In search of quality

Feldman's secret: He invests in dominant, relatively easy-to-understand companies with solid finances, such as Citigroup, Southwest Airlines and EMC, the leading computer-storage company. Feldman doesn't try to call the overall market. Rather, he watches how companies make money and studies such factors as the direction of profit margins, operating costs and potential new sources of growth. He follows news developments for each company as closely as if he were one of its executives. Owning stocks is "like buying a business," he says.

What kind of businesses is Feldman leaning toward now? Not the kind that depend on consumers' discretionary spending. In fact, Feldman has been selling retail stocks, such as Guitar Center, which had been one of his best picks. He worries that Americans will cut back on spending because of high energy prices and that merchants will respond by whacking price tags.

Kevin Sharp, a systems test engineer from Dallas, invests more for the long term. Unlike Feldman, he doesn't depend on current returns from his stocks, which are mostly in retirement accounts. Sharp, 33, says he hasn't made any money in 2005, but he's okay with breaking even. He thinks now is a good time to invest in exceptional companies at bargain prices and is willing to wait five to ten years for results.

For example, Sharp recently bought shares of eBay in the low $30s, or about half what the online-auction site fetched in late 2004. Sharp's rationale: "Ebay's not big in China yet, and everyone I know uses it, so imagine once it takes over China." (Ebay launched its China site in 2003.) But Sharp balanced this adventurous choice by also investing in Altria, the former Philip Morris. Altria yields 4.3% and has been one of the Dow's best performers for several years.

Feldman, Sharp and a long list of professionals have no illusions. They expect returns to be just so-so in the coming year, and they certainly don't expect the stock market to reward wild risk-taking. Even shares of marquee stocks, such as Apple (which is riding iPod mania) and Google, with its mystique and turbocharged growth, can't climb forever. Although the shares of such companies as GE and Microsoft have struggled in recent years, those are the kinds of well-established leviathans that will allow you to claim victory in the year ahead.

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