Step 1: Get wood
I used a "pen blank", that's a 3/4 x 3/4 x 5 inch piece of wood. Woodcraft sells a five pound grab bag for $13, so I have plenty of wood.
In addition to the wood, you'll need a 5/16th drill bit and a 5/16th hardwood dowel.
You can start by drilling a 5/16ths hole down the center of your piece of wood. How deep? Less deep than the wood, or if you need exact numbers, the hole should be x-1 inches deep, where x is the length of your piece of wood. Use a drill press and a vice, if you choose to freehand it, please clamp the wood in something, you don't want splinters do you?
Step 2: The window and lip
Start by using a razor saw to make a transverse cut approx one inch from the drilled end. Cut down as squarely as possible. Stop when the blade of the saw extends approx 1/8th of an inch into the hole.
Now using a chisel (mine are muy dull), cut towards the slot you just cut, making about a thirty degree incline, make the cut as smooth as possible. Stop when the you have sliced into the bore hole about an 1/8th of an inch.