Once again, I've very excited to share a Q&A with you with a leading outside expert who has graciously taken the time and effort to share their wisdom with us.

I'm often asked how I decide who to interview for these Q&A sessions and my goal is very simple - I want to interview people who I know will offer something of value and who will ultimately help us take our investing and trading to the next level. Ultimately, if I've personally benefited from something they've done or shared, especially over a long period of time, they are put at the top of the Q&A invitation list. Harry Domash has been at the top of that list for some time.

For the past 5 years, Harry's columns at MSN have been some of my favorites. Harry often provides an investable concept or theme and then offers a stock screen and/or method to take advantage of that idea on your own. It's a unique format and a personal favorite of mine because his work is focused on helping investors succeed rather than simply telling them what to do. Case in point, Harry's book "Fire Your Stock Analyst," is among my most recommended readings for good reason because it basically provides a step by step process that enables any investor to analyze potential investment opportunities and ultimately become a much better investor.

In this Q&A, we will talk about Harry's approach, stock screens, and more. I'm sure you'll find it helpful!

Kirk:  Hi Harry. Welcome to the Q&A. When and how did your interest in the market begin?

Harry Domash:  Hi Charles, thanks for taking the time to interview me. As you know, I’m a regular reader of The Kirk Report.

While I’ve always been interested in the market, I didn’t look at in a serious way until the early 1990s. Although the Web didn’t exist, that’s when I discovered that on-line services such as CompuServe and AOL provided timely access to all sorts of individual stock and overall market data that, up to that point, I didn’t know were available to individual investors.

At first, I was intrigued by the possibilities of technical analysis. I subscribed to the magazine “Technical Analysis of Stocks & Commodities,” and devoured books on the topic, including “Trading For A Living,” by Alexander Elder.

From my reading I learned of technical analysis programs such as Metastock, TradeStation and TeleChart from Worden Brothers. I settled on Metastock because you could modify standard indicators and combine them with other indicators to create just about any type of trading system that you could imagine.

I would be embarrassed to tell you how many hours I spent devising and backtesting trading systems. But, eventually, I devised a trading strategy that I liked.

It used the Commodities Channel Index or CCI along with a bunch of customized modifications. I still use it to generate the DJI, S&P 500, Nasdaq and Russell 2000 timing signals that I give away for free on my Winning Investing site.

But, alas, in the market, nothing works all the time. I grew frustrated when my trading system failed to predict sudden downdrafts, such as those triggered by an earnings miss. So, to improve my odds of success, I started adding fundamental indicators to the mix.

Kirk:  Can you tell us a little bit about how you learned to become a successful investor?

Harry Domash:  I got a lot of ideas from books such as Martin Zweig’s “Winning on Wall Street,” and William J. O’Neil’s “How To Make Money in Stocks,” as well as hearing money manager Louis Navellier at various seminars. Over time, I also filched ideas from the likes of Warren Buffett, David Dreman, James P. O'Shaughnessy, David Edwards and many others who were careless enough to leave their time-proven strategies unguarded on bookstore shelves and on Web sites waiting for me to swipe.

Over time, I mashed their concepts together to come up with the strategies that I follow today.

Kirk:  How did those early experiences grow into a lifetime career?

Harry Domash:  By this time, the Web was happening and I was amazed by the amount of valuable information that was readily available online. But, I realized that all of the investors that I knew were still picking stocks by following tips and hunches, the same way they did it before the Internet.

So I started giving seminars to computer clubs, investing clubs, just about anyone who would listen, about how to use the Internet to make better investing decisions. Eventually, I started teaching investing classes on a regular schedule.

Those classes led to my investing tutorial columns in the San Francisco Chronicle newspaper, then in Business 2.0 Magazine, and eventually on MSN Money.

After a while, I realized that many investors didn’t want to spend the time required to find, research and analyze stocks on their own. They’d rather have somebody hand them a list of stocks to buy, and tell them when to sell.

Seeing a need, I started my Winning Investing newsletter in early 1998.

Kirk:  What was instrumental in your development to becoming a successful investor?

Harry Domash:  Before the Web took over, I subscribed to an online database called Telescan that allowed you to download a variety of fundamental reports for most stocks. It was by experimenting with Telescan’s information that I was able to devise many of the strategies that I use today. Particularly, the ability to quickly evaluate large numbers of potential stock candidates in a short period of time.

Kirk:  For those who don't read your weekly columns and newsletter, please provide us with a basic overview of how you approach the market?

