Your watchlist is an essential tool for your investment process. It is a list of companies that meet your criteria and includes both your current positions and potential future investments. This is where the real work begins – waiting, observing, and reading constantly to identify the right opportunities to invest.

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What is a Watchlist of stocks?

Having a well-curated watchlist of potential investments is critical to being effective with your time. It helps you stay focused. Filtering out irrelevant information and leaving only the news, alerts, and reporting that is most likely to lead you to take action.

As an investor, you need to define a clear investment strategy and identify the areas where you want to hunt for opportunities. However, it is rare to have a list of companies that all meet your criteria straight away. Businesses are always evolving, and you may need to wait for certain catalysts to play out before investing.

That’s where your watchlist comes in. By narrowing down a pre-screened group of companies that you have been observing, you can perform better in the long term. Hunting for investment ideas is a daunting and never-ending task. Your watchlist can help you stay prepared and confident when it’s time to invest.

The Watchlist is the step-by-step process of identifying the companies that you align with and creating a database for yourself. Having a clearly defined watchlist is probably the most under-utilised action that I see investors not taking advantage of. A lot of investors have a watchlist, but it is not curated to suit their strategy and philosophy. This becomes a distraction when looking at companies outside of your competence, risk tolerance and ability to assess. This leads investors further away from achieving their goals.

Why is an Investment Watchlist important?

Investors can benefit from using a Watchlist to stay focused. By organizing all of their research, idea generation, and companies of interest, the process can be streamlined. The Watchlist is not just about monitoring stock prices, but about creating a personalized system of information, news, alerts, and resources that are directly relevant to the investor.

The Watchlist should only include companies that capture the investor’s attention enough to want to learn more about them. It’s not about adding companies that are the subject of rumours or hype without doing any prior research. As we discussed in the idea generation phase, screening and creating hunting grounds, the goal is to quickly eliminate ideas that don’t meet certain criteria. Companies that make it onto the Watchlist have already passed some screening protocols.

Investors need a Watchlist to help facilitate the flow of information around “Actionable Ideas.” These are ideas and companies that have the potential to make it into the investor’s portfolio. Real-time monitoring of these ideas and keeping tabs on them can help investors prepare to take action when it is needed.

How to build a Watchlist?

This watchlist will contain a list of stocks that you want to track for investing. These will already meet certain criteria formed by your Investment Philosophy, Circle of Competence, and your Investment Style. Having a well-defined watchlist allows the patient investor to simply wait for good investments and buying opportunities rather than continuously be on the hunt for them.

Being prepared with prior research and checklists can help you to make better decisions when the time calls for it. Perhaps a large sell-off happened after some negative news occurred around a company on your watchlist. However, you have thoroughly researched the business and have the confidence it is “Mr Market” reacting. You’re able to go against the herd and have the courage to buy. The Watchlist allows you to sit in preparation. A watchlist is about being vigilant.

Once an investor screens for ideas and creates a pool of companies within their investable Universe this needs to be consolidated. Here is how I group my watchlists around three core categories, this makes up my “Inventory”.

Current Holdings

This is my current holdings, a list of my portfolio. I have alerts set up to streamline all news and reporting to do with each company. It allows me to stay focused by automating alerts, so I don’t miss anything and am always prepared. I have a watchlist of my current holdings for the reasons below.

• Observing for sell signs, to see if the Investment Thesis breaks.
• Monitoring to see if there are catalysts to top up my position.
• Allows me to stay alert to what is happening with my investments.

Potential Investments

These are companies that present a good buying opportunity. They have passed initial screens; a checklist however may need a catalyst maybe in the business or perhaps the right price. Sometimes companies can sit on this watchlist for years until a theme plays out or an expansion pays off. I don’t mind coming a little late to the party as long as I miss the awkward start!

• Perhaps they are overvalued or too much hype is built into the price.
• May be waiting for certain milestones and business goals to be achieved.
• Watching for certain catalysts or growth to play out.
• Waiting to see if management deliver on their word.
• Sometimes I am waiting on liquidity in smaller companies.
• These can also be compelling competitors I am keeping a close eye on.

