In last month’s article, I published a brief overview of the UK’s investment budget and explored how some of the changes may impact the investing landscape. Since then, reactions to the budget have turned decidedly sour, with most investors now resigning themselves to the view that the new Labour government are saying one thing and doing another “We want growth but we’ll hike your taxes”. As a patient, long-term investor, I’ve watched the current budget much the same as others, recognising that “this too, shall pass”. With this in mind, my focus is now on cultivating my investing watchlist in preparation for 2025.
In the world of patient wealth builders, the foundation of any enduring portfolio lies not in frenzied speculation but in measured preparation. To the astute investor, an investing watchlist is no mere accessory – it is an essential tool, an architect’s blueprint for future prosperity. A well-crafted watchlist, much like a meticulously tended garden, requires both diligence and discernment, a keen eye for quality, and the patience to allow seeds to flourish over time. In today’s article, I will share an insight into how I construct my own watchlist and share some principles I apply in pursuit of ensuring a sound investment strategy.
The Purpose of an Investing Watchlist
To begin, let me clarify the purpose of an investing watchlist. It is neither a shopping list for immediate acquisitions nor a whimsical collection of speculative fancies. Rather, it is a dynamic curation of high-quality opportunities -companies, funds, or assets – that an investor might acquire when conditions align favourably.
For those accustomed to the idea of long-term investing, the value of such a tool is self-evident: the patient investor does not chase the herd but prepares to act decisively when the time is right. A watchlist provides precisely this advantage, a curated resource ready for moments of valuation misalignment or market dislocation.
Step 1. Define Your Investment Criteria
Before one can populate a watchlist, clarity of purpose is paramount. A discerning investor must first articulate the criteria by which opportunities are evaluated. The principles here will vary depending on your goals – as with all things investing, one size will not fit all, but a consideration of the following concepts is helpful when building your watchlist.
Financial Health: A company or asset of enduring value must demonstrate financial robustness. Balance sheets matter – assets must outweigh liabilities, and debt must be proportionate and well-managed. Look for businesses with ample cash flow, conservative leverage, and the ability to weather economic downturns.
Profitability and Growth: The capacity to generate profits consistently is the hallmark of a high-quality enterprise. Seek businesses with a history of growing revenues and margins. Avoid those whose fortunes hinge entirely on cyclical or speculative conditions.
Valuation Discipline: True wealth builders understand that price and value are not the same. A fine business bought at an inflated price is no bargain at all. Include on your watchlist only those assets which, at a fair or undervalued price, would constitute an attractive investment.
Dividends and Income Potential: For those who favour income generation, prioritise companies or funds with sustainable and growing dividends. The stability of the payout matters more than headline yield.
Moat and Competitive Position: A truly exceptional business enjoys what is often referred to as an “economic moat” – a durable competitive advantage that allows it to maintain pricing power, defend market share, and deliver superior returns over time.
Write these criteria down and review them regularly. They form the backbone of a disciplined watchlist strategy.
Step 2. Diversify Thoughtfully Across Sectors and Geographies
The prudent investor understands the perils of concentration and the benefits of diversification. Building a watchlist is no different. A well-balanced watchlist should account for both sectoral and geographical exposure. Divide your list into broad sectors such as financials, consumer staples, technology, healthcare, industrials, and infrastructure. Consider including areas of enduring demand, i.e those which fulfill fundamental needs. For instance:
– Financials: Banks, insurance firms, and asset managers with long-standing reputations.
– Consumer Staples: Providers of essential goods such as food, beverages, and household products.
– Healthcare: Pharmaceutical companies, medical devices, and healthcare providers.
– Infrastructure: Utilities, toll roads, REITs, or energy producers delivering stable cash flows.
The old adage bears repeating: “invest in businesses people cannot live without”.
While it is tempting to keep one’s watchlist close to home, global markets offer opportunities of great distinction. For the UK-based investor, look beyond the FTSE to Europe, North America, and the emerging economies of Asia. Whilst the UK is a bastion of income-generating businesses, the US has many world-leading innovators and global leaders, and for the more adventurous investor, Emerging Markets offer tantalising growth opportunities in rapidly developing economies.
A watchlist with measured global exposure ensures you are prepared to act wherever opportunity arises.
Step 3. Research and Due Diligence
A watchlist built on conjecture or hearsay is of little value. True investors must practice rigorous research, reviewing annual reports, investor presentations, and quarterly filings. Focus on the metrics that matter: revenue growth, margins, return on equity (ROE), and cash flow generation. Understand the company’s strategy, risks, and opportunities. It is also key to study the competitive landscape, ensuring you develop an understanding of the factors that drive industry.
The wise investor also takes steps to value the assets on the watchlist, and establish whether a company’s shares trade at fair value relative to its peers and history. Familiar metrics include:
– Price-to-Earnings (P/E) Ratio which measures a company’s share price relative to its earnings per share (EPS). The ratio essentially tells investors how much they are paying for every £1 of earnings. A P/E of 10 suggests you are paying £10 for every £1 of the company’s annual profits. Compare the P/E ratio of a company to its historical P/E, peers, or the broader market index. For example, a company with a P/E of 12 while its industry peers trade at 18 may represent a value opportunity.
