(FORTUNE Magazine) – You are the type of person who dives into the business section of the paper every morning, sometimes even before your coffee fix. When you roam through a mall, you observe the consumption habits of your fellow humans, noticing which stores are full and which are empty. Figuring out how the economy works--by delving into which companies are creating wealth and which are fading away to irrelevanc--is one of your minor obsessions.

You've also just received a windfall, in the form of a bonus or inheritance, that won't fit into your 401(k) or real estate portfolio. And like many of us, you actually have the nerve to think you can do a little better than the market. Well, now's your chance to build your own stock portfolio and match wits against hotshot fund managers.

To help you get set up, FORTUNE sought the advice of some of the best long-term investors in the land. Their first tip: This strategy is not for everyone. You must be motivated enough to do your homework. As Andrew Davis of Davis Selected Advisers points out, "People spend more time researching how to buy a refrigerator than on their retirement needs." Indeed, Roger Hertog, president of Sanford C. Bernstein & Co., argues that money management is best left to the people who do it full-time. Says he: "Don't be a do-it-yourself investor just because somebody calls you up with the best names, or you read about them in FORTUNE."

But if you are willing to invest time as well as money, there can be advantages to doing it yourself. Not least of them is the savings on fund fees and expenses, which shave about 1.5% a year from total returns. That can add up mightily over the years (see chart). By steering clear of fund managers, who tend to turn over the shares they own in a perpetual search for short-term profits, you also defer taxes on your gains, which boosts the compounding of your returns. Avoiding this tax leakage pretty much ensures you will do better than if you try to time the market. (If you reinvest dividends, as most funds do, your returns will grow even faster as the stocks' prices rise.)

Doing it yourself means time is on your side. To outperform most money managers over the years, all you need to do is to buy and hold stocks that match the overall market. Notes Wharton finance professor Jeremy Siegel: "You don't have to beat the market to do well." Assuming a 10.5% annual return--the average chalked up by the S&P 500 since 1926--$100,000 invested today will grow to more than $700,000 in 20 years. True, this result could be achieved by investing in a low-expense S&P 500 index fund. But where's the fun in that, and what chance do you have to test your stock-picking skills?

When you choose stocks for your portfolio, investing gurus all advise that you aim for a range of companies, across both geographic and industry lines. As FPA Capital's Robert Rodriguez puts it, "I try to diversify my stupidity." (He has averaged a stellar 19% annual return over the past decade.) The quickest way to do this is to include one or two funds in your portfolio, such as the Emerging Markets Telecommunications Fund mentioned here, although to keep fees low, you should not let them exceed 15% of the total.

The bulk of the portfolio should be world-class companies that can sustain above-market rates of earnings growth. The keyword here is "sustain." For the most part, avoid nosebleed stocks with profits shooting up at 40% or 60% a year, because when they inevitably slow down, the price/earnings multiple will compress, and the stock will likely be hit hard. George Yeager, portfolio manager at Yeager Wood & Marshall, says the best two criteria to determine if a company is capable of maintaining its growth rate are whether its products or services need to be replaced often, creating a stream of recurring revenues, and whether it has the flexibility to set prices at high profit margins. Mason Hawkins of Longleaf Partners concurs: "It boils down to a competitive edge that translates into pricing power."

To merit holding for 20 years, your company should also be unique. "Try to assess a company's competitive advantages and how easily they could be duplicated," says CS First Boston research director Al Jackson. Such advantages can include brand-name recognition, an entrenched market position, a proprietary distribution network, or patented technologies. The businesses you invest in should be innovators that are helping change the way the economy operates. Identify broad themes-- such as the graying of America or the worldwide shift to free-market economies--and stocks that will ride them. And look for shareholder-managers. "The CEO should care more about the stock price than about his bonuses," says David Pear, who runs private accounts at Beecher Investors.

If the share price of one of your companies heads south, don't panic. Andrew Davis says that turning tail on a company because of a disappointing quarter is "similar to losing faith in a child after one lousy report card." Remember that market volatility can deliver great companies at bargain prices. "Don't be afraid of controversy; it holds down a stock's multiple," says Morgan Stanley strategist Byron Wien. Check not just the price/earnings and market-cap-to-revenue multiples but also the balance sheet for positive indicators like a low debt-to-capital ratio. One rule of thumb: A stock is usually cheap when the company's P/E ratio is lower than its earnings growth rate. Also, look for companies that can handle growth without undue strain, so that a doubling of revenues will not require a doubling of the labor force or capital outlays. Says Smith Barney's equity strategist Marshall Acuff: "You want companies that are generating cash in excess of their needs."

A way to single out companies with long-term growth prospects is to look at economic value added, a measure of the difference between a company's return on invested capital and its cost of capital. EVA lets investors see how efficiently a company is using its resources; the companies that ultimately generate the most wealth for shareholders are those able to invest their capital at high rates of return for long periods. Declares Jackson of CS First Boston: "EVA explains half of why stocks appreciate."

