This is going to be a journey ending with eight stock picks for 2008, on December 28, 2007. It is my intention to use the closing prices on that day for those eight stocks as the point of departure to publicly track the results and see if I can beat the market again. This year, as measured through October I have done so. I have also been tracking James Cramer's picks and he too has beaten the market to date, but lags behind me (sorry, couldn't resist). While we made some great picks, we both had some dogs as well. Furthermore, I will be the first one to admit that there is some luck involved in the short run.

Last year I beat the market, earning 29%, and it was my fifth straight year doing so after going down in flames with the rest of you when the tech bubble burst. At that time I also had the pleasure of being an Enron investor as well, so I have made plenty of blunders. But I have learned a lot from my mistakes, and hopefully others can learn from them as well as I share my investing adventures and how I turned things around.

In 2007, our oldest portfolio has beat the market by quite a lot (so far) and although it is down in the past week, it looks rather powerful at the moment. It has a very tight group of stocks anchored by Berkshire Hathaway (NYSE: BRK.B), Huaneng Power ADS (NYSE: HNP), Intuitive Surgical Inc. (largest holding) (NASDAQ: ISRG), PetroChina Co. Ltd ADR (NYSE: PTR) and United Parcel Service (NYSE: UPS).

BRK.A and UPS are two of the six Triple-A rated stocks that are not financial institutions. There are times I have been ridiculed for remaining a buy and hold guy, but we have not bought or sold any of these shares all year. Actually we have only made two purchases and no sales in the portfolio this year.

It is my objective too find eight stocks for next year that will not only outperform the market but perform over the long haul. In general, I am looking for dividend-paying stocks with solid management and strong balance sheets. While these three elements are major success factors, I am not dogmatic in my analysis. To start with, I am including three of the stocks mentioned above for consideration in the eight, although right off the bat two do not meet all of my criteria.

• Berkshire Hathaway is a strong candidate. It meets two of the three criteria in a big way. Although it does not pay a dividend, most of its stock holdings do and Warren Buffett has been the gold standard for creating shareholder equity. If 2008 proves to be a shaky year on Wall Street, you will want to own this stock.
• Intuitive Surgical is also a strong candidate that I have written about many times. It does not pay a dividend, but this one has beat everybody and everything every year since I bought it, and is likely to do it again. It has hardly penetrated its potential market. It is significantly off its all-time high, and may look like a bargain by December 28.
• Huaneng Power does pay a sizable dividend and has plenty of room to run. It has come down a lot with the rest of the inflated Chinese stock market, but this one is not threatened by competition and is a good long-term value. The largest potential downside might be costs associated with environmental clean-up. China is addressing these issues but has a long way to go.

Among my own holdings that I am keeping but not including for 2008 are PetroChina and United Parcel. PetroChina has had a great run since I purchased it at $44 a share, but it is not the place for new money at current levels. I have nothing bad to say about United Parcel, and it certainly is a safe haven anchoring any portfolio, but next year might be one where it follows the market closely, and I do not see the catalyst for growth in what might be a slowing economy.

Looking at this year's 2007 picks, there are many that seem like they have continued potential.

• The Dow Chemical Company (NYSE: DOW) has done well this year but not spectacular. It meets my criteria for consideration on all counts and has a lot going for it. In partneship with Corning, it is developing materials for the solar energy industry. It will probably continue to be mentioned in merger and acquisition rumors, and it has historically been an innovator willing to spend on R&D.
• Duke Energy (NYSE: DUK) (NYSE: SE) will remain on the possibilty list for now. It pays a handsom dividend and might see some growth next year as investors look for stability. This year it was flat. That might be good enough if the market ends in turmoil next year.
• The Home Depot (NYSE: HD) was one of my dogs this year (and continued to report poor earnings) but there is value here and this year going forward it is greater than last year. There are a number of latent problems at HD, but at current prices there is also deep value.
• Valero Energy (NYSE: VLO) was one of my favorites last year, remains one of my favorites now and is a very strong candidate to stay in favor next year. Its margins have been squeezed lately by high crude prices and stable pump prices, but that could change, and the stock may appreciate significantly in 2008.

