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How to Watch your Stocks

“Heads up!!” That’s what they yelled at school when a ball was about to crash into your head on the playground. If you heard the warning and ducked in time, you saved yourself a nasty headache and maybe a new set of glasses.

The stock market is no different. Except you not only want to avoid getting blindsided, you want to get out ahead of the herd and buy the good stocks before everyone else discovers them (and bail out of your losers before they cost you your profits for the year).

Staying ahead of the game means you have to keep an eye on the stocks you own, at least once a week and preferably every day. You should also monitor what happened to the stocks you used to own and dumped, or cashed out at a profit. And you need a pool of new stocks to switch into at short notice.

You have to be ready to shift into new sector leaders as they emerge, and move into entirely new sectors when the “hot” plays from last year go south.

Where do you find out what’s hot? The three must-reads for me every day are, Silicon Investor and the Wall Street Journal/Barrons.

Follow some guidelines when it comes to chat boards. And don’t sweat the few hundred bucks these three gold mines will cost you. If you don’t make it all back in the first month, you probably shouldn’t be investing in stocks on your own anyway.

The real key to staying ahead of the herd is a good set of watch lists.

I keep my portfolios on Yahoo! Finance because they have so much information right at your fingertips. But Quicken, MSN and many other sites also offer portfolio services with lots of bells and whistles.

What’s the point of watching dozens or hundreds of stocks you don’t own? Simple.

The more you watch a stock, the more you learn how it trades. You see how it reacts to earnings (does it spike and sell off or start a new rally after beating estimates?). You see whether it falls every year in December due to tax-loss selling or jumps on the January Effect bandwagon. And your portfolio program should automatically pick up all the news items linked to the stock symbol.

You can catch the important developments before Joe Kernan starts one of his “here it comes” routines on CNBC.

You know the act. First Joe gets that sad, hangdog look and sighs, then he says, “Blowup Inc, ticker symbol BLOW, is called down 10 this morning - that’s 45% , right? Ouch. The company announced an expected earnings shortfall for the rest of ther year due to…uh, slow widget delivery from their Burmese suppliers. BLOW has been selling off steadily for a week, so somebody must have known something.”

Watch a stock closely and you will see the pattern before it’s all over CNBC. You will know if a pullback in the stock is a sign of serious trouble or a buying opportunity.

What should you put on your watch lists? That depends on what kind of stocks you like to invest in. I don’t play the big industrial and utility stocks. I also avoid most OTC Bulletin Board penny stocks (except when I get a weird urge to lose money on purpose). That reduces the range of choices by a few thousand companies right off the top.

Next you need to decide whether you want to group your watch lists by sector or some other criteria. I created an “Invest” portfolio dedicated solely to the stocks I actually own at the moment. You should monitor how your actual portfolio is doing compared to the rest of the market.

When the NASDAQ is up 2% and my tech-heavy portfolio doesn’t keep up, I want to know why and fix the problem (if there is one - some days just suck no matter what you do. Learn to live with it.).

After “Invest” I had to create “Current Shorts” once I started shorting stocks. If your portfolio site understands shorting stocks you can mix them in with your long positions. Yahoo doesn’t, so I keep them on a separate list where I WANT to see lots of red every day.

It didn’t take long before I had a group of stocks I had played for a while and abandoned. Many were sold due to protective stop-loss orders, so I christened the new list “Stop Watch.”

I don’t add short-term plays to Stop Watch any more - I play too many. But it’s useful to follow stocks that I liked in the pastand see how they are doing now. Sometimes I even go back and buy them again if the fundamental story improved or the stock looks like a bargain.

The sister thread to Stop Watch is “Hot Watch”.

How often do you hear about a company that could be a great investment but it just seems too expensive, or your portfolio is already overloaded in that sector? Put them on a watch list as they come up and go to that watch list first when you are dumping some bow-wows and looking for fresh blood.

Next you need to set up your sector portfolios. This is vital for tech stock players. Separate the hardware stocks from software companies, then pull out the pure Internet plays and put those on a separate list. You can even break those lists down further as sectors like the Internet become more complex.

The idea is not to make more work for yourself or create more pages to click through. But you need to follow individual sectors as they move in and out of favor.

I have special watch lists for Hardware, Software, old Internet stocks, Brokers, Retailers, Semiconductors, Disk Drives, picks from the Louis Navellier newsletter and several others. That is in addition to Invest, Current Shorts, Stop Watch and Hot Watch.

There is no way you can follow that many lists every day. But you don’t have to.

Every now and then, I call up a Yahoo watch list I haven’t been through lately and hit the “Detailed” display command. Up comes a thumbnail chart and some fundamental information for each stock. I can tell at a glance how the stock has been doing the past few months.

If a stock looks promising, I dig some more and see what they have been up to lately. I will already know a lot more about it than the latest new IPO you just heard about on CNBC.

Because I have it on my watch list.