Harry Domash:  I follow two different strategies, one for growth stocks, and another for high dividend stocks.

For growth stocks, I follow a bottom-up approach. That means that I don’t worry about what which way the economy is headed, or which industries or sectors have the best outlooks or are moving into, or out of favor with the big money.

Instead, I look for individual stocks that meet my selection criteria. For starters, they must be profitable, cash flow positive companies that are growing sales and earnings at least 20% year-over-year, and hopefully, faster. I also require low debt, institutional support, and a strong price chart. For stocks meeting those requirements, I analyze financial statements searching for “red flags” warning that an earnings disappointment is on the way.

Although I said that I don’t worry about the economy, I do pay attention to what the market is doing. Growth stock investing requires at least a flat market, and works best in an uptrending market. In a down market, these stocks don’t move up as much on good news as the drubbing they take on bad news. So, the risk/reward equation works against you.

For high dividend stocks, I do start with the economy and industry outlooks. The stocks that pay high dividends, such as real estate investment trusts, energy pipeline operators, banks, ocean going ship operators, and the like, tend to move as a group in response to industry or economic conditions. Then, when an industry passes muster, I try to find the players within that industry with the best dividend growth prospects. Unfortunately, analyzing high dividend stocks is more subjective than analyzing growth stocks and doesn’t lend itself to quantitative strategies.

Kirk:  Would you say you are now more a value or growth oriented in your approach?

Harry Domash:  Growth, here’s why.

Value investors look for former growth stocks that tripped up, but will eventually recover. But successful value investors don’t try to pick a stock at the bottom. Instead, they determine what a stock will be trading at when it recovers, and if the reward/risk equation works, they buy. They know that the stock might go even lower before it recovers, and they’re willing to wait as long as it takes, often years.

As a newsletter publisher, I’ve found that my subscribers get really annoyed if a stock that they bought on my advice drops and stays down for more than a couple of months. So, value investing doesn’t work for my newsletter, consequently I don’t do it.

Kirk:  A guiding principle, you believe that investors should remember COSC which stands for "concentrate on the strongest candidates." Can you explain what this is and why it is so important?

Harry Domash:  A common mistake many beginning investors make is to pick a couple of stocks and then try to find a reason to buy them. I think that it’s better to start with a large group of stocks, say 20, and then pick the strongest one or two candidates from that list. But most of us have day jobs and can’t spend the time that it takes to analyze the financial statements of 20 stocks.

So the COSC strategy involves eliminating a stock as soon as you find one thing wrong. For instance, say you only want positive cash flow stocks. So you would eliminate cash burners as soon as you discover them. Same thing with stocks with weak price charts, or stocks carrying high debt. Every time that you cut one stock, that gives you that much more time to evaluate the rest.

By the time you’ve tossed all the stocks with obvious flaws, you’ll probably only have two, three or four of your original 20 left that you’ll have to analyze in detail.

Kirk:  What is the best way for an investor to concentrate their time on the strongest candidates?

Harry Domash:  Start by compiling a list of candidates. That can be from a screen, from gurus that you see on TV, or from someone you meet at the gym. Whether you get your ideas from Warren Buffett or from a screen, put all of your stocks through the same evaluation process.

Please read “Find Great Stocks In Two Minutes or Less” that describes how to hone your list down to the most promising candidates.

Kirk:  In your MSN column you typically share screens that you've designed to achieve specific objectives and/or cover themes (like 5 stocks to catch today's oil boom). Obviously, you like to use a variety of different stock screens to achieve specific objectives, but if you were forced to choose just a handful of screens to use, what would they be and why?

Harry Domash:  One of my favorite screens is based on James P. O’Shaughnessy’s Cornerstone Growth Strategy. Despite the name, it’s really a combination of value and momentum.

Another of my favorites is based on a Merrill Lynch survey of institutional investors about how they pick stocks.

Here’s a growth stock screen that I use all of the time. But I don’t remember which column I wrote that describes the screen.

Kirk:  Although I know it may entirely depend on the objectives you've set for a particular stock screen, generally speaking what are your go-to criteria and/or most popular elements found within your favorite screens?

Harry Domash:  Basically, I always look for strong historical and forecast earnings growth, and strong profitability, usually using Return on Assets (ROA). By strong, I mean at least 20% historical earnings and revenue growth and at least 25% forecast earnings growth for the next fiscal year. For ROA, I require at least 10, and higher is better.

