Washingtonpost.com: Jerry Knight Live Online

A Q&A With Jerry Knight Wednesday, April 7, 1999

(Jerry Knight photo by Reginald A. Pearman Jr. – washingtonpost.com)

I've been covering Washington business as a reporter, editor and columnist since 1977, watching the region evolve from a collection of Beltway bandits, banks and regional firms into a diversified high-technology economy.

I'm not going to tell you what stocks to buy, but I hope to help you identify investment ideas so you can decide how they fit with your personal investing style and your own financial goals.

Remember, it's your money and your call. I don't own shares in any of the companies we'll be talking about. That's against the rules for Washington Post reporters who write about these issues.

For background, read my latest columns and stories.

Arlington, VA: I am a single parent -42 yrs old- with a decent job which provides a good retirement plan. I would like to invest some of money into Mutual Funds-Stocks for future use but have no experience. Please advise.

Jerry Knight: I'm a great believer in Stock Index Mutual Funds, particularly for novice investors. They buy all the stocks in some index. The S&P 500 is the most popular. Most of the big mutual fund families have an S&P Index fund. The big advantage of Index funds is that it costs very little to run them since there are no analysts or managers to claim big bucks for out-smarting the market. Index funds don't try to out-smart the market; they ARE the market. Since the vast majority of funds do not match the S&P's performance most years, you wind up getting well above average returns at low costs.

falls church virginia: what do you think will be the
effect of sec regs requiring
more open disclosure on the
net effect of fees and sales
loads on individual mutual
fund investors? is it a good
idea, or will it further muddy
the water-are there already
too many variables in individu
al investor's decisions?

Jerry Knight: I think anything the SEC can accomplish to make mutual fund charges easier to understand will be a great boon to investors. Even the most consumer-friendly funds bury the details of what they are charging. Since there are several different kinds of fees, few people even know what to ask about. Along with being a big fan of Index funds, I'm rabid about no-load funds that don't make you pay a sales commission. And with Index funds, there is simply no reason why the fund companies should skim 1 or 2 percent off the top when you put money into the fund. Footnote: I've noticed that banks are particularly poor at revealing their fund costs. In part, I suspect that's because the bank regulators are not as agressive as the SEC.

ft. myer hts., va: AOL is up dozens of points in the past month. Didn't you say its stock price growth was going to flatten out?

Jerry Knight: AOL! I cringe every time somebody asks about that stock. I've been so wrong about it for so long, that I just throw up my hands and say: go ahead, buy it! What do I know? AOL is the Internet's best brand name and has been the best local stock for years. I can't fathom why it keeps going up so much, so fast, but it does. But it's very, very volatile. With a few minutes to go before the market closes today, it's down about $11. But it could just as easily go up that much tomorrow. Or go down more. Who knows?

Springfield, VA: What are your investment recommendations regarding Mills Corp.?

Jerry Knight: I try not to make investment recommendations, either online or in my Washington Investing column in Monday's Washington Business section of The Post. I like to dig out details of what a company is doing and put it in perspective and let you make the call. It's your money. I think I'm pretty good at playing that role, but totally inept at predicting what the market will do. Example: REITs and related real estate stocks are very much out of favor with investors and most of them are down from a year ago--almost without regard to their performance. But all those warnings aside. I've been a fan of this company's projects since Herb Miller built Potomac Mills. He's gone now, off doing other kinds of development projects. But the company has very professional management. Their still a highly creative mall builder, even though their dreams are less exotic than Herb's were. You can look for Mills Corp. to build something big in the Baltimore-Washington Corridor in the next few years. What that will do to the stock, is another question.

Alexandria, Virginia: Hi Jerry,
I owned stock in Frontier Communications which was offered $60 a share in an impending acquisition. I followed my broker's advice and sold for about $51 -more than twice what I paid.- Is there any way the Frontier stock won't be worth $60, if that is what the offer is for?

Jerry Knight: It's been a long time since Rochester, N.Y. was the Frontier, but their local phone company has turned into a pioneer in telecommunications and now wants to become part of an even bigger company. The game you're into now is what Wall Streeter's call risk arbitrage. You've got a $9 a share bet on whether Frontier's proposed purchase by Global Crossing (GLBX) will go through. And how long it will take to complete if it does. There are enough doubts about the outcome that Frontier stock (FRO) has fallen since your broker suggested selling for $51. That would seem to indicate the pros aren't certain this deal will happen. If you're happy with $51 a share (and if you've held the stock for any length of time, you ought to be) take the money.

Hampton, VA: My two children have about $600 -current value, not face value- each in EE bonds. They want to get into a mutual fund, but don't want to be committed to regular monthly investments. Are there any mutual fund companies which would take a one-time investment of this amount and allow them to "let it ride" for either long or short term?

Jerry Knight: Sure. A lot of funds do have a $1,000 minimum, but shop around. (the web is great for this) With a small investment like this it is particularly important to avoid paying costly fees which can kill your return. This is an ideal index fund investment.

Silver Spring, MD: Is Value America fair game for this discussion -it's in Charlottesville-? What do you think will happen with their IPO? Will it hold its value?

