Watchlists help you invest -- just don't fret about missed chances.
A watchlist is a dangerous thing. It can torment and tease you with all the stocks you should have bought, but didn't. The ten-baggers that got away, the takeover targets you turned down. It is a tale of missed opportunities and might-have-beens, so it is hardly surprising that some people shun them altogether.
I regularly suffer at the hands of my watchlist, but I still check it most days. Why? Because if you can stand the pain, it can teach you a lot about picking stocks.
But approach with caution.
Turning down a free ride
In July last year, I added oil exploration company Aminex (LSE: AEX) to my watchlist, after David Holding wrote that it offered investors A Free Ride. I thought long and hard about investing in the company, whose shares were then trading at 8.25p, but my nerve failed me at the last. My watchlist dutifully informs me that Aminex is now trading at 15.3p, a rise of 82%.
If you believe, like me, that Hindsight Will Break Your Heart, your watchlist will pile on the agony.
Tullett trouble
Last week, it was a toss-up between investing in interdealer Tullett Prebon (LSE: TLPR) and stockbroker Charles Stanley (LSE: CAY), two companies whose shares have taken a hammering in recent weeks, and looked ripe for a rebound. I bought Charles Stanley at 225p a share, and it has since crept up 1%. My watchlist tells me Tullett Prebon is leapt 10%. Ouch.
Last year, I took a punt on Royal Bank of Scotland (LSE: RBS), and lost 26% of my money. My faithful memory jogger reminds me that I had been tempted by IG Index (LSE: IGG) at the time, and that has subsequently risen 31%. That hurts.
And yet still I feed it. In the last fortnight, I added potential rebound plays Aer Lingus (LSE: AERL), Enterprise Inns (LSE: ETI) and technology investment trust Polar Cap Technology (LSE: PCT) -- they are up 10%, 9% and 8%. It's enough to drive a Fool crazy. So why do I still keep peeking at my watchlist? Because I think it makes me a better investor, and here's how.
1. It is free fun
Adding a share to your watchlist doesn't cost you a penny. No dealing charges, no stamp duty. If the shares tank next day, your wealth remains intact. The obvious downside is that if they soar, you don't earn any money either, but you have to learn to live with that. You can't buy every bloomin' stock! Running a watchlist adds to the fun of investing. You can still exercise your stock-tipping instincts, and cheer on winners and losers from the sidelines, even if you haven't got the cash to invest right now.
2. It isn't all bad news
I've now got an unwieldy 20 stocks on my watchlist and surprise, surprise, they aren't all three or four baggers. Most are pretty humdrum, yet were hot tips at the time. My watchlist reminds me that I get it right sometimes. It also tells me that most stocks don't blow the lights out, especially in the short run. For every idea that flies, two or three barely leave the starting blocks. Those are the odds you are facing, so be realistic.
3. You can test the tipsters
There are scores of tipsters out there, but one easy way to check if they're any good. Toss their best ideas into your watchlist, and see if they sink or swim. It's amazing how many hot tips quickly take a cold bath.
4. Watch and pounce
Perhaps the best use of a watchlist is keeping an eye on good companies that you'd like to buy if only they were a little cheaper, and waiting to see if the price slides back into range. I've been keen to buy a mining company for some time, and my watchlist is keeping a close eye on Vedanta Resources (LSE: VED), keen to alert me to any pricing setback. It's also got its eye on two or three other likely lads.
Keeping your sanity
You still have to use your watchlist carefully. You have to remember why you chose to watch a stock rather than invest in it, especially if it subsequently flies out of reach. I regularly remind myself that Aminex was too much of a punt for me, I already had enough excitement in my portfolio.
And if you're waiting for a stock to slide, but it soars instead, you have to resist piling in at that higher price. There will be other stocks!
It is possible to operate a watchlist without entirely losing your sanity. But approach with caution, or you could lose your mind.
More from Harvey Jones:
> Harvey owns shares in Charles Stanley.
