In the checkout line of a supermarket, you’ll typically see all sorts of products that are purposely placed there to be “impulse” buys. When customers finish shopping, the store wants them to come up to the checkout line and see over-priced individually wrapped pieces of candy, 20 oz sodas, and magazines. You can get a lot of that stuff throughout the store in far cheaper, larger bundles, but the store wants you to overpay and they succeed in doing that by convincing your emotional side into wanting something right now.
Stocks can be like that too. If you’re reading my site, unless you’re new to investing, chances are that you read several investing sites. You probably come across a bunch of wonderful stock stories quite often. You’ll read about how great this company is, how under-followed it is, and how its price is quite attractive. It’ll make you agree so completely that you’re ready to buy the stock today, or perhaps tomorrow. Maybe the article even explains why time is limited, like how soon this stock will be on Wall Street’s radar, or as soon as some event occurs, this stock will be loved and bought and the price will go up. Of course you want to buy it before this happens.
The problem is, impulse stock buys are just like impulse candy buys. They skip over our better judgment. Maybe they’re good ideas, or maybe they’re bad ideas, but if we don’t do our due diligence and invest in them anyway, then it’s luck if the investment works out and it’s entirely our fault if it fails. Have you ever purchased a stock only to have “buyer’s remorse” later? I sure have.
Make a Watch List
The solution to this dilemma is to construct and maintain an up-to-date stock watch list. This is a list of stocks that you would like to own if certain conditions are met. Perhaps you’ve found a great company to invest in, but you’re short on investment capital at the moment. Or maybe you’ve got the money and you love the company, but you think it’s a little bit expensive at the moment and you’d rather see if you can purchase it at a better price. Or maybe it’s all there- a great company at a great price and you have the money, but you want to think it over for a bit longer. The point is, you have a list of great companies that are close to being good investments, but you want to hold off for a while.
One of my investing rules is that I never invest in a company that was not already on my watch list. If I see an investment that looks very attractive, I put it on my watch list and think it over for a bit. It could be a few days or it could be months. I never end up buying most of the companies on my watch list because I only pick from my best ideas after thinking for a while about them.
When you have your own portfolio you (should be) very familiar with those companies. You’ve researched them very thoroughly and you keep tabs on their progress. A watch list expands your attention not only to your own investments, but your potential investments. I become very familiar with the companies on my watch list because it’s like they’re already in my portfolio. For some of them, I come to find that they are not something I’d like to invest in. Other times, I end up buying them for my portfolio. With a watch list, it’s like I go to the back of the store and buy a big case of cheap soda instead of buying an expensive 20 oz soda in the checkout line because I buy them on my terms instead of on the whim of emotion.
I’ve heard advice that if you want to buy something at a store, you should think about it for 24 hours first, and if you still want to buy it, then go for it. A stock watch list is kind of like this, except I have no time limit. It lets my emotional response to the stock dissipate so that I can see if there really is a good investment there. I recommend that all long-term investors keep an updated stock watch list.
{ 5 comments… read them below or add one }
Very sound advice here. I have a watch list and I would say my average wait time is about a year before I buy
there are several reasons and that’s not what I intend to do, but it’s how things have played out the last few times I have bought stock.
It’s like my parents used to tell me when I wanted something RIGHT NOW, “That toy will still be there tomorrow” and the stock market will still be there tomorrow…
Jesse,
That sounds good to me. Sometimes inaction is the best action. I can’t really offer a number for my average time. It can be measured in weeks or over a year. It depends on the market for me. During 2009 my wait time was very low. During 2010 it’s longer. When the market is very highly valued, it can be a lot longer, as I have fewer values to pick from.
DivMonk:
Problem is with different accounts, ended up having different lists. With no central location, I just dropped the tracking. Probably should resurrect the list.
Instead I switched to independent research reports as my “tracking”. Would NOT recommend that as a strategy – definitely had buyer’s remorse!
For easy tracking use a Google portfolio — as a price, put in the price you want to buy it at.
As for the importance of the list — I definitely agree (and have succumbed to the temptation to purchase to early more than once). There is a psychological principal behind it — it’s called “buyer’s paralysis” — a bad name for a good concept. It makes you stop and think when you have so many choices, thus no rash decisions. See James Montier’s books for more on the subject – they’re invaluable. Great site BTW.
Thanks for the comment Kevin.
I use google portfolio as a way to keep a stock watch list. It really is a nice tool.
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