Huaneng Power and PetroChina have already been discussed. That leaves Time Warner (NYSE: TWX), my other dog from 2007. This will not be on my 2008 list. Yes, this company has all the promise in the world, and yes, maybe 2008 will be the year that shareholders see an increase in equity, but they will do it without me. Unless Time Warner asks me to join its board, I just cannot get excited about next year. They have shifted around the management again, elevating Jeff Bewkes to CEO, but this company requires a major overall and his task is quite forboding.

The next place I am looking for 2008 is in the defense industry. Most of the large defense contractors have a backlog of tens of billions of dollars that will take them through 2008 and beyond. They pay dividends, and their books are subject to frequent audit -- that's how you find $2,000 hammers and toilet seats. I think they are all downside-protected in case the economy falters, and have a good chance of beating the average stock in appreciation. All three of these companies carry some debts on their balance sheets, so they are not of the caliber of ISRG or BRK.B. Their backlog of contracts gives some assurance that their debt is manageable.

• General Dynamics Corp (NYSE: GD): The price-to-sales is a low 1.26 and the P/E is average. It makes the Gulfstream aircraft for the wealthy jet-setter and the Abrams tank for the military. How many of those will need parts or replacement in the coming years?
• Northrop Grumman (NYSE: NOC) sports an even lower P/S of 0.81 and a lower P/E too, of 15.25. It has a higher dividend yield than General Dymanics and a P/B of 1.57, which seems to low.
• Lockheed Martin (NYSE: LMT) has a low P/S but a high price to book of 6, which I will have to explore. However, if you need a satellite or a fighter, who are you going to call?

I do not think you can abandon energy or basic materials in 2008, as you can see from some of my 2007 holdovers, and there are some more that I have been following that should receive consideration.

• Anadarko Petroleum (NYSE: APC) is one of my favorite stocks. It is in the right business at the right time, and it has substantial proven reserves in North America. I see APC as a perpetual takeover target, but it has been successful as a stand-alone and can remain so.
• Anglo American (NASDAQ: AAUK) is another stock that could end up in M&A discussions. Let's see, it's a global player in diamonds, gold, silver, platinum, coal and more. This is a currency play, a commodities play, a global play, and an inflation hedge - got to love that if you can get it at the right price.
• BHP Billiton (NYSE: BHP) made an unsolicited offer to buy Rio Tinto (NYSE: RTP) earlier in the week, and is looking to grow more dominant in mining and raw materials. What it is thinking about the global opportunity is the same reason I have included it on my shopping list.
• Chesapeake Energy (NYSE: CHK) is a big player in the North American gas exploration and production market. It is floating about halfway between its 52-week high and low. Gas prices are significantly down from the highs of a couple of years ago. Another mild winter seems to be shaping up, but any chilling in the temperature or increases in demand from electric utilities could send this stock back to its highs and beyond.
• Nucor Corp. (NYSE: NUE) is one of the world leaders in the idea of mini-mills. This smallish steel producer prides itself on running a tight ship, pays a dividend, and has a P/E around 10. Once again, it could be a takeover target as the industry continues to consolidate. It is 25% off its high, and is a strong candidate to make the final cut.
• Reliance Steel and Aluminum (NYSE: RS) processes and distributes more than 100,000 products made of carbon, alloy, stainless, and specialty steel, as well as aluminum, brass, copper, and titanium. It serves more than 125,000 customers. For reasons that I will explore in future stories, the entire steel industry seems to be on sale and perhaps priced for a recession. Reliance has a P/E of 9.6 and a PEG ratio of 0.71, so unless there is something here that is well concealed, it seems way too low.

So we have 16 stocks to start the journey. In the following weeks, some others will be added and many will be cut until there are only eight for 2008. Since I view all of these companies worthy of consideration, it may very well come down to the greatest value on the given day...as it should.

To find potential opportunities and verify my track record, read Chasing Value or Serious Money.

DISCLOSURE: I own shares of most of the stocks in this story except: BHP, CHK, HD, LMT, NOC, NU, RS & RTP

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.