Kansas and Edmonds Chat: By (Buy) the Book

Dave Kansas and Christopher Edmonds chatted on Yahoo! Wednesday, Jan. 11 at 5 p.m. EST.

rm_dkny: Hey there, welcome to a Yahoo! (YHOO Quote) chat, looking forward to all your various questions, and I'm excited to welcome Christopher Edmonds, one of our ace writers from TheStreet.com!

csethestreet: Welcome to all -- we have a great new book to discuss as well as the wild start to the year in the markets. Its great to be here with Dave -- lets get started!

tc990436 asks: I'm a first time investor any suggestions on how I should do my research on a company?

csethestreet: First, read our book how's that for self promotion, but seriously it will give you the tools and ideas to get started. Then read as much as you can from all sorts of source -- the media, analysts, the company, its customers, its suppiers, etc. The more you know, the better decisions you will make.

leyssallenne asks: Should I start investing though a broker or should I do it on my own?

rm_dkny: It depends on how much time you want to devote to the task of investing. Doing it on your own is definitely possible and there is a ton of great information out there, but it requires a lot of self-discipline and time. If you're not certain about it, you may want to try first with a broker to get used to investing.

csethestreet: I agree with Dave -- it depends on what you are looking for. If you are willing to do the leg work, you can make decisions on your own that will be as good as the brokers, in many cases. One caveat -- if you use a broker understand that the decisions he makes may be based on more than your interests. Always ask why he is making a recommendation and, just like we do as journalists, ask what his motives are -- specifically has his firm done work with the company he is recommending and make him explain why he or she thinks you should buy the stock.

Peonywhite asks: How to find a expert investment broker that fit my trading style?

csethestreet: By asking a lot of questions. Interview a broker just like you would interview someone for a job. After all, you are hiring him as an employee to watch your money. Ask him about his experience, his investing discipline, etc. Be comfortable before you pull the trigger. I know way too many people who have sent brokers money without asking the right questions, only to be disappointed later.

ph_goggles asks: Can you give us an explanation of earnings? How did Yahoo! not meet their expectations and still the Nasdaq went up?

rm_dkny: Well, the market is a strange beast and doesn't always react to just one company. The fact is Yahoo forecast ugliness ahead and its stock got smacked pretty hard. The rest of the market, however, may be taking its cues from other areas. I think there's a small amount of optimism about tech right now but the real question is how sustainable that optimism is. And I think tech remains a very difficult area of the market.

tc990436 asks: Are there any flaws that I should watch out for if I decide to invest in taxable mutual fund?

csethestreet: Other than performance, make sure you pay attention to the turnover in the fund if you are worried about taxes. A fund is required to pay out a vast majority of its capital gains each year to its shareholders and, hence, you end up paying taxes. So check the distribution history of the funds you are considering, especially if you are concerned about taxable income or gains.

ph_goggles asks: How do you short a stock?

csethestreet: Its exactly the opposite of buying (going long) a stock. You sell the stock by borrowing it from your broker in hopes that it will go down in price and you can buy it back at a lower price. Be careful, however. . .your broker can tell you to cover your position at any time -- if the stock is no longer available to borrow -- and your losses are infinite. If you are long, the worst a stock can do is go to zero. If you or short, it can go to the moon!

Peonywhite asks: For the last 3 days, naz was up. Is this a sign that the tech stocks are coming back alive? Is this the sign to jump in now?

rm_dkny: This has been a surprising move in the Naz, and I think a lot of people wonder if this is the start of something good or not. I would caution people about tech, and instead take a longer look at what's happening. The fed is easing rates, and in that environment, it's better to look at stocks that do well in a rate-cutting world like banks and other financials.

csethestreet: Dave makes a great point -- tech will come back, but I'd be cautious. . .earnings are very important in this environment.

ph_goggles asks: Do you recommend any online trading services? Do I dive in or take a toe-dip?

csethestreet: Just like the broker answer above -- you have to see what fits your needs. There are all sorts of services out there. I encourage you to start by checking out TheStreet.com's ratings of the Internet brokers and work from there. You can find the results in our book or on the site.

Peonywhite asks: Cisco (CSCO Quote) is a sell or hold? Short term?

rm_dkny: Cisco is a great company, but earlier this week, the jefe, Chambers, seemed to indicate that he's concerned about the near of enthusiasm for corporate cap spending. I think I'd be cautious about Cisco short term.

csethestreet: Great company but in this environment it is still pricey. And, Dave is right, Chambers says he is concerned about the near-term which is probably a short-term negative.

tc990436 asks: I don't understand when you say I should watch out for the turnover of a mutual fund?

csethestreet: When a mutual fund buys and sells, that is turnover. A source like Morningstar can tell you what the turnover of a fund is. The more turnover, the more capital event there are in the fund and, potentially, the more tax you will pay as the capital gains are passed through to shareholders in the form of distributions

ph_goggles asks: What do you own when you own a tracking stock?

csethestreet: Great question -- you actually own the theoretical stream of earnings from the portion of the company the tracking stock was set up to track. How's that for circular thoughts!