Kirk:  Are there any criteria that you avoid using and/or have found unhelpful in your research?

Harry Domash:  Historical P/E, based on the trailing 12-months earnings doesn’t mean much. Same thing for price/book, anything based on trading volume or analysts’ buy/sell ratings. Well, let me modify that last part. I don’t think that “strong buy” rated stocks will outperform “hold” or “sell” rated stocks, but for low-risk screens, I do rule out “sell” rated stocks. I figure that analysts are usually overoptimistic. So the fact that they are advising selling signals added risk.

Kirk:  I know you use stockscouter ratings in your system (something I have also talked about several times in the past). How helpful has that rating system been to you and your stock screens?

Harry Domash:  I haven’t done any meaningful research on my own. However, John Markman and possibly others at MSN Money have, and they’ve found the ratings helpful. The nice thing about StockScouter, is that it looks at a lot of factors that you can’t screen for on your own.

Kirk:  In your experience in developing stock screenings, what are some important things that you have learned so far that would have surprised you initially as a new investor and/or someone who doesn't use stock screens?

Harry Domash:  For starters, there’s an art to screening. When you run your first screens, you’ll probably turn up too many or too few stocks. Then, when your screens do turn up the right number of hits, you’ll find that you don’t like any of the stocks. So, there’s a lot of trial and error involved before you get the hang of it.

Kirk:  I know you use MSN's Deluxe Screener, but what other stock screening tools do you find helpful?

Harry Domash:  I used to use the Wall Street City and Reuter’s screeners, which were both good. But both are gone now. The Portfolio123 screener is the best I know of on the Web, but it costs about $40 per month. I don’t use any of the screeners that mainly rely on technical indicators.

Kirk:  How do you track the screens you create and how do you evaluate their performance?

Harry Domash:  I used to track the returns of every screen I developed, at the end of every week, on a giant spreadsheet. But I’ve given up on trying to use screens, per se, to build portfolios. So, I no longer track them, except if I’m going to write a follow-up for a MSN column. Then, I just go back and see how the stocks originally picked by the screen have worked over time.

Kirk:  So, is it fair to say that when you've tried to develop portfolios from specific screens, they've been unsuccessful? Why do you think that is?

Harry Domash:  For starters, you have to understand my perspective. All of my screens are intended to be used to come up with stock picks for my Winning Investing newsletter and/or Dividend Detective. With that in mind, there are two factors that prevent me from using screen generated portfolios.

First, my screens usually have a momentum aspect that produce "high beta" portfolios. These portfolios tend to outperform in a strong market and underperform when the market turns down. Since the market can change from strong to weak in an instant, you have to be prepared to dump the portfolios on short notice. However, Winning Investing targets investors who want to hold stocks for periods ranging from three or four months, minimum, up to years. Dividend Detective targets even longer-term investors. So, the short-term outlook required for screen-generated portfolios doesn't work.

Second, within the portfolios that my screens turn up, the performance is often driven by two or three rockets. The remaining picks often record lackluster results, and some may record serious losses. So, again, putting such portfolios in Winning Investing doesn't work.

Bottom line: For me, it works best to use a screen's results as a list of candidates that I can then put through the same fundamentals tests that I apply to any stock. I know that it sounds like a "canned disclaimer" when I add a sentence saying that to the end of my screening columns, but, in fact, that is what I really believe.

Kirk:  Some of the screens I've used turn out quite a few candidates (especially when economic times are good). What are some tactics you use to narrow down the results of a stock screen that turns out so many stock ideas?

Harry Domash:  I usually just tighten up the profitability (ROA or whatever) specs, maybe also the chart strength (e.g. relative strength or distance above 50- or 200-day MA). For those two factors, higher is usually better.

Kirk:  Stock screening is good both for identifying new investment ideas but also to create short-sell ideas and/or avoid lists. I know you've created at least one stock screen looking for doomed stocks, but what are some screening suggestions you can share for investors looking for stocks to short and/or to build "must avoid these stocks" watchlists?

Harry Domash:  Besides for the Doomed Stocks screen that you mentioned, I’ve never been successful at creating a screen for shorts. Somehow, simply reversing the criteria for finding good stocks doesn’t work. But, I’m still trying.

Kirk:  In my experience, you're right - you can't simply flip the criteria and come up with stocks that go down. Like you, my work in this regard is very much a work in progress. At your website you do provide two death lists. How are these different from the Doomed Stocks screen?

