Developers Cheung Kong (Holdings) and Sun Hung Kai Properties are still trading more than 20 per cent below their highs, but each is on pace to increase in 2010. That will mark Cheung Kong's seventh gain in the past eight years and Sun Hung Kai's sixth.

'We are starting to see more rationality and people are more selective so it has been a battleground this year for stock picking,' said Nicholas Yeo, director and head of equities (China/HK) at Aberdeen International Fund Managers. 'And it will be the same again in 2011.'

Stock picking focuses on fundamentals, seeking companies that can withstand downturns and then outperform the market during recovery periods. Those with a history of paying out dividends are an added bonus.

The strategy is supposed to prepare portfolios for both good times and bad, setting them up for near-term stability and long-term returns. But it lost its lustre when the financial crisis battered stocks across the board and during the ensuing recovery, when lesser-known companies yo-yoed up and down, presenting tempting short-term buying targets.

'When money is cheap, it is the low-quality stocks that tend to perform well,' said V. Anantha-Nageswaran, the chief investment officer at Julius Baer.

'But it is never sustainable and [they] will definitely fall, especially as the environment becomes more and more difficult next year.'

Analysts are bracing for a stagnant environment because most of the low-hanging fruit in the market has been snapped off already. Overseas economies have exercised most of their capacity for stimulus plans and valuations have crept up to historical averages. The Hang Seng Index is trading at about 14.5 times current earnings, just like before the financial crisis.

Stock pickers who just buy and hold may not generate substantial near-term returns, said Geoff Lewis, the head of investment services in Hong Kong for J.P. Morgan Asset Management.

'For the next two to three years, it probably doesn't make much sense because markets are probably going to go sideways with pretty low returns,' Lewis said.

Stock pickers do not have to write off active trading. They could buy and sell their targeted stocks at predetermined price points to generate returns.

Trying to time the market introduces an emotional dimension to portfolio management, however, requiring investors to maintain a disciplined approach when executing their trades. 'That will involve a lot of genius forecasting in terms of which sector will be the next to do well,' Yeo said. 'We just stick with the companies we know for a long time.'

J.P. Morgan's Lewis also said the passive, buy-and-hold strategy remains a valid one for investors with a long-term outlook. 'For a 10-year horizon, put your money into China and India funds and some emerging-market debt funds and then forget about it,' he added.

Stock picking is usually best left to fund managers since they have more experience in vetting companies and identifying winners.

But if you want to go it alone, what should you do?

Yeo said he makes his picks by first restricting his targets to companies which could succeed in all market environments. This will rule out most companies that have their money tied up in cyclical sectors, like commodities or materials.

'It is hard to make a long-term investment [in those areas] because of the cycles. Some companies may not have the ability or the balance sheet to manage the cycle well.'

You can trim the list down further by focusing on companies that have viable business plans and are in a position to deliver on those promises. It can be difficult to separate fact from fiction, but you can look for clues in companies' balance sheets, annual reports, expansion plans and history.

Dividend payouts may be another criterion you can use for stock picking. Companies should not be ruled out if they do not grant dividends, particularly if they pump extra cash back into logical growth areas for the business. But a steady dividend income could help support your portfolio if you are picking stocks with the intention of holding on to them for the long term.

Garry Evans, a strategist at HSBC, said that dividend-yielding stocks have become an attractive, conservative investment in the current environment. 'For prudent investors who typically would have put their money in a bank account or in government bonds, we would actually suggest looking at high-dividend-yield stocks,' Evans said.

Last year, for example, Cheung Kong recommended full-year dividends of HK$2.70 per share and Hong Kong Exchanges and Clearing suggested HK$3.93 per share.

While comparing dividend payouts, you should not overlook small and mid-cap stocks if they have resilient balance sheets and strong business plans. These companies are sometimes the market leaders in long-term growth sectors, making them especially attractive for long-term investing.

For instance, mainland department store operator Parkson Retail Group has been a popular target for investors hoping to cash in on the domestic consumption story. The stock is on pace to rise this year for its fifth yearly gain since 2005, when it started trading.

After picking stocks that project to be future winners and adding them to your portfolio, you must then decide how long you plan to hold them. Yeo said the majority of his Top 10 holdings have been in his portfolio for close to a decade.

'Our ideal holding period is forever,' he said.