No investment will ever boast all these attributes, but here are 12 that come close. This core portfolio can be added to over time, although trying to keep track of more than 20 stocks is not advisable.

GENERAL ELECTRIC (GE, NYSE)

GE is a play on global growth. Revenues from international operations are increasing at triple the rate of those from domestic businesses. Last year 38% of GE's $70 billion in sales were foreign; by 2000, more than half will be. The developing world's insatiable hunger for power generation, household appliances, plastics, and aircraft engines plays to GE's strengths. Like Coca-Cola, GE is spreading its brands and its costs across an expanding global customer base, and reducing its dependence on any single economy. Also like Coca-Cola's, GE's EVA is consistently improving. Best of all, the stock is trading at about 19 times this year's estimated earnings, vs. 33 times for Coke. Predicts Nicholas Heymann of NatWest Securities: "GE is a $200 stock this decade." The company is using its roaring cash flow to buy back $3 billion of stock this year, an indication that CEO Jack Welch thinks its price is attractive.

BRITISH PETROLEUM (BP, NYSE)

Oil analysts always seem to shoot low when they predict demand. Not only does the thirst for oil in the developing world seem unquenchable, but consumption keeps soaring as well, even in the U.S. Says Richard Unruh, an institutional investor at Delaware Management: "Look at all the sport-utility vehicles on the road--energy conservation is not an issue here anymore." The price of crude should come down for a while once Iraq reenters the market, but all it takes is one little disruption in, say, Nigeria or the Middle East for prices to gush back up. BP will be ready to exploit any rise; in the past decade it has participated in about half of all major petroleum discoveries. And BP has plenty of cash to pursue more exploration. Like its U.S. rival Mobil, it has undertaken a vast cost-cutting program. Over the past three years it has halved its debt to 26% of its capital.

SONY (SNE, NYSE)

PlayStation videogame consoles, Watchman TVs, and CD-ROM drives are a long way from the electrically heated seat cushions Sony peddled when it was founded 50 years ago. And Sony is sure to change just as dramatically as a new management team shifts its focus to merging electronic gadgetry with computing and communications devices. With the introduction of its own computer this summer, Sony is throwing its marketing muscle at the home-user market, where it wants to make the PC a centerpiece in people's living rooms and a source of audio and video entertainment as well as of information. By year-end, new digital videodisk players could start to replace both CD players and VCRs. Despite its recent troubles in the movie business, Sony has a wide product range and will never be dependent on one product line or market. And as the only foreign company in the portfolio, it adds diversity.

HEWLETT-PACKARD (HWP, NYSE)

Recently many analysts downgraded their ratings on Hewlett-Packard when it announced that orders for its PCs and printers were slowing down. The shares took a hit, but it is exactly this sort of short-term controversy that can signal a buying opportunity for long-haul investors.

One of the most balanced companies in the technology sector, HP has products ranging from printers and computers to high-tech test equipment and medical instruments. Of its $31.5 billion in sales last year, the company spent fully 7% on R&D. Such investments allow HP to create an early presence in new markets and dominate them when they take off, as it did with ink-jet and laser printers.

HP uses EVA as an internal measure, and one in which it boasts the best improvement of any large computer company. Says Salomon Brothers' John Jones Jr., one of the few analysts who still rates HP a buy after the recent tumble: "It will take a significant number of problems in lots of areas to derail them."

BOEING (BA, NYSE)

What better way to spread your global risk than by investing in a company that gets 70% of the world's commercial aircraft orders? Boeing's dominance of the aircraft market is particularly strong in jets that seat more than 400 passengers, the most profitable segment. Its operating efficiencies will keep growing as Boeing continues to standardize its models around a few common platforms. Margins should also widen, and analysts say a share-repurchase program is likely to be announced by year-end.

Two wild cards could significantly boost Boeing's prospects. China, which will account for more than 15% of commercial aviation sales over the next two decades, is considering a $4 billion contract for the company's jets. Boeing is also competing to build a fighter for use by the Air Force, Navy, and Marines. The common fighter would take advantage of Boeing's ability to assemble several model variations on the same production line, and would be worth $90 billion or so of orders for the chosen suppliers over the next few decades.

PFIZER (PFE, NYSE)

Over the next 20 years, aging baby-boomers will put unprecedented strain on the U.S. health care system. While less than 6 cents of each health care dollar is currently spent on drugs, analysts say that share is bound to become larger, since it is cheaper to treat someone with medicine than with a hospital stay. Using drugs to treat chronic conditions creates sought-after recurring revenues. Add the FDA's willingness to approve drugs more quickly than in the past, and you have a sector ripe for long-term growth.

Among drug companies, Pfizer arguably has more hot products in the pipeline than anyone else, and it faces no major patent expirations until the turn of the century. Pfizer is readying drugs to treat Alzheimer's disease, schizophrenia, and impotence. What's more, Pfizer has cultivated a strong relationship between its sales representatives and physicians that is the envy of the industry. The stock isn't cheap: Its P/E multiple is the highest in its group. But it is not likely to disappoint.

