I'm a newbie and had the same concern last June.
You will here both sides.... but I guess it's what you have the most success with.
I went right by the book with Weber instructions... and guideance from here. I foil the pan and use water, and only Kingsford Blue.
i'm very pleased with my results, I guess if I had some bad results I may need to try something different.Right now I'm as happy as a pig in _ _ _ !
For those just starting out with the WSM, my advice is to use water in the pan. It virtually guarantees "low & slow" 225-250*F cooking temps because you just can't get the WSM much hotter than 300*F with water in the pan. Once you've got some experience under your belt with controlling the WSM, you can try eliminating the water. Many people never go back to water after dropping it. But for low & slow, I continue to use water in the pan. I'm just old-school, I guess. And remember, most of the time when I'm barbecuing, I'm doing it as something I intend to feature in an article on The Virtual Weber Bullet, so I'm trying to illustrate what I think is "best practice" for the beginner, and in my opinion, that includes the use of water in the pan.
As for charcoal, to each his own. But here's a little secret that I've never told anyone. While I've grilled with lump on many occasions, I have never used it in the WSM. I've always used briquettes, several varieties over the years, in fact, but have pretty much settled down to Kingsford Original for the reasons I wrote about in my All About Charcoal article. Cheap, consistent, long-burning, and readily available. The choice of many barbecue champions. Who am I to argue with that?