Harry Domash:  The momentum Death List is the same formula as the Doomed Stocks list. I think it works pretty well, but I haven’t tested it for several years (maybe since 1997). I haven’t tracked the Death By Debt list’s performance. In fact, I’m still fiddling with the parameters. Of course, debt is much more important in times like this than in normal economies, so it’s probably working pretty good now.

Kirk:  You clearly recommend that investors who use the screens you share as "candidates for further research, not buy lists" as I do with the screens I share. To give us some idea of the next step after you run a stock screen, please select one of screens from your market workshop and then briefly talk about how you would narrow down the screen's results to an actionable investment idea.

Harry Domash:  I always start by looking at the price chart. If the stock’s in a downtrend, I stop there. If not, I check the revenue forecasts on Yahoo! If analysts aren’t forecasting at least 20% year-over-year growth for this fiscal year and next fiscal year, I stop there. Next, I apply the tests described in the Two Minute Check.

Kirk:  I know from reading your book "Fire Your Stock Analyst!," (among my recommended readings list), investors should take the following 11 step approach to analyze a stock:

Step 1: Analyzing Analysts' Data
Step 2: Valuation
Step 3: Establishing Target Prices
Step 4: Industry Analysis
Step 5: Business Plan Analysis
Step 6: Assess Management Quality
Step 7: Financial Strength Analysis
Step 8: Profitability & Growth Analysis
Step 9: Detecting Red Flags
Step 10: Ownership Considerations
Step 11: Price Charts

That's a lot of steps to go through, and in a general way I'd like to talk about some of important points you make about these. First, as a general principle, what are some basic things investors should be looking for in analyst research and opinions?

Harry Domash:  As far as analysts go, I would never follow their buy/sell ratings per se. In my book, I use analyst ratings as a Sentiment Index. Basically, if a lot of analysts have “strong buy” ratings; that means that market expectations are high, and likely to be disappointed. The more analysts making the ratings, the more well known the stock, and the higher the expectations.

Conversely, if analysts are mostly negative, expectations are low, which means it will be easy for the stock to beat expectations. Same thing if only a couple of analysts are covering a stock. So my Sentiment Index is a contrary indicator. The stronger the sentiment, the riskier the stock.

Along those lines, I also think it’s important to watch the number of analysts making buy/sell recommendations on a stock. In my view, a stock price reacts to the supply/demand equation, just like most products. For stocks, the supply doesn’t change much; it’s the “float.” The demand is the main variable. Whether at buy or sell, analyst reports make more investors aware of a stock, thus increasing demand.

It’s good to own a stock that analysts are just discovering. The “sweet spot” is when the number of analysts covering a stock moves from one or two up to three or four. Once you get above five or six, adding more analysts doesn’t make much difference.

Kirk:  Value-investor John Dorfman (see previous Q&A) said that stocks advance by "exceeding expectations" and that his favorite stock screen point to low-expectation stocks. Does your research confirm this point of view?

Harry Domash:  Yes! I couldn’t agree more. Stock price action is all about expectations. Valuation ratios such as P/E and P/S simply describe the market’s expectations for a stock. High valuations mean high expectations and vice versa.

Kirk:  In the book you cover several formulas for valuation analysis, but seemed to focus on a company's implied growth rate. How does one specifically figure this out?

Harry Domash:  The point of looking at implied growth is to see what annual earnings growth would be required to justify a stock’s current P/E. I got the idea from Nicholas Gerber of Ameristock Funds.

The implied growth formula that I use is just a Benjamin Graham intrinsic value formula turned upside down. The calculation uses the current corporate bond rate, which is 6% or so.

Using that number, you can calculate implied growth by multiplying the P/E by 0.68, and then subtracting 4.25. For instance, if the P/E is 50, the formula gives you an implied 30% annual earnings growth rate, which, by the way, is not sustainable for most stocks. If you don’t want to do the math, you can look it up on page70 of my book, “Fire Your Stock Analyst.”

Kirk:  Just to be clear - how do you define overvalued?

Harry Domash:  I’m not big on defining overvalued. As I mentioned before, valuation simply puts a number on the market’s expectations for a stock. That said, sometimes valuations get so ridiculous that you can’t ignore them. For instance, a forward P/E (based on next FY EPS) of 100 would be overvalued.

