Beginners' Portfolio: We Start A Watchlist

Published in Investing on 20 September 2012

A key part of any investment strategy is to keep a close eye on potential purchases.

This article is the latest in a series that aims to help novice investors with the stock market. To enjoy past articles in the series, please visit our full archive.

In recent weeks, I've been pondering what shares to invest in next, and we've had a few ideas -- but we've also reflected on the fact that we don't need to rush into anything and we can take as much time as we like. In fact, as investors, we're always faced with a clash between wanting to be fully invested so that our money is working to its maximum benefit, and being careful not to rush into investments too hastily.

In addition, we're also faced with another clash -- between holding on for the long term, and selling and buying something else. The Foolish message has always been that investing for the long term is by far the best approach, as it keeps trading charges to a minimum and reduces the temptation to lose money by following fad and fashion. In short, it's surprising how many short-term investors end up buying high and selling low -- the exact opposite of what we want to achieve.

Never sell?

So, once we're fully invested, do we sell something so we can buy the latest hot stock? No, of course not. But at the same time, if we see something that really does look like a bargain, do we stubbornly let it go because we're adamant that we're holding on to our current shares forever? No, that would be ideological nonsense.

What "long-term buy and hold" really means to me is that we should buy shares that we initially would wish to hold for the long term (though, even then, there's nothing wrong with the occasional short-term punt for a bit of fun, providing we understand that's what it is and don't do it too big or too often). But once bought, that doesn't mean we should should stubbornly hang onto our current holdings through thick and thin.

Anyway, what I'm really talking about is setting up a watch list of candidates that we can keep an eye on alongside our current holdings. It will achieve two purposes -- firstly, to help us choose the final additions to our portfolio, and later to keep a track of possible alternatives should fortunes shift. So what's going into it?

What to track

We've looked at general consumer goods suppliers, and though I think they're a bit expensive right now, we should keep an eye on them, so I'm putting Unilever (LSE: ULVR) into the list. I've also been looking at engineers lately, because I think the sector is generally undervalued. In fact, I've been considering adding BAE Systems (LSE: BA) to the portfolio for a little while, but the recent news of a possible merger with the pan-European corporation EADS, a constituent of the Euronext index and listed in Frankfurt and Madrid, means that needs rethinking. But it can certainly go in the watchlist. I'm also quite impressed by Ricardo (LSE: RCDO), which I looked at earlier today.

What else? Well, for long-term investors interested in dividend payouts, utilities are pretty safe payers, so I'm going to add United Utilities (LSE: UU) to the list -- I actually don't think it matters a great deal which of the big ones we choose, as their valuations tend to follow each other, and having one in our watchlist will help us track the industry.

So, here are the first few entries in our new watchlist...

CompanyPriceForward P/EForward dividend
Unilever2,292p183.4%
BAE Systems340p8.45.6%
Ricardo368p123.6%
United Utilities729p185%

Can you see what it is I like about BAE? Anyway, that's just the first four, and there we're not really restricted in the number companies we can keep an eye one. So we'll certainly be expanding this list -- please feel free to make your own suggestions, below...

And in the meantime, a big part of the Beginner's Portfolio is based on a strategy of buying strong dividend-paying shares, and Neil Woodford is an acknowledged expert on it. The free Motley Fool report 8 Shares Held By Britain's Super Investor" takes a look at some of his major holdings. Click here to get your free copy, while it's still available.

Are you looking to profit from this uncertain economy? "10 Steps To Making A Million In The Market" is the very latest Motley Fool guide to help Britain invest. Better. We urge you to read the report today -- it's free.

More for beginners:

> Alan does not own any shares mentioned in this article.

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Comments

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goodlifer 20 Sep 2012 , 8:24pm

"There's nothing wrong with the occasional short-term punt for a bit of fun."
Nothing wrong with encouraging rookies to play with fire?

Get hooked on this kind of fun - the fascinating game of trying to beat the market - and you'll turn yourself into a speculator without even realising it.

