One on One With Robert Doll, CIO, Merrill Lynch Investment Management
Monday, September 11, 2006
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SUSIE GHARIB: Our guest tonight is also reflecting on the past five years since the terrorist attacks, in particular the impact on the financial markets and the investment lessons learned. Joining us now, Robert Doll, president and chief investment officer of Merrill Lynch Investment Managers. Hi, Bob. BOB DOLL, PRES., MERRILL LYNCH INVESTMENT MGRS: Hi, Susie.
GHARIB: In your report about 9/11, you said that in looking over the past five years, several themes have emerged and that they could be helpful to investors. Now one of the themes, the first one is the reality of terrorism. What do you mean by that?
DOLL: Well, sadly, Susie, one of the lessons learned from 9/11 is that the reality and the threat of terrorism is a part of everyday life. And if it is a part of every day life, it is part of your investment thinking as well. So even if it is on the margin of your mind, the threat of that, the uncertainty of that, the risk of that is part of into the investor`s psyche as we speak.
GHARIB: And you also note that aside from 9/11, other terrorist bombings in recent times like Madrid or that terror plot in London, that the market response to these events has still been followed by a rally or a muted response. Now what is your analysis of why that is the case?
DOLL: Well, what we observe in these things, Susie, is investors (INAUDIBLE) panic and that causes a downturn in markets. And as you will recall after 9/11, it was a double-digit percentage decline for the U.S. stock market. But in some of the other instances that you cite, our research shows that that decline was less. Now some might say well, it was a lesser event. That`s certainly possible. But nevertheless, the decline was noticeable as investors first reaction is get out now; I will ask questions later.
GHARIB: Another theme that you have and it is related to what you just said is that the events of September 11th and the fear of more terrorist attacks have made investors risk averse. So what is the lesson from that? I mean what should investors draw from all of this?
DOLL: Well, certainly. I think the first point is a follow up to the last comment, Susie is we`ve had a move up in those markets afterwards. For example, the U.S. stock market after it hit its low shortly after the markets reopened, from that low was up 20 percent, declined 11, up 20 six months later. And some of these events also show that resilience as markets come back and start paying attention to things that really matter over time. But to your point on risk premiums, have they moved up? Well, one way to measure risk is what`s the valuation of the market, price- earnings ratios, for example. We know that price-earnings ratios today are a lot lower than where they were. Yes, it could be because oil prices are up. Yes, it could be because of the uncertainty about the economy and the Fed and so on. But our hunch is that the uncertainty related to terrorism threat is on that negative list that cause people to say, I want my risk premium to be a little bit higher. GHARIB: And you say that another lesson out of this is that diversification is more important today in this environment of geopolitical risk than ever before. Can you explain?
DOLL: Certainly. Things, as this world has become flatter, to use the saying, having diversification makes a lot of sense. Now some say correlation of markets has moved higher, yes, they have. But it still makes sense whether it be asset classes or geographies within asset class to think beyond your borders. Americans, we think, smartly have diversified beyond just holding U.S. securities over the last bunch of years. And we think that has accrued not only to their benefit from a return standpoint, but actually reduced the volatility of the portfolio. And so these events and the threat of them says diversification makes sense.
GHARIB: I was going to ask you one more question but we`ve just run out of time. Bob, thank you very much for coming on the program.
DOLL: Thanks, Susie.
GHARIB: My guest tonight, Robert Doll, president and chief investment officer of Merrill Lynch Investment Manager.