Jerry Knight: Read my lips: Value America will be hot news tomorrow. I personally do not understand their business model. They claim to be an Internet retailer and thus a surefire hot IPO, but they spend huge amounts of money on newspaper advertising and like most e-tailers, they lose money by the bushel. But net investors love them. The price of the stock they're selling has already been raised twice this week. The final offering price is being set right now (that's 4:30 eastern time) and trading is supposed to start tomorrow morning. Unless the IPO forecasters turn out to be an inaccurate at TV weatherpersons, the stock will take off instantly.
ADVICE TO NEW IPO INVESTORS: If you want to try to catch the Value America wave, don't just call a broker (or go to yours on-line) and put in a "buy" order. Specify the price you're willing to pay for the stock. A lot of these hot numbers go up like a rocket in the morning of the first day's trading, then cool off considerably in the afternoon. If you put in a straight "buy" order instead of a "limit order" that sets a maximum price you're willing to pay you WILL pay top dollar. Of course you run the risk of not getting the stock, but that's better than paying too much. Long term? who knows? Value America wants to be the Internet's first department store (though it really doesn't carry clothing in any depth) and is far ahead of anyone else with that goal. My guess is the stock will roll as long as the Internet boom continues. If net stocks crash, it will go down with them. The tough question is where this company will be in three to five years. Right now, it's hot.

Herndon, VA: How do you know when it's too late to invest in a certain tech stock? So many of them soar, and you think you're too late, and the next month they're up ANOTHER 100 pts.

Jerry Knight: I'm the wrong person to ask. I thought AOL stock had gone as high as it could go months ago. Ditto for some other tech stocks.

Sarasota, Florida: I am retired and have owned TNSI for years -- watching it go above thirty twice and then back down twice. Is this a takeover play and is it worth holding for the long term -- 2-3 years?

Jerry Knight: I'm not on top of the latest developments at Transaction Network Solutions, a Northern Virginia company that handles credit card transactions. they're the electronic link between the credit card terminal in the stores and your account. I do know that the stock is at its lowest level in about six months. If there's a reasonably consistent pattern of it cycling up to around $30 and then pulling back, I'd be inclined to wait for the next upcycle and then jump.

Arlington Va: What are your thoughts on Dominion Resources Inc.'s recent acquisitions? How are they situated for a deregulated environment?

Jerry Knight: This is another company that I'm behind the wave on and my co worker Martha Hamilton, who follows Dominion Resources, is out today so i can't shout over and ask her. My impression is that since the days when it was Vepco this company has had good management and has been able to stay on top of utility industry developments. It certain seems to have a better future than Pepco.

Washington, D.C.: It seems that internet companies are very popular and profitable for investors these days. A highly anticipated IPO, Proxicom, in Northern Virginia should be out soon. What do you make of this up and coming company??

Jerry Knight: Proxicom is also supposed to be a hot IPO. I've got their prospectus on the top of my pile but haven't plowed through it yet. The buzz is positive.

Arlington, VA: I'm in my late twenties and I have a 401K that I'm contributing to aggressively, as well as an IRA and a healthy savings account. I have a small chunk of money -$1200- that I was thinking about rolling into my IRA, but I've also been toying with the idea of buying a few shares of a blue-chip like Microsoft or GE. Which do you think is a smarter strategy? I'm looking longterm, of course. However, I'm also trying to save for a house.

Jerry Knight: If you can put money into an IRA, regular or Roth, why not do it? You can still buy any stock you want and get the IRA tax benefits. At your age, the pros would say your "risk profile" might be such that you could go for something more exotic than GE. But there's nothing wrong with starting out with one of the most successful long term corporations America has produce. GE is what all these hot technology and internet companies would like to be when they grow up.

Crystal City, VA: Any suggestions on how a novice investor could learn how to read annual reports...specifically the balance sheets? And, how to interpret what some of the numbers mean -for example, what is a good debt-equity ratio-.

Thanks in advance!

Jerry Knight: Balance sheets? Who reads balance sheets? This is entirely too serious an approach to take in today's market and will probably make you smart and rich. I'll plug a book by a friend of mine, Jeff Hooke, it's called Security Analysis on Wall Street, published a few months ago by John Wiley & Sons. If you want to learn to study stocks the old fashioned way, from the bottom up, this is a great text. Jeff is not one to rationalize the runaway prices of today's net stocks, he believe in the fundamentals. And I believe he's right.

Albuquerque, NM: V-ONE is a small cap that has not turned a profit. However, its revenue growth is robust and the company has promise in several areas. What ratios or methods can be used for valuation of a company that appears to have promise but is not yet profitable?

Jerry Knight: That's the kind of question that Hooke's book might help you with. The trouble is that today investors are willing to listen to a company's story and if they like it, buy the stock regardless of what it happens to be selling for. VONE's story has not exactly been a best seller. And they company has been around too long to be a wunderkind. There a lot of companies like that in the Washington area. Solid, but not sexy. These days sex sells.

Bethesda, MD: Do you think the anticipated Y2K problems will have an effect on the stock market? If so, how?

Jerry Knight: This will have to be our final question because I've got to finish a little story for tomorrow's Tech Thursday package on a company that's fallen victim to the Y2K bug. Axent Technologies Inc. a Rockville computer security company, is having trouble because its customers are spending so much money fixing their Y2K problems that they've put off buying other computer upgrades, like the stuff Axent makes. Analyst Bill Loomis of Legg Mason has been warning for months about this "crowding out" phenom. It's happening to a lot of software companies that cater to big business. That's the biggest Y2K impact I've seen so far. Certainly nobody has made any money on Y2K stocks. Thanks. See you all again. You can e-mail me at Knightj@washpost.com.

© Copyright 1999 The Washington Post Company

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