Otherwise, in my experience, stocks rarely go down because they are overvalued. Yes, sometimes analysts downgrade a stock based on valuation, but that’s usually a buying opportunity because the stock will probably pop back up. Stocks usually go down because they miss current growth expectations, or the firm reduces forward guidance (its growth forecasts for next Q or next year.). When that happens, valuation doesn’t matter. Low P/E stocks drop just as much high P/E stocks.

Kirk:  You believe it is important for investors to establish a target price (you provided a 7 step formula in the book and a 5 step formula in this previous article). After you set them, however, when do you know it is time to reduce and/or increase your initial target? In my experience, price targets can be dangerous things because they tend to bias your analysis and cloud your forward judgment because you expect the target to always be hit.

Harry Domash:  In my book, I said that price targets were mandatory for value investors and a good idea for growth investors. Because of the reasons outlined in the Valuation question, I have stopped using price targets for growth stocks. For value stocks, you would simply recalculate the target using your current growth and earnings forecasts.

Kirk:  You've said in your book that growth investors will "do best by picking candidates in fast growing industries" and that you "can score the biggest profits by pinpointing the eventual winner in a still-fragmented emerging industry." What are some rules of thumb for doing this?

Harry Domash:  Usually, over time, one or two companies end up dominating an initially fragmented industry. The dominators’ shareholders often win big and the others lose out. The eventual winners are usually the firms with the fastest revenue growth, the highest gross and operating margins, and the highest ROAs.

Kirk:  How do you pinpoint an industry's best investment opportunity?

Harry Domash:  Again, I look for the fastest revenue growth and the highest ROA.

Kirk:  In your book you recommended investor to use a business plan scorecard. Essentially, you would award one point for each category where a company has a significant advantage and subtract one point where it is at a disadvantage (no score is given when the category is not relevant.) 11 categories are provided: brand identity, other barriers to entry, distribution model, access to distribution, product useful life/product price, access to supply/number of suppliers, revenue stream predictability, number of customers, product cycle, product/market diversification, & growth by acquisition. Obviously, this kind of research takes tremendous amount of time and effort. Do you really think investors have the time and information in takes to undertake this kind of in-depth analysis?

Harry Domash:  I tried to make my book a basic text that serious students of stock analysis would find useful. I think I’ve succeeded on that score because I know that it is used in many college level courses.

However, I know that most individual investors have “day jobs” and don’t have the time to do all of that analysis. However, for me, I’ve found that once aware of the scorecard factors—they unconsciously creep into my analysis. What I’m saying is that you don’t have to fill in the scorecard. Once you know what’s in it, you’ll do the scoring in your mind whenever you encounter relevant information.

Kirk:  You've said that "management quality is probably the single most important determinate of a company's success." But, as you know it is difficult to screen for management quality. How do you identify good management?

Harry Domash:  You’re right, you can’t screen for management quality. However, you can get clues from the quarterly report press releases.

Does the company report everything, including cash flow, or do they just include snippets of information. While every firm sometimes has non-recurring expenses, good managements keep them to a minimum. So look at the percentage of non-recurring expenses over time. Normally, operating cash flow should significantly exceed net income. If it doesn’t, management may be doing creative accounting to make reported income look good.

The one thing you can’t rely on is how company execs sound in a conference call. In my experience, the ones who sound the most honest on the call turn out to be the biggest liars. While the conference call info is important, it’s best to read the transcripts rather than listening to the call. You’ll save a lot of time by doing that. Seeking Alpha is doing a great job of providing free conference call transcripts.

Kirk:  Do you still think the use of a company bond rating is helpful in the determination of financial strength (especially with issues concerning faulty ratings by these agencies during the latest credit crisis)?

Harry Domash:  Yes, I know that bond rating agencies screwed up badly in the mortgage mess. But still, analyzing financials is their day job. So, consider bond ratings as another tool in your analysis toolbox, not the final answer.

Speaking of the mortgage mess, anyone with half a brain should have seen that coming. I live in a relatively small town, but I knew plenty of people who were making money by flipping houses. At the end, they were buying with no cash. Sometimes it pays to turn off your computer and just look at what’s happening around you.

Kirk:  You have advised investors to look for the following red flags: slowing sales growth, increasing accounts receivables, rising inventory levels, increasing incomes due to pension plans, capital expenditures lag depreciation write-offs, and temporarily low income tax rates. However, when these red flags show up, isn't it already too late to take action?

Harry Domash:  The only “red flag” anyone notices is slowing sales growth. Most analysts and almost all investors totally ignore the other “red flags.” In fact, I can’t tell you the number of conference calls I’ve listened to where I’ve waited in vain for an analyst to ask about rising receivables or inventory levels, the two most obvious signals warning that bad news is on the way.

