after 5 years). Don’t confuse these products with other Treasury Notes/Bonds that are priced at market rates. These don’t protect principal. If you are unsure, look for the words “Savings Bond” in the investment name.

• Treasury Savings Bonds (current yield: 0.6%)
• Treasury I-Savings Bonds (current yield: 3.0%)

If you cash these in prior to the 5 year holding period, you get all your principal back with a penalty of 3 months interest.

Each person can buy up to $10,000 worth of these bonds each year. The U.S Treasury makes it easy to buy them, you can buy them direct with no fees. An electronic link to your checking account is the easiest method. Check out the links above to buy these savings bonds.

These Investments Are Not Cash

The following investments are not cash because there is a risk of losing principal. This doesn’t mean that they are necessarily risky, but just that they are not designed to protect principal. (For example, Treasury bonds are not inherently risky, but they are priced to market).

All of these investments are priced to market, which means that they can be bought and sold for a gain/loss.

• Bond Funds.
• Stocks.
• Treasury Notes/Bonds – You get all your principal back when held to maturity. If you sell prior to that, you can make/lose money.
• Gold/Silver – Commodities don’t earn interest and can either lose/make money.
• Corporate Bonds.
• Municipal Bonds.
• Preferred Stocks.