And everybody knows what happens to speculators, or anyway most of them.

a937fns 20 Sep 2012 , 10:19pm

Hi

I'm starting my first share portfolio and have come up with these 7 companies, which I'll be buying £1,000 of each. I would really appreciate any comments on how it looks. My aim is for a decent income, but also some decent medium/long term growth:

RSA, Seadrill, Vodafone, Astrazeneca, Carillion, National Grid and France Telecom

Obviously I may add to these in the future.

ANuvver 21 Sep 2012 , 6:00am

goodlifer:

I don't think there's anything wrong with the odd punt here and there, as long as you have a solid investment basis already established and you only speculate with what you are genuinely prepared to lose.

I think everyone should gamble a little at some stage, just to understand it and learn from the experience.

It's highly educational to lose a meaningful amount on a long-shot, and frankly I wish that on any new investor. No amount of sober and sensible advice can beat that kind of experience. The danger for a newcomer, of course, is to win on a donkey on your first time out, become a "bagger" addict and start chasing the same sort of returns with larger amounts.

One of two lessons tends to get learned very quickly:
1. That's not the way to go, I'll try the slow'n'steady route instead.
2. I'm not right for this.

I've sat at blackjack tables (where possible under the dealer) and watched people burn what I'd regard as horrendous amounts. Some are chumps or addicts, some are just operating on a radically different level of "fun money" compared to mine.

trmeer 21 Sep 2012 , 10:31am

As ANuvver says, there's nothing wrong with a bit of trading here and there as long as you're responsible about. I made a good profit from buying Aviva, Cape and Carillion near their lows a few months back and selling recently for 15%-20% profit. If you can see a company is selling ridiculously below it's intrinsic value the chances are that the price will rise in the pretty near future. I think the key point is that I would be happy to hold these companies and collect a 7% dividend if the price didn't rise but if I can sell it a few weeks later for a decent profit, I'll happily do that too. There are many ways to make money if you have common sense.

goodlifer 21 Sep 2012 , 11:00pm

trmeer

It might be worth considering two superficially similar situations rather carefully.
I both cases I've got some money to invest.

Situation one.
Plastic Pills look cheaply priced, so I work through my checklist and go ahead and buy, with every intention of holding them for ever.
To my delighted surprise, their price shoots up to well above what I think they're worth.
I think we'd both agree it's common sense to cash in and sell.

Situation two.
This time Plastic Pills cost more than I think they're worth,
But I notice they've been steadily been going up over the last month or so, they're tipped by some penny-a-liner in from the Telegraph, and my MF expert instructor thinks I deserve a bit of fun,
So once again I go ahead and buy.

Am I a mug?
Or not?

Gengulphus 22 Sep 2012 , 11:05pm

And in the meantime, a big part of the Beginner's Portfolio is based on a strategy of buying strong dividend-paying shares, ...

Is United Utilities supposed to be one of those? If so, what makes it count as a "strong dividend-paying share"? Its forward dividend cover, which is about 1.1 on your forward yield and P/E figures? Its historical record of growing its dividend, which is basically negative? Something else?

Gengulphus

goodlifer 23 Sep 2012 , 12:58pm

ANuvver
"It's highly educational to lose a meaningful amount on a long-shot, and frankly I wish that on any new investor."

If this poor guy's anything like me he won't need bad advice from self-confessed experts to make his fair share of mistakes.

On the other hand if he's unlike me, and never makes mistakes, said experts might do better than ask for advice than fall over themselves to give it.

TMFBoing 26 Sep 2012 , 4:41pm

Is United Utilities supposed to be one of those? If so, what makes it count as a "strong dividend-paying share"? Its forward dividend cover, which is about 1.1 on your forward yield and P/E figures? Its historical record of growing its dividend, which is basically negative? Something else?

UU is in there more as a placeholder for utilities companies for now, as they traditionally pay the bulk of their earnings out as dividends. The watchlist will be refined as we go - more in the latest article.

Best,
Alan
TMFBoing

MrSkinny 03 Oct 2012 , 8:35am

I would go for NG. instead of UU for the utilities share.

TMFBoing 04 Oct 2012 , 9:51am

Hi Fools,

We now also have a Beginners' Portfolio Discussion Board, at...

http://boards.fool.co.uk/beginners-portfolio-51822.aspx

Foolish best,
Alan
TMFBoing

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