tc990436 asks: Is turnover good or bad for a mutual fund?

csethestreet: Depends on what you are looking for -- if you are looking to minimize taxes, then the less turnover the better. However, you should never, in my mind anyway, base investment decisions solely on tax issues. . .you want to make money --- if you have to pay taxes, there are worse problems to have.

ph_goggles asks: What are the benefits to after-hours investing?

rm_dkny: AFT can be very dangerous. Liquidity is sometimes not so great, and information flows can be not as good. The sometimes benefit is if you have an information advantage you can take advantage of after-hours trading. But it is more of a wild west environment than the regular trading day.

ph_goggles asks: So if the parent company has a major problem can it go to the unit or tracking-stock part of the company for help?

csethestreet: The tracking structure is not a separate entity it's all part of the same company -- however, that is really a legal entity question that can get quite complicated. Best advice -- when you are interested in a tracking stock, read the filings very carefully to see what you are really buying.

the_best_pokemon_trainer_2001 asks: What IS the most dangerous kind of trade in stock?

csethestreet: The ones that lose money! Lots of money!

rm_dkny: Sure, Chris, that's dangerous! Also, getting short a stock can place you in a position when you face unlimited downside risk. So be careful if you ever decide to short stocks.

im_no_cassanova asks: I will be getting over 4700 dollars for a school loan....what is the best way to invest this?

rm_dkny: Well. As a recipient of school loans, I think you are best off investing that in school that's what I did with my loans.

csethestreet: I agree!

ph_goggles asks: Can you explain buying on the margin? Is there ever a good time to do that?

csethestreet: Margin is tricky and can be very dangerous. You need to have a strong discipline, understand what your goals are and be ready to move quickly. I don't recommend it for individuals, generally. Too risky. Just ask those that invested on margin in the tech world thinking the good times would never end. They are mostly gone now. Caution!

im_no_cassanova asks: Would you ever buy stock in the Bovespa? Or Nikkei?

rm_dkny: Sure, I'd think of buying stock overseas, especially if you have a longer-term outlook. The Nikkei has near-term challenges, but distributing some long-term risk overseas is not a bad strategy. If you are school-age, I think the best thing to do is start setting up a strategy for the long term, thinking about IRAs and other tax-protected vehicles that will give you a good jump start on saving for retirement.

csethestreet: For the average US investor, the best way to play is in funds. Look at either diversified international funds or, if you want specific country exposure there are fund families that offer that as well as a host of closed-end funds that trade on major exchanges.

ashleyiii asks: Is El Paso Energy (EPG Quote)a buy here (61-ish)?

csethestreet: El Paso is one of the best energy convergence plays out there. And, with the pressure from the California situation it looks. Pretty attractive. The merger with Coastal is a real positive. Look for it to become a big player in trading and marketing of both power and gas in the coming months. Many fund managers say it may be the next Enron. That is a hefty claim!

casper220 asks: What do you think about investing in startups?

rm_dkny: That's a very challenging thing. Often the business is not yet tested, and the key thing, outside of the business plan, is knowing the people who will be running it. Essentially in a start-up you are making an investment in the people. That's the biggest piece of the equation. But start-up investing is very risky, so don't take it lightly.

ph_goggles asks: Are IPOs a good way to start investing? How different are the rules with IPOs from the actual market?

csethestreet: The rules once the stocks start trading are the same. However, getting access for the individual is the difficult part, although it has gotten better. Contrary to popular belief, most IPOs aren't flyers! Be careful here.

realtizight asks: What happened to priceline.com (PCLN Quote) how can i avoid it

rm_dkny: priceline is an intriguing issue, like so many of the imploded net stocks how to avoid these stocks? Well, hindsight is always excellent, but the fact is you have to figure out when the hype is outmatching the stock. One thing that always puzzled me is that I just didn't know ANYONE who was using priceline. Kind of made me skeptical. That's the kind of thing that should raise some red flags.

rm_dkny: Also, I think the idea of priceline groceries never really made sense to many people. And one basic beginning point is examining the thesis behind the company. If it doesn't seem to make sense, that's a red flag, too.

csethestreet: It reminds me of that Star Trek episode where the energizer didn't work and Captain Kirk was lost in space. . .oh, nevermind! I couldn't come close to Dave's answer. . .he's right!

ashleyiii asks: There is a coffee IPO (PEETs) scheduled soon. Any ideas?

csethestreet: Like the coffee -- know nothing about the IPO -- seems like a tough business, but I always said that about Starbucks. Timing isn't very good though. I'll check with our IPO master, Ben Holmes.

im_no_cassanova asks: How realistic is "the $treet" or "BULL" or "Boiler Room" to the real market?

rm_dkny: Well, for starters nobody around here is that good looking.

csethestreet: Speak for yourself!

rm_dkny: And, for the life of me, I can't figure out how they come up with these story lines. Whoops -- Chris is, I forgot!

rm_dkny: I think they don't do a good enough job conveying how truly vicious the pure capitalism of Wall Street can be. And I don't think they do a good job of showing how difficult some aspects of investing or banking or trading can be. Typical TV fare, imho.