It’s important to keep valuations next to the ideas so you know WHEN a buying opportunity awaits. I run a few notes of rough valuations so that I can set alerts when the share price meets an approximate buying price.

Interesting Ideas to Research

These are companies I have found interesting during the idea generation stage that warrant further research. They will still have passed some initial screens. I am always selective of what gets added to the Watchlist.

• Companies I have not conducting deep research or analysis on.
• Perhaps they passed a checklist but don’t warrant deep work on just yet.
• A lot of early stage, small-cap growth companies fall into this category.
• Sometimes undervalued opportunities I am waiting to see what the fallout may be.
• Companies that are outside of my competence however I am curious about.

Other Watchlists that I form…

I have various other watchlists categorized by market cap and geography. Recently, I have been creating thematic watchlists based on emerging trends and sectors that I find interesting and believe will have a promising future.

These watchlists include funds and other investor holdings that align with my investment style. It’s important to keep an eye on their movements and what they’re holding. If I receive updates from investor funds via shareholder letters, I add companies that I may have missed and need to be investigated further.

The key is to continuously develop, fine-tune and clean the watchlist. It’s essential to keep it updated and remove companies that no longer meet the research criteria, fail checklists and valuations, or fall from grace. It’s important not to allow anything to occupy mental space if there is no potential for action from the idea.

Keeping the watchlist clean is like doing a regular stocktake on your inventory.

Define what makes the cut.

Developing a watchlist for investments is crucial, but it is important to know what to look for first. Regardless of your investment style, you can create a watchlist that suits your needs.

For instance, value investors can create a watchlist of undervalued companies that have not yet provided them with a sufficient “Margin of Safety”. Dividend investors can create a watchlist of companies with increasing dividend yields or payout ratios. Growth investors can create a watchlist of companies that are about to scale and provide hyper-growth opportunities based on growth metrics, market share, and news. Quality investors, on the other hand, can create a watchlist of companies with wide MOATs, high and increasing returns on capital, and strong gross margins.

To develop a successful watchlist, it is essential to define your criteria and the basis for making the list. Once you have an idea of your criteria, you can start to form the database around those areas.

The bottom half of My Investment Process showing how the Watchlist comes in.

For example, my buying opportunities Watch List comprises companies that have the qualities I am looking for. All the companies on my list have returns on capital employed above 20%, gross margins above 40%, no-to-low debt, low share count, and free cash flow. I add only those companies to the list that suit my criteria. The watchlist is always ready with the companies that match my requirements, enabling me to make a move when the time is right.

Another way to think about Watchlists.

The watchlist for me becomes a place to vet what I do own against other potentially better ideas. I am quite a concentrated investor backing my highest conviction ideas. Usually holding between 8-12 positions at most in my active fund. I look at companies on the Buying Opportunity watchlist and compare them to my portfolio. I am not one to keep adding more positions. It does not make sense to me.

An idea must be better than something I already own. If a company does not have a better chance to compound my capital than something I already own, then why own this company? Why not just add more capital to my highest conviction ideas?

So, for me, I am looking at ideas from my various watchlists to either add more to holdings or replace certain holdings. On occasion, I may take a starter position in something I believe can develop into a quality growth company.

In Summary…

It’s not the size of the watchlist that matters, but the quality of it. Having too many ideas and adding every new idea to a watchlist can create an overwhelming amount of information to gather. You can’t set alerts to 200+ companies as that would result in hundreds of brokerage alerts a year.

What is important is how you define and interpret the database. It is essential to keep notes next to each of the ideas. The watchlist can be built through brokerage accounts or online via websites like Yahoo Finance. I keep one offline in Excel for a list of buying opportunities connected to my brokerage accounts.

The reason why I keep track and notes next to each idea is that it’s important for me to go through why something is on the list to begin with. I want to know why it made the cut, why I have not invested in it, what am I waiting for, what would make this company a buy, what metrics do I want to see, and what milestones need to be achieved. What would make me change my mind and invest?

This is where the value of the system comes in. You can start monitoring potential investments, watching for the catalysts to change to make the idea investable.