Kirk:  How important are insider and institutional ownership to your analysis? A lot of investors look for stocks with insider buying, can you provide some rules of thumb as they pertain to insider and/or institutional ownership?

Harry Domash:  Yes, very high insider ownership, say 60 percent or so, often indicates that private equity investors are waiting for the right time to unload their holdings. Of course, in some cases, the founding owners still hold big hunks of shares. So, you have to see who the shareholders are before you make a decision. You can see that in the Ownership section of MSN Money.

When I first started doing fundamental analysis, we looked for significant insider ownership to assure that company execs wanted the share price to go up as much as we did. Now, all top execs have their personal wealth tied to their firm’s price action one way or another. So, whether their share ownership looks significant or not on Yahoo! doesn’t matter.

Same thing with insider trading. We used to evaluate that to see if insiders were buying ahead of good news or dumping ahead of bad news. Now, everybody knows that everybody is watching the insider trading numbers, so the insiders know how to manipulate them.

Regarding institutional ownership, that is an important signal as to what the smart money thinks. Low institutional ownership, say below 30 or 40 percent, tells you that the big players are avoiding the stock. So should you.

Kirk:  Although it is in the last area of your 11 step approach, you say that "you can often avoid unnecessary losses by looking at a company's stock price chart before you buy." In fact, in your book you made two recommendations I thought were quite interesting. First, you think that value candidates should be trading below or near their 200-day moving average and not more than 10% above the average. Is this a qualifier you would place on all value-focused screens? Why or why not?

Harry Domash:  Yes, the premise of value investing is that you are buying out-of-favor stocks. A stock is not out of favor if it’s in a strong uptrend. Stocks trading more than 10% above their 200-day MAs fit that bill.

Kirk:  You also recommend growth investors to avoid buying downtrending stocks and any stock that is trading within its "the risk zone." What is this risk zone and how do you know when a stock is trading there?

Harry Domash:  Many technical types will tell you that a stock with a parabolic stock chart is risky business. By parabolic, I mean that its share price is rising at an ever increasing rate. I used the term “risk zone” to mean that stocks were overextended along those lines. I defined the risk zone as trading at least 50% above its 200-day MA. However, based on some recent research that I’ve done, I think that 50% is too restrictive. Now, I’m more inclined to move the risk zone boundary up to 60 or 65%.

Kirk:  At this point we've now talked about how you screen and properly analyze those stocks, but let's talk about the most important part of the transaction - knowing when to sell. I know you understand how important this part is because even you've said that "deciding when to sell is just as important as analyzing purchase candidates." So, what are your favorite sell signals?

Harry Domash:  For value investing, you sell when your stock reaches its price target or you realize that your original buying premise isn’t going to happen.

For growth stocks, ideally, you would spot a “red flag” in a quarterly press release that would get you out before the stock dropped. But that doesn’t happen all of the time. Your next best sell signal is when a competitor announces bad news or cuts guidance. Analysts, company execs, and other gurus will tell you that the competitor’s problem was company specific. But it probably isn’t, so sell.

Another possible advance warning is when your stock announces a major acquisition. Such an event usually triggers a small selloff on the announcement. But it’s better to take that small loss. Chances are, only bad news lies ahead.

Missed earnings or cut guidance usually hits a share price hard in this market. So, it’s tempting to decide that the market overreacted and that the stock will recover. It might do a short-term “dead cat bounce” a day or so later, but it may not. As heart wrenching as your current loss is, things will probably get worse. So, sell after any bad news.

Kirk:  As I've told you before, your website is one of my personal favorites. Between your market workshop, stock analysts checklist, free tutorials, etc. you also produce two newsletters - Winning Investing & Dividend Detective - for those who don't want to take the time or effort to do proper stock screening and analysis. In the past year, can you talk about your overall performance in both newsletters compared with the market?

Harry Domash:  Our Winning Investing newsletter has four stock portfolios. Here’s our detailed return info for each portfolio as of December 14 (that’s the day we finish our December issue) for the years 2004-2007.

Those returns are reasonably good. The newsletter itself contains return data on currently held stocks, but I haven’t tabulated overall returns (including sells) for this year, but I’m assuming that the returns won’t be pretty.