User Warning: The P/E is based on past or forecast earnings, which can be manipulated or misrepresented through accounting practices.
– Price-to-Book (P/B) Ratio which compares a company’s share price to its book value per share. Book value refers to the company’s net asset value (assets minus liabilities), often found on the balance sheet. P/B is particularly useful for asset-heavy businesses such as banks, REITs, and industrial companies, where book value is a reliable measure of intrinsic worth. Be wary of relying on P/B for businesses with intangible assets (e.g., technology or brands). For these companies, book value may not capture the value of intellectual property or goodwill.
– The Dividend Yield expresses a company’s annual dividend payout as a percentage of its current share price. For example, if a company pays £2 per share annually in dividends and its stock trades at £100, its dividend yield is 2%. The dividend yield reflects the income return on investment, making it particularly relevant for income-focused investors with a higher yield indicating an attractive income opportunity. Investors must investigate whether the yield is sustainable however, as high yields sometimes result from falling share prices- a potential red flag indicating trouble within the business.
Focus on the sustainability of dividends. Metrics such as the payout ratio (dividends as a percentage of earnings) and cash flow generation are key indicators. In addition, compare yields to alternatives such as bonds, savings rates, and other dividend-paying equities. A well-balanced portfolio might include a mix of high-dividend stocks and growth companies that reinvest for future gains.
– The Free Cash Flow Yield measures a company’s free cash flow relative to its market value (or enterprise value). Free cash flow is the cash generated from operations after capital expenditures (CapEx), and it is the lifeblood of a business. For example, if a company generates £5 of free cash flow per share annually and its stock trades at £50, its FCF yield is 10%. The FCF yield shows how much free cash a company generates relative to its valuation. It provides a clearer view of a company’s financial health and profitability than accounting earnings. Free cash flow is a superior indicator of a company’s ability to create shareholder value. While earnings can be manipulated, cash flow is more difficult to distort. FCF yield is especially useful in capital-intensive sectors (e.g., energy, industrials) and for identifying companies with robust financial flexibility.
While each of these metrics provides useful insights, they are best used in combination rather than in isolation.
- P/E and P/B ratios help identify valuation relative to earnings and assets, respectively, making them staples for value investors.
- Dividend Yield reveals income potential, appealing to those prioritizing cash flow and financial stability.
- Free Cash Flow Yield offers a more robust measure of a company’s ability to generate cash and, consequently, create long-term value.
Together, these tools enable investors to judge whether a business is undervalued, overvalued, or fairly priced. They also provide a critical lens through which to assess the sustainability of a company’s operations and shareholder returns.
The discerning investor, much like the connoisseur, balances these metrics with qualitative assessments -understanding management quality, competitive position, and growth prospects – to ensure their investments are as enduring as they are rewarding.
Avoid the temptation to focus solely on past performance; instead, ask whether the business is positioned to deliver future returns.
Step 4. Monitor and Maintain Your Watchlist
An investing watchlist is not static; it is a living document. As markets evolve and businesses progress, the watchlist must be reviewed regularly and curated with discipline.
- Set aside time each quarter to assess the entries on your watchlist. Has anything material changed? Has valuation improved? Have the prospects of a business declined?
- Order your watchlist by conviction level—those assets which, in your judgment, represent the highest quality and value should be given priority. This will help you act decisively when the opportunity presents itself.
- Adding to one’s watchlist should be as deliberate as buying itself. Likewise, do not hesitate to remove names that no longer meet your criteria. Quality, after all, is the watchword.
Step 5. Develop a Plan for Action
A watchlist without a strategy for execution is but an academic exercise. Thus, as part of your investing discipline, establish a plan to act when the time is right. Identify the price at which each asset would represent an attractive opportunity. These valuations should be based on your analysis, not the whims of market sentiment.
When conditions align, avoid the impulse to commit capital all at once. Instead, consider building positions gradually, particularly in volatile markets. A well-prepared investor maintains liquidity to act decisively when opportunity strikes and follows the age-age aphorism: fortune favours the prepared mind. Building wealth is not a hurried pursuit but a measured and disciplined endeavour. A watchlist, therefore, is not a ticket to frenetic trading but a tool for cultivating patience.
Consider the lessons of history: many of the most distinguished investors built their fortunes not through ceaseless activity but by identifying exceptional opportunities and holding them for decades. A watchlist provides the foundation for such an approach, enabling you to act with confidence when market conditions favour the patient.
Conclusion: A Timeless Asset for the Thoughtful Investor
In a world driven by instant gratification, the value of preparation cannot be overstated. An investing watchlist, thoughtfully constructed and carefully maintained, is a tool of immense power. It sharpens focus, disciplines decision-making, and positions the patient investor for enduring success.
It is worth remembering that investing, like so much else in life, is an exercise in quality over quantity. Populate your watchlist with businesses and opportunities of the finest pedigree, and you shall lay the foundation for wealth that endures.
Thus, to the investor who aspires to stewardship over speculation, a watchlist is not merely advisable – it is indispensable. Take the time to build it well, and fortune shall reward your prudence.
“The big money is not in the buying and selling, but in the waiting.”
Charlie Munger