Introducing Our Watchlist for 3Q'06

We have decided to take the possibly foolish step of creating a watch list. This post is to tell you what the watch list is and equaly importantly, what it is not.

It is not a recommendation to buy or sell any or all of the securities on the list. We are not registered investment advisors, and even if we disclose that we have bought or sold one or more of the investments ourselves that decision will have been made on the basis of our own circumstances. Without knowing your circumstances, we are in no position to make any sort of recommendation to you. Nuff said.

It is where we will look for most of our articles, research and commentary. We want a list of stocks that is both reasonably diverse and reasonably small in order to keep our site both reasonably interesting and reasonably manageable. Hopefully by broadening our perspective we will find more to talk about than the LCD Panel glut.

It is not an index. It would be very difficult to duplicate the performance of this watch list, which may turn out to be a good thing. It is, at this point, completely untested. It may do far better or far worse than common benchmarks such as the S&P 500 or Russell 2000 indexes. Furthermore, the relative weights of each component are likely to fluctuate over time.

The watch list was assembled by taking roughly equal dollar amounts (rounded to the nearest share) of each security as of June 24, 2006. At the end of each calendar quarter we may or may not add/remove names from the list. However, we will not adjust the number of shares subsequent to the initial purchase except under extreme circumstances. Winners will be left to run for the most part and will constitute an ever-greater influence on the overall portfolio. To try to prevent excessive trading we will deduct a $10 per trade commission that will go against the watch list’s performance.

It is something we will track. Our plan is to update the performance weekly, and compare it to several major benchmarks. It may do better. It may do worse. We don’t know.

How the watch list was constructed: We ran a couple of screens to find stocks that appear to have attractive attributes. Then we picked names from these screens on the basis of both relative attractiveness according to these traits and familiarity to us. Pretty unscientific stuff, here. Mostly we wanted to get a group of names that included representatives from every sector. We also wanted to get a spectrum that included various market capitalizations and also included a few foreign stocks. In the end, although the average market cap of $10 billion would indicate a mid- to large-cap portfolio, the median market cap of $1.3 billion shows that the vast majority of the names are small-cap. This wasn’t by design, it just seemed like more small-cap names made it through our screens. So be it.

Again, to view the watch list, click here.