Bolen | Dodson & Associates employs a five-step process to investing that is logical, systematic and disciplined:

FIRST, analyze the market. What is the market's general direction? Are risks high or low? Given the market direction and risk level, what actions can be taken to maximize returns or limit downside risk?
SECOND, analyze the various sectors within the market, and how the distinct size and styles attributes are performing. Where are the best opportunities? Are there areas of the market that should be avoided?
THIRD, based on our findings in steps one and two, select a pool of securities whose fundamentals are solid or improving. This is called our "what to buy" list.
FOURTH is to review the selected securities on a technical basis. Technical analysis provides insight into who is winning the short-term and long-term battle between supply and demand and helps determine "when to buy".
FIFTH is to regularly review the portfolio and manage the positions, adjusting when appropriate to manage risk levels and to remain on track with each client's goals.

First, analyze the market.

When analyzing the stock market, we first determine general market direction and market risk. We then examine which particular investments make most sense given the direction and risk. The typical length of an upwardly moving market (a bull market) lasts about 36-40 months. The typical length of a downwardly moving market (a bear market) lasts about 18-24 months. We are not talking about the gyrations typical within the major moves, but it is clearly more art than science.

A football analogy works well to explain how we operate. Before we know which plays to run, we must know which team is on the field and what the field position is. If the market is generally going up, we are on offense (that is, the offensive team is on the field) and if it is generally going down, we are on defense (the defensive team is on the field).

After we determine which team is on the field, offense or defense, we gauge how risky the market is. Many factors go into determining market risk including both fundamental and technical factors. Are interest rates rising or falling? Is the economy expanding or contracting? Is it growing faster or slower? We manage positions and equity exposure with extreme interest in strategic objectives, tax efficiency and minimal transaction costs, but we do believe in risk management.

When the market is on offense, we focus on building wealth, but when the market is on defense, we focus on preserving what you have. We will never be 100% successful in our efforts, but our approach is logical, systematic and disciplined and clearly improves our odds of success.

Second, analyze the various sectors within the market.

Whereas the market explains about 30% of a stock’s price action, movement in a particular market size, style attribute and sector (such as healthcare or consumer staples) explains fully 50% of a stock’s total return. A large company stock has a market capitalization of $5 billion or greater. A small capitalization stock has a market capitalization of under $2 billion.

A “Growth” company is typically in expanding or new markets in which earnings have increased, and/or are expected to increase, at a higher rate than the overall market. Growth companies often reinvest profits rather than pay high dividends and tend to perform relatively better in a decelerating profit cycle.

A “Value” company is typically more mature and is thought to be under-priced or out of favor and pay above-average dividends. Value stocks have lower earnings multiples and tend to perform well in rising economic conditions. Clearly understanding a securities size and style attributes and sector's strengths and weaknesses is very important.

Like Morningstar, we group stocks into large capitalization, mid cap or small cap size attributes. Style attributes refer to Growth, Value or Blend (both growth and value) investment styles. We analyze size and style attributes of the market to determine which size or style, if any, is exhibiting positive relative strength against the broad market averages. Size attributes relate to the market capitalization of a company. Often times, a particular market size or style finds favor with investors and will out-perform the others. Notably, this relative out-performance often last for years, which makes it easier to take advantage of the trend profitably.

In addition, we analyze economic sectors on a fundamental and technical basis. We analyze each of the nine sectors that make up the S&P 500 – Technology, Financials, Consumer Discretionary, Consumer Staples, Industrials, Healthcare, Energy, Materials, and Utilities. Guidelines for sector analysis are similar to our market analysis. Which team is on the field, offense or defense, and what is the field position, or risk, for each sector?

We determine how each sector is actually performing relative to the market as a whole. A basic objective of most investors is to outperform the market averages. Relative Strength is an easy way to measure whether or not a particular security or sector is doing better or worse than the market. How is the sector performing “relative” to the market? We measure relative strength over the short term and longer term, looking for clues to its likely direction.

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Third, analyze the fundamentals.

After we understand market trends, risk levels and which sectors and size and style attributes are in favor, we look for fundamentally sound sectors, mutual funds or companies within the more promising areas. What are the fundamental drivers of the particular company or sector and are they improving or deteriorating in the current phase of the market cycle? This is our “what to buy” list.

Sectors, as well as size and style attributes have historical valuation ranges, which are monitored and compared against each other. This valuation criteria helps us determine when to overweight or underweight certain areas.

We analyze fixed income securities for credit rating, duration and time to maturity, interest rates and direction, and expectations of future changes in interest rates. We will lengthen or shorten average maturity and raise or lower average credit rating depending on our findings and appetite for risk. We used fixed income positions to generate income and reduce overall portfolio volatility and generally not for capital gain.

Fourth, analyze the stock's technical condition.

Securities that pass the screen for positive trends and fundamentals then get further screened for positive technical attributes. Technical attributes also help us manage the position. We look for securities that are in a general up trend that are outperforming the market averages and outperforming their peer group. That is, outperforming other stocks in the same sector. Again, this out performance is called positive Relative Strength. We determine how the stock is trading compared to its daily, weekly, and monthly average. Also, whether the change in securities price is accelerating or decelerating, this is known as momentum. Often, changes in these indicators point to opportunities to fine-tune our purchase or sale decisions and tack on a few extra basis points of return. Once we make the purchase, we manage the position for long-term gains, avoiding short term trading whenever possible.

Fifth, regularly review the portfolio.

When looking for new buy ideas, our bias is fundamentally sound securities with positive technical attributes. Once a position is initiated, we'll own it as long as it is helping you in your objectives. Oftentimes we own a position for years, but sometimes, depending on market conditions, turnover will rise. We tend to take partial profits along the way, locking in gains. We will often sell positions that are breaking down for no apparent reason to live to fight another day. Securities will often break down and the technical indications will falter before there is any indication of fundamental deterioration. Usually, however, fundamental deterioration does indeed follow a technical breakdown.

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