Swimming upstream

(Fortune Magazine) -- I am an optimistic fool. In fact, that's a core value of the Motley Fool - not Pollyanna-ish optimism, but optimism nonetheless. I was bearish on the overall market for most of 2007, but I still invested. Why? Because Foolish investing means seeing the individual trees, not worrying about the forest. If I may continue with that hoary metaphor, there are lots of strong oaks out there, many fast-growing and stout saplings, but there is also plenty of dead wood that will look healthy until it tumbles.

Indeed, it seems likely that 2007's late-season storms - tight credit markets, housing woes, a slowdown in consumer spending, the swooning dollar, and the resulting wild market gyrations - will continue through most of 2008. So you're going to have to tread carefully. If we learned anything from 2007, it's the wisdom of staying clear of companies where so much is unknowable. Homebuilders? Banks? I would not touch either unless I lived in the accounting department at the home office. And maybe not even then. Who knows what horrors lurk on the balance sheets in either of these sectors? What's all that land worth now that homes aren't being sold? Are all those mortgage-backed assets finally marked down to fair value? You get the point.

Oh, and another worthy lesson from 2007: Resist the temptation of fad stocks. Remember, this was the year that late-coming speculators in Crocs, Heelys, and Jones Soda got crushed. Fools should not play the game of the greater fool. But as I said, I'm optimistic, so here are a few suggestions to help you narrow your search.

If you believe (as I do) the figures showing that mortgage equity withdrawals accounted for up to a third of GDP growth over the past five years, you should assume that further wallet tightening is on the way. That means we should look to place bets where consumer dollars continue to flow.

Let's start at your waistband. Fast-food restaurants provide some of the cheapest meals around, so even penny-pinching consumers are likely to continue eating at them. McDonald's (MCD, Fortune 500) has the size and the focus to perform well even in an iffy economy, as does Yum Brands (YUM, Fortune 500). Yum, owner of the Taco Bell and KFC chains, operates 34,000 restaurants in 100 countries and boasts strong growth overseas. There's also McDonald's spinoff Chipotle Mexican Grill, which continues to outperform even the most optimistic predictions on Wall Street. Remarkably, it's doing well even as costs for its key ingredients - cheese and meat - rise.

Across the street from the food outlets, apparel sellers offer a mixed bag. "Mom" retailers such as Coldwater Creek, Chico's, and Talbots have been turning in atrocious sales figures for months now. Many of the stocks are beaten down, but I believe they'll get cheaper still as moms continue to watch their budgets. Results have been better at the other place moms spend their dough: teen retailers. Companies such as Abercrombie & Fitch (ANF), American Eagle Outfitters (AEO), and Aeropostale have so far behaved a little like consumer staples, with fairly steady sales growth. Their stocks, on the other hand, have been walloped. If you believe parents are scrimping to put the clothing budget into the kids' hands, these companies present better odds. Another apparel retailer bucking the slowing sales trend is blast-from-the-past Guess. Its higher-margin overseas sales are growing even more quickly, giving it an edge despite our weakening dollar.

Electronics is another category that for now is weathering the storm. Several surveys predicting lackluster holiday spending overall still forecast strong sales gains for high-definition televisions, digital cameras, videogames, music players, and computers. One obvious beneficiary: Apple (AAPL, Fortune 500), whose iPod is firmly entrenched as the must-have, must-upgrade media device for the masses. Apple has rarely looked cheap to me, but if it can continue with its heady growth - and I think it can - shares look to be trading at a 25 percent discount. The other way to get into this segment is through the retailers. Best-of-breed shopkeepers, like Amazon.com and Best Buy, will probably see a happier holiday season than the rest of their industry. Best Buy (BBY, Fortune 500) looks cheap enough for long-term holders to nibble right now. Amazon, alas, trades at tech-bubble multiples despite its hit-and-miss record of profitability. I'd avoid that one for now.

Finally, remember that the buck doesn't stop here. The worldwide loss of faith in U.S. mortgage-backed assets, along with the Federal Reserve's cheap-money policy, has sent the dollar plunging to all-time lows against foreign currencies, oil, gold - just about anything. Our normally polite northern neighbors are giggling as the Canadian loonie laps the greenback. This trend looks likely to continue, so Foolish investors need to consider moving a portion of their money into companies that earn their cash in foreign currencies.

Asia's very hot these days - too hot for bargains, especially in the sexy story stocks Wall Street likes to flog. In those frothy markets I prefer monopoly commodity and cash flow plays such as PetroChina and China Mobile, but only if the price is right. (Those two highfliers, trading at $191 and $90, respectively, in early December, need a 20% haircut before I'd venture back in.) I'm ambivalent on many European companies these days, as the strength of the euro will punish big exporters, thereby hobbling profitability. If you're determined to bet on the European Union, make sure the companies you buy do the majority of their business within the EU itself.

Closer to our shores, there are plenty of good opportunities in faster-growing economies. One Fool-recommended company I like is Brazilian food producer Sadia. Its stock nearly doubled in 2007, and it continues to benefit from both a growing economy at home and a thriving export business. I've also got high hopes for south-of-the-border beverage producers like Chile's Andina Bottling and Mexico's FEMSA , the largest bottler and brewer in Latin America.

Although the housing-induced hangover will probably rattle the markets well into 2008, the best part of being an individual investor is that you need not go the way of the markets. While 2007 index returns lacked luster, scores of individual stocks put up amazing returns. The key to beating the market in 2008 will be the same as it was for 2007. It's not about knowing more than the Street - the Street isn't stupid by any stretch. It's about controlling your temperament when the Street loses its temper. It's about doing your homework, finding value, seeing past the noise, buying and holding in the face of overdone pessimism, and even selling when things are valued too dear. Those are simple concepts, but mastering them takes work, time, and commitment. Good luck in 2008.

SETH JAYSON is a senior analyst at the Motley Fool, an investment advisory company in Alexandria, Va. He writes about stocks at fool.com. He owns shares in Chipotle, FEMSA, Guess, and American Eagle.