Jason Ramage serves as an advocate and inspiration for young folks (at any age) who should start investing now.

Every investor probably has a list somewhere, written down or in their head, of stocks they like. Before you even start investing, you need to start with some kind of list which you eventually narrow down. My watch list has been in a portfolio that I track on Yahoo! Finance. It’s easy to add stocks to the list, and check their prices and news, but it hasn’t actually been very profitable to me. (We are trying to make money here, right?) Just scrolling through my list of about forty stocks, there are two or three where I know I missed the boat because I wasn’t even paying attention.

The majority of my “watch” stocks I place in the “If only it weren’t so expensive…” category. They are well-managed companies with consistent sales and earnings growth rates, growing profit margins, a good SSG… most everything is great except the market is currently pricing them well above what I am willing to pay. So my goal is to catch one of these well-managed companies at a point when some temporary bad news has hit the stock price hard, or perhaps after a couple years earnings growth will catch up with the stock price to provide for a more fair valuation.

One thing every investor absolutely must know is that the stock market is volatile. You must be prepared to stomach a volatile stock market and the effect it can have on your portfolio’s valuation. Pull up some quotes on a few stocks and check the 52-week trading range. A 50% difference between the one-year high and low prices is not unusual. You will often find even greater differences.

While volatility can be scary, it can also be your best friend. Take a list of stocks that you would love to own. If you start tracking this list today, chances are within the next year (most likely sooner) at least one of those stocks is going to fall into your buy range. However, if you aren’t keeping track of your watch list, you could miss a rare buying opportunity.

Here are a few suggestions that should make the work of watching the stocks on your back burner a little easier.

1. Limit the size of your watch list.

   Most people will advise investors to own somewhere between five and twenty stocks in their portfolios, depending on how much time you have to track your stocks. If you have a huge list of 40 or 50 stocks, you should be able to eliminate several lower-quality stocks. Watch the trends in quarterly sales and earnings (by the way, this is easy to do with the PERT-A graphs in Toolkit Pro) and read what management has to say about future earnings projections. If you find a company isn’t fulfilling your expectations, scrap it from your watch list so you can focus on your higher quality companies.

2. Write down two or three reasons for watching a stock, and perhaps why you are not going to buy it right now.

   This gives you a way to objectively evaluate how a company has changed since you added it to your watch list (or since your original investment if you decided to buy). A good SSG, showing consistent and strong sales and earnings growth, excellent management, and a fair valuation automatically provides you with several reasons for buying or watching a stock. You may want to take note of things that impress you about the company, like a great Investor Relations web site or a relatively straightforward and honest portrayal of the company in the annual report. As simple as it seems, writing things down forces you to be more objective in your research. It can be easy to fall in love with a stock when all the analysts are writing glowing reports, and maybe not realize management has strayed from their original focus too far, or are sacrificing quality for the sake of growth. Plus, you can easily pick up where you left off when you return to research the stock further.

3. Focus on industries that you understand.

   We all have our areas of strengths and knowledge that can give us an advantage investing in certain industries. Being invested in McDonald’s (MCD) for eight years has given me a pretty good understanding of the restaurant industry and especially fast food. I like to track competitors to McDonald’s, like Wendy’s (WEN) and Yum! Brands (YUM) since I have already been tracking the major news stories in fast food for several years and have a good understanding what kind of growth rates and valuations to expect. This background knowledge could help me quickly realize a rare buying opportunity, or perhaps avoid a stock that Wall Street is falling in love with.

   Of course, be mindful of diversification too. If you have six stocks in your portfolio, you probably don’t want three restaurants. You raise the stakes by investing large portions of your portfolio in similar industries, or even similar-sized companies. Should a recession cause restaurant stocks to under-perform for the next three years, your money is either stuck there or you might be forced to take a loss. There are also periods when small and medium-sized companies perform better than large, “blue-chip” companies and sometimes it’s the large companies that perform better. By spreading your money out, you can avoid the sharp rises and falls in the value of your overall portfolio (and sleep a little better at night!)

4. Develop a system that works well for you.

   This is something I have just begun working on myself. I have never actually had a system for tracking my watch list. I have created an Excel spreadsheet that lists the stocks I’m tracking, the date they were last updated and some basic information (price, P/E ratio, earnings estimates) that is available from an online finance web site (like finance.yahoo.com or moneycentral.msn.com) and some information from the SSG. Nothing too detailed… I mostly want to be able to quickly eliminate the overvalued stocks (which is most of them) and focus my research on just two or three companies.

   If you find a way to track your watch list that is easy to follow through with, you will certainly find opportunities that, more or less, fall right into your lap. All it takes is the patience to wait for the market to offer you the price you want (remember the market is highly volatile… the odds are in your favor) and pounce on it when the time comes. In the meantime, tracking the progress of companies is also fun, and provides you with a greater understanding of how the company works, what the management is like, etc. This is all extra knowledge outside of understanding the SSG and its results, but in the long run a greater understanding of individual stocks can only make you a better investor.

   
   

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