There's an old saying in real estate: "You make your money when you buy." That refers to the fact that your cash flows from investment real estate will be based on market rents for the area, rather than on your purchase price for the property. If you pay too much when you buy the place, you can lose money even if the property itself is an otherwise fabulous one to own.

That concept holds true in the stock market, as well. Warren Buffett, arguably the world's greatest living investor, has told people to "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years." Again, the best investments are bought for the right reasons, at the right value for the cash flows -- not just on the anticipation of a quick potential gain.

Keep your eye on the prize
At any given time, there tend to be more great companies in the market than there are ones trading at the "buy it and forget about it for 10 years" prices that Buffett advocates paying. Fortunately, the market still has its occasional bouts of volatility. If you learn to use those bouts to your advantage, you can often find the opportunities to not only buy great stocks, but also pay decent prices for them.

And the secret to working the market's volatility to your advantage? Well, it isn't really all that secret at all: It's a watchlist. With a good watchlist in your toolkit, you can keep your eye on any number of great companies without having to buy their shares first. Then, only when a company hits all your buy criteria -- including reaching the right price -- do you move it from your watchlist to your real portfolio by buying its shares.

After all, you never know exactly when the market's volatility will work in your favor. If you're prepared with a list of companies you're willing to buy if conditions are right, you don't need to know when that company will be worth buying. Instead, you simply need to wait until the market's volatility makes any of the companies on your watchlist worth buying, then pounce on that one when the opportunity presents itself.

So easy, a caveman can do it
The great thing about a watchlist is that it's a no-cost, no-risk way to prepare to invest. You don't have to spend or risk a dime to make a list of the companies you're interested in. Another benefit is that if you wind up being wrong about a company's overall prospects while it's still on your watchlist, you don't lose a thing. That's not a bad way to watch and wait for an opportunity to come around to buy one of your pre-identified right companies at the right price.

To show you how easy it is to build one, the table below has a sneak peek into my personal watchlist, along with the reasons why those stocks haven't quite turned into investments (yet):


Why It's On My Watchlist
(Instead Of In My Portfolio)

Add It To Your Own Watchlist
(It's Free)

Cisco Systems (Nasdaq: CSCO) * Needs to actually initiate its promised dividend.
* Price below $19 looks fine, if the dividend is decent.
Pfizer (NYSE: PFE) * Need to see signs that its turnaround is successful.
* Would prefer to buy below $18.
Berkshire Hathaway (NYSE: BRK-B) * Would like to see a dividend before buying.
* Something of a "personality stock" (Warren Buffett), and that personality is 80 years old.
* Would prefer to buy below $80.
General Growth Properties (NYSE: GGP) * Balance sheet needs to stabilize.
* Dividend needs to be 100% cash & well covered.
* Prefer to buy below $14.
Kraft (NYSE: KFT) * Waiting to see how well it integrates Cadbury acquisition.
* Want to see whether it can pass along food price inflation.
* Price below $32 looks fine, if it does the above items well.

In addition to enabling you be prepared to buy when conditions are right, a good watchlist can help keep you from buying companies on their way out. Fannie Mae (OTC: FNMA.OB) and Freddie Mac (OTC: FMCC.OB), for instance, stayed on my watchlist as they completely imploded, never earning an actual cash investment. Had I bought instead of watched, they would have been added to my already too long list of stupid investments to confess.

What's on your list?
Whether it's because you've got more ideas than money or it's because you're waiting for the right conditions before buying, a watchlist can help you better manage your portfolio. With the Fool's free watchlist service, you can keep an eye on the companies you want to watch, and the Foolish news that tracks them. Click here to get started.

Berkshire Hathaway and Pfizer are Motley Fool Inside Value recommendations. Berkshire Hathaway is a Motley Fool Stock Advisor selection. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of Berkshire Hathaway. Motley Fool Alpha owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. At the time of publication, Fool contributor Chuck Saletta did not own shares of any company mentioned in this article. The Fool has a disclosure policy.