rm_dkny: now, if you want to talk temptation island....

csethestreet: I'll stick to CNBC and CSPAN for my entertainment. . .oh, and the PGA Tour!

smartboy316 asks: How much tax do you pay on your stock where does the taxes go, fedral government?

csethestreet: As far as the capital gains tax, it depends on your income. You are taxed on your gains based on income up to the cap set on capital gains which is now 20% on long-term gains. All short-term gains are taxed at your ordinary income rate.

rm_dkny: The taxes go to the federal, state and local government, though the local and state piece varies from jurisdiction to jurisdiction.

csethestreet: One point, that is sometimes lost on new investors is that if you have capital gains you may need to pay estimated taxed during the year -- every quarter. If you trade and invest a lot you should check with an accountant who can help you!

ph_goggles asks: can you explain P/Es?

csethestreet: Very simply -- you take the companies stock price and you divide it by the earnings. So, if the stock is trading at 10 a share and they have 2 dollars in earnings, you get 10/2 or 5 P/E.

ashleyiii asks: I love the new TSCM/RM! What total return do you expect this year from a good REIT mutual fund?

rm_dkny: Chris may disagree, but I think the REITs are going to have a so-so year.

csethestreet: I agree with Dave -- last year was a good year. They will have a tough time repeating there. Real estate is a key input to the economy. As the economy slows, REITs will slow. Steve Sakwa at Merrill Lynch brought all of his earnings estimates down today because of the economic slowdown. I think you'll make money, but it will be more difficult. Lets say you'll get the dividend -- avg. about 7% now plus about 2% growth. 9% total return, on average is a good estimate

casper220 asks: How risky is the commodity market if you have a good broker and take your time to find the trades

rm_dkny: The commodity market tends to have a big risk element, primarily because it is more easily dominated by a handful of bigger players. That's not to say that an individual can't figure out how to navigate the shoals.

ph_goggles asks: What's the difference between your book and any other investing book out there now?

rm_dkny: I think a number of things:

rm_dkny: 1. Author is from Minnesota.

rm_dkny: 2. It is very clearly written and easy to understand, a rarity in investment books.

rm_dkny: 3. It attacks issues with an element of sophistication, yet is very accessible.

rm_dkny: Many of these books are aimed at people who just fell off a bus near a stock exchange, rather than for people who have some interest in investing. Also, it has expert opinions and advice from a number of people who have a proven track record in doing well in the stock market. Anything to add Chris?

csethestreet: The other item I think is that is comprehensive. It starts in the beginning with basics and takes you right through the gamut of investment opportunities, including the BEST explanation of options I have ever read, ANYWHERE!

im_no_cassanova asks: When does Alan Greenspan's term end?

rm_dkny: Aught-4.

rm_dkny: or 04.

rm_dkny: or 2004.

rm_dkny: he's been there since 1987!

ashleyiii asks: With the slide in the utilities, do you see any good buys for good 1 yr total return?

csethestreet: Utes had a spectacular run last year and it will be hard to repeat. Still, I think some of the independent electric generators are very attractive at current prices, depressed because of California. Names like Duke, NRG and Southern Energy (SOE Quote)(I am long) come to mind. I also think that Calpine (CPN Quote) gets very interesting at current levels, under 30.

csethestreet: Finally, I think you want to look at solid utilities like Exelon, Duke, Southern if you are looking at the traditional utes. From a purely speculative position, if you think the California crisis gets solved. PG&E and Edison International are very cheap asset plays. But there is HUGE risk there right now.

ph_goggles asks: Which valuations methodology is better, technical or fundamental. Is that like defense and offense, you need both to win the game?

rm_dkny: This is one of the great religious debates on Wall street and it's hard to find people who don't fiercely fall in one camp or another. But the fact is that many traders and investors rely on both methods. Personally, I am not a pure technician and would lean more heavily on fundamental analysis, but that's often a reporter's bias. I think most pros I see rely first on fundy, but always 'check the chart.' No matter what, both play important roles in how investors set up their strategies.

csethestreet: If you want to see results from someone who combined the two go back to the TSC archives and read the Christmas weekend Streetside Chat with Robert Robbins , the Chief Market Strategist at Robinson Humphrey. He has successfully combined the two in his work and done very well. Good example of both methodologies working together.

im_no_cassanova asks: Kodak vs. Fuji. Who do I buy with? Fuji is a worldwide leader...Kodak is a US leader?

rm_dkny: tough call. ek has had some problems domestically and both are grappling with the changing world if image-making/photos, etc. If I had to choose, I'd probably stick with EK.

csethestreet: At some point, Kodak turns it around and is a great value play. From a paper perspective, Fuji always has brighter colors, but the new Kodak Gold paper is coming close.

tc990436 asks: Where do you think the market is heading too? In your opinion which sector looks strong?

rm_dkny: We're in for a tough year

csethestreet: It will be tough.

csethestreet: Thanks everyone! It's been a great hour and, remember, we hope you will join us at TheStreet.com and check out our book