If a stock you owned -- a stock you wanted to own -- suddenly dropped 20% in price, would you know whether to buy or sell?

For many non-Fools, investing in stocks is one part analysis, one part emotion, and one part hold-your-breath-and-close-your-eyes. It doesn't have to be this way, though. By Foolishly keeping a watch list, you can prepare yourself to take advantage of opportunities as they arise.

A watch list catalogs the stocks you'd like to buy, along with the "target price" at which you'd like to buy each one. Value-oriented investors like the folks over at the Motley Fool Inside Value newsletter know that the key to developing your target price lies in estimating the stock's intrinsic value.

Intrinsic value is derived by estimating and assessing future cash flows generated by the company. This is different from the market value of a stock, and may vary considerably from that figure. (Learn more about valuing stocks.)

The intrinsic value estimate should be conservative, and you may want to set a further margin of safety (perhaps 20% lower than your estimate), just in case your calculations prove to be way off track. By establishing a conservative price target and sticking to it, you'll put the risk/reward ratio in your favor and eliminate the emotional impact of market gyrations.

Your watch list should also state your "buy rationale" -- why you want to own the company. Maybe you like Wal-Mart's (NYSE:WMT) dominance in retail. Perhaps you're enamored of Intel's (NASDAQ:INTC) share of the microprocessor market. Or you might want a piece of Dell's (NASDAQ:DELL) methodical efficiency. Document these reasons, then list the potential risks facing the company.

Documenting your buy rationale also helps remove the emotion from investing, especially when you're faced with the decision to sell a stock. A strong buy rationale, coupled with an understanding of a company's risks, can become your selling rationale. When the reasons for owning the company are no longer evident, or too many potential risks become reality, you should consider selling. Notice I didn't say you have to sell -- that's your own decision, but at least you'll have a rational basis for making it.

A standard watch list could be set up in Excel with the following headers:




Target Price

Current Price

Buy Rationale


A watch list is one of the most important tools a Foolish investor can have, and it's critical to intelligent investing. It's designed to promote rational investing decisions by boiling down all of your research and analysis to the most important aspects for long-term investing success: when to buy and when to sell.

Philip Durell of Motley Fool Inside Value is a keen proponent of watch lists. His own presently includes Cadbury Schweppes (NYSE:CSG), ExxonMobil (NYSE:XOM), and GlaxoSmithKline (NYSE:GSK), among others. Want to see the full list? Sign up today for a free 30-day trial.

Fool contributor Chris Mallon does not own any of the stocks mentioned in this article, although they are on his watch list.