Is it possible to fail the side quest with the pocket watch? I placed it where I was told to, but nothing happened. I'm not even sure if anything was supposed to happen, I guess. Also, is there anything else I can do with the wandering old man, or is he just for flavor? I'm missing an inventory item on the bottom left, so I'm just trying to figure out what side content I'm missing.

The pocket watch is the end of that quest line. The side content is an "interpret as you will" kind of thing. The old man has a handful of interaction (I think 4 or 5). Each time you talk to him he shows up somewhere else. There's some extra dialogue with Elend at the end if you have a specific item and 2 extra upgrades. Lastly there's a max of 8 hearts you can gather.