Dividend Detective is a website, not a newsletter. Nothing gets mailed except billing notices. It covers 100 or so high-dividend stocks. Some are rated buy, others are ‘do not add,’ and some are rated ‘sell.” While it does have model portfolios, it’s mainly a resource for dividend investors. While I know that return info is important, I haven’t figured out how to compile the data in a time-efficient manner. However, that’s on my “to do” list.

Kirk:  Looking over the past year, please tell us about your most successful pick and how you discovered it.

Harry Domash:  Of the stocks we sold over the past year, salt miner Compass Minerals (CMP), which gained +154% (counting dividends), did the best. But we held it for three years, so I’m not sure that’s what you’re looking for.

In terms of year or less holds, casual shoemaker Crocs (CROX), up +144%, which we sold in July 2007, did the best. Next best was bank security system provider Vasco Data Security (VDSI), which we sold in November 2007. It had gained +102%. We found both the way we find most growth stocks, via a screen.

Kirk:  What was your worst performer recently and looking back was there something you could have done to avoided it?

Harry Domash:  3-D model maker Stratasys (SSYS), which we sold in February at a -28% loss, was our biggest recent embarrassment. We added Stratasys to our Growth portfolio on October 15, 2007. At that time, everything looked good from our perspective. There were no “red flags” of any kind.

But, just two weeks later, on October 31, Stratasys reported strong September quarter results but said its December quarter would fall short of earlier forecasts. We could have sold on November 1 at a 15% loss. But, we violated one of our main selling rules, thinking that the market had overreacted to the bad news.

As is the case for most of our big losses, we ignored our own rules.

Kirk:  One of unusual things about your newsletter is that sometimes you recommend very speculative situations. As someone who stresses hard work, research, and structured analysis and screening, I find this very interesting. To what degree do you think highly speculative investing (sometimes even in thinly traded stocks) has its place within investors' portfolios?

Harry Domash:  We tell our subscribers to put their serious money in our 18% Solution and Mattress Stuffer dividend portfolios. But, everyone wants to have something to talk about in the locker room. It’s hard to brag about a natural gas pipeline operator that jumps maybe 3%, in a good month.

So we have our Growth portfolio for growth stocks that meet all of our usual selection criteria. But our Speculators are for fun. That’s where we put Crocs and other potential rockets. It’s for play money only.

Kirk:  It is readily apparent to me that you think stock dividends are more important to investors than they've been in the past. Can you explain why this is and how investors should build portfolios with this criteria in mind?

Harry Domash:  In the 1980s and 1990s, technology was coming of age. You had Microsoft, Intel, Oracle, Amazon.com, Cisco Systems, and tons of other great growth plays. You could make lots of money by jumping on those fast growers.

But now, there are few fast-growing emerging industries. Solar stocks come to mind, but everybody has already jumped on that bandwagon and it’s hard to make money when you’re the last one to join the parade.

Sometimes we find a small medical device maker with a great new product and good growth prospects. But that field is so competitive that before you know it, General Electric or another big player has jumped in, killing the growth prospects for the small guy that developed the idea.

That scenario makes dividend stocks appealing. For starters, they are the only stocks that actually pay you to own them. With growth stocks, you only make money when you sell at a higher price than you paid.

Many relatively conservative dividend stocks pay 5% to 7% or so yields (yield is 12-months’ dividends divided by the price you paid for the shares). Usually, they are relatively slow growers, maybe growing earnings 8% to 12% annually. But do the math. Long-term that earnings growth rate should translate to similar stock price appreciation. So, the dividend yield plus share price appreciation adds up to a 13% to 19% or so annual return.

While new investors think they can do 30% by picking the right growth stocks, those of us who have been around the block a few times know different.

Kirk:  Obviously, you're a stock picker at heart and its apparent that you think the way to achieve long-term wealth is through individual stocks. What do you think about lazy portfolio strategies using ETFs?

Harry Domash:  I like ETFs. We have a few in the Fund section of Winning Investing and I own them myself. But in the end, ETFs are index plays. They work well when you want to ride a particular trend, say solar, Brazil, agriculture, or energy.

In a more general sense, you get into the issue as to whether it’s possible for any investor to beat the indexes over time. If you believe that it is possible, than, obviously, you need to buy individual stocks.

Kirk:  Those who invest in ETFs have to allocate their portfolios to outperforming sectors. Do you still use the hot and cold screens to locate the most attractive sectors?

Harry Domash:  It’s still important to spot the strong sectors. However, now, with the help of the MSN Money or Morningstar ETF Performance Trackers, you can use the ETFs themselves to spot what’s hot. Here’s a column explaining that process.