BLACK & DECKER (BDK, NYSE)

Boomers are discovering the national pastime of fixing up the family house, and Black & Decker is the market-share leader in professional and consumer power tools. It's the No. 1 supplier to Home Depot, for instance. Intensive product development keeps churning out popular items such as the SnakeLight, a rugged light on the end of a self-supporting, adjustable coil. Many of the company's power tools work off the same rechargeable battery packs, encouraging loyalty among customers who slowly buy entire tool sets. With nearly half its sales outside the U.S., Black & Decker has established a presence in Europe, Asia, and Latin America. A focus on cash flow has helped reduce debt from a troublesome 62% of total capital at the end of last year to 57% now. Susan Gallagher at NatWest Securities says that percentage should drop ten points more by the end of next year, after which the company might start buying back stock.

MELLON BANK (MEL, NYSE)

One of the cheapest stocks in the financial services sector, Mellon trades at a lower multiple, 10, than most bank and asset-management companies. Robert Sanborn, a value-oriented money manager at the Oakmark Fund, thinks the price is about half what it should be. Since Mellon bought Dreyfus in 1993 and Boston Co. a year later, more of its revenues are coming from fees than from lending. The fact that Mellon is really an asset-management company disguised as a bank means that its business is now less capital-intensive than in the past. So as the $237 billion in assets it currently manages climbs higher, it suffers virtually no incremental cost while collecting more fees. These are likely to rise as baby-boomers worried about retirement shift their funds out of banks and into mutual funds.

SERVICEMASTER (SVM,NYSE)

This giant provider of commercial and residential services like lawn care, pest control, cleaning, and home warranties is a play on demographics. The rise of dual-income households has prompted growing numbers of homeowners to outsource what once were common chores. And ServiceMaster recently moved into home health care, a kind of service an aging population is increasingly demanding. Rising living standards outside the U.S. should spur further growth for ServiceMaster, which is making a push abroad.

For the past quarter-century, ServiceMaster has increased earnings at a 23% compound annual rate. By 1998 the company, which is now a limited partnership, will incorporate. Money manager Yeager points out that the switch will make the company more appealing to institutional investors, which generally shun limited partnerships. Individuals who act now can get in early. The stock's P/E of 9 is considerably less than ServiceMaster's 15% expected earnings growth rate.

INTERNATIONAL GAME TECHNOLOGY (IGT, NYSE)

"The U.S. leads the world in goofing off," declares the Acorn Fund's Ralph Wanger. And more fun seekers head to Las Vegas than to Disneyland. That's why Wanger likes International Game Technology, which sells about three-quarters of all slot machines in the U.S. The mainstay of the gaming industry, slots account for over 60% of the typical casino's total take, says CEO Chuck Mathewson, who is also the company's largest individual shareholder. He adds, "Slot machines don't get migraines, don't take vacations, and don't need supervision. They are very reliable." Gaming stocks are under pressure now because fewer new jurisdictions are opening up. But construction in Las Vegas and Atlantic City remains robust. What's more, slot machines are typically replaced every five years, which helps make 65% of IGT's sales recurring. Bear Stearns analyst Jason Ader rates the stock a hold because he expects lackluster returns over the short term, but says, "Five years from now, most people will wish they'd bought a lot of IGT stock."

STANFORD TELECOMMUNICATIONS (STII, Nasdaq)

About 5% of an investor's portfolio could reasonably be made up of a small-capitalization, aggressive-growth company. Lee Kopp, one of the top private money managers in the country, says Stanford Telecommunications is his best long-term pick. After 20 years of developing and building digital communications systems for the military, Stanford is now branching into commercial areas including wireless, satellite, and cable, sending earnings skyward. Stanford's market cap is only twice its annual sales of $145 million. Revenues will go bonkers if one of the new technologies it is betting on is a hit. A chip for cable modems, which cuts through noisy interference that currently prevents two-way communications through cable lines, is one promising product.

EMERGING MARKETS TELECOMMUNICATIONS FUND (ETF, NYSE)

"The center of economic gravity is shifting to the developing world," says Smith Barney analyst Michael Porter. He's thinking of rapid urbanization and exploding demand for information in places like Asia and Latin America that are creating a bonanza for local telecommunications companies. The ETF fund, run by BEA Associates of New York City, is a great way to play on that growth while diversifying your portfolio. And it is trading at a 20% discount to its net asset value. Before you leap at these suggested stocks, do some research for yourself. You may also consider other industry leaders, such as Coca-Cola (KO, NYSE), Eli Lilly (LLY, NYSE), Kellogg (K, NYSE), Lockheed Martin (LMT, NYSE), Mobil (MOB, NYSE), and SunAmerica (SAI, NYSE). Follow news reports about the companies; call the headquarters and request their financials; lay your hands on as many analyst reports as possible. Then judge for yourself. It's your future, after all.

REPORTER ASSOCIATES Joyce E. Davis, Victoria Brown