Kirk:  If you don't mind, please take us through a "normal" work day for you. I know you don't trade stocks, but how do you organize and spend your time in a typical day?

Harry Domash:  Like most who enjoy “being their own boss,” I work a huge numbers of hours. If you count watching CNBC and Bloomberg, reading the Wall Street Journal, and checking my e-mail as work, I start around 6 am. Otherwise, I usually sit down at my computer around 9 am. Besides for the usual breaks, and an hour or so for a walk on the beach, many days, I work until 11:00 or 11:30 pm.

Besides for that, I don’t have a typical day because I work to deadlines. If I have a column due, I work on that as long as it takes. The week before Winning Investing goes out, I work almost full time on screening, researching, and analyzing stocks. I should tell you that my wife Norma also does screening and participates in the analysis. In fact, all Winning Investing changes must be unanimous decisions.

For the week or so surrounding the first of each month, I work on finding and analyzing stocks for Dividend Detective.

Kirk:  In doing all of your investment research, what are your "can't live without" tools and websites?

Harry Domash:  I have all my portfolios set up on Yahoo and that is my source for news on all stocks of interest. I also use Yahoo’s analyst earnings and revenue forecasts. To keep up with analyst pronouncements, I use Briefing.com. Its e-mail alerts are especially helpful. For screening, I mostly use the MSN Money screener. I also use Morningstar’s analyst reports and Morningstar’s fund screener.

When I’m doing research for a column, I often use Reuters Knowledge, which is a pay site that provides access to analyst reports, news, and fundamental data about almost all stocks.

Kirk:  Through your newspaper, MSN columns, website/newsletter, I'm sure you come into contact with a wide range of investors. In your experience what are some characteristics you find in those who are the most successful? Likewise, what things do you find in those who are destined for failure in the market?

Harry Domash:  The investors that appear to me to be successful are those that can objectively process and act upon new information without bias. These investors know that they are often wrong and are always willing to listen to ideas from others. Most professional money managers fall into that camp.

Conversely, very few individual investors can do that. Most filter all new information through preconceived notions and only accept what agrees with their existing view. Often, they let their political or social views influence their investing decisions. They are sure that they are smarter than anyone else and posses unique abilities to ferret out winning stocks. If you gave them a list of Warren Buffett stocks, they would be confident that they could cherry pick the list and out do WB.

Kirk:  In your career, what were some key lessons that had the most positive influence on you?

Harry Domash:  I’m not sure who said this; it could have been Woody Allen. But whomever it was said that the key to success in any endeavor is to keep showing up every day. That has certainly been true for me.

Before I did investing, I started two other successful businesses from scratch. In all three cases, there were always plenty of reasons why my ideas wouldn’t work and there were many days when it seemed as though failure was at hand. Success came from just showing up every day.

Kirk:  In your opinion what is the very best way to learn how to become an investor?

Harry Domash:  Study, study, study. Read, go to investing seminars, learn from the pros that are already doing it.

Kirk:  A common element I find in all successful investors and traders is that they are always working on expanding their knowledge and improving their strategies. What have you been working on lately in this regard?

Harry Domash:  My search for the Holy Grail never ends. Currently, I am working on a risk/success predictive scoring system for quantifying the medium term (3-6 months) outlook for stocks. I keep voluminous records on the data that existed when I made previous buy/sell decisions. Basically, my scoring relies on what worked, and what didn’t work, in the past. I am working on separate scoring systems for dividend and for growth stocks. Amazingly, I’ve made some decent progress on the dividend part. The growth stock part—not so good, but I just made several changes that I hope will help.

Kirk:  At this point of your career who do you look up to for inspiration and guidance?

Harry Domash:  Nobody in particular. I pay most attention to academic or professionally done reports that examine how different factors affect future stock performance. Basically, I’m still searching for what works, and what doesn’t.

Kirk:  If you had it to do over again would you choose a different career path?

Harry Domash:  Yes, I would probably have skipped engineering and gone directly into finance.

Kirk:  Finally, if you had one piece of advice to share with all investors and traders, what would it be?

Harry Domash:  Be sure to take that daily walk on the beach.

Kirk:  Thank you Harry. We appreciate the insight and look forward to reading your perspectives in the future.

Those of you who would like to read Harry are encouraged to visit his website, book, and MSN columns. Harry's a great resource and one that I'm sure you'll find helpful.