Bob Doll

Uploaded by WealthTrack on 20.07.2012

CONSUELO MACK: This week on WealthTrack, one of Wall Street’s widely followed strategists
and mutual fund managers looks into his market ball and explains why, after the worst decade
since the 1930’s, stocks might be the best investment for the next decade. BlackRock
consultant Bob Doll on strategies for the future is next on Consuelo Mack WealthTrack.
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Hello and welcome to this edition of WealthTrack. I’m Consuelo Mack. There was a counter culture
novel published in the 1960s, titled I’ve Been Down So Long It Looks Like Up To Me,
a phrase later memorialized in a song written by Lee Hazelwood and picked up by the rock
band The Doors that just might describe where market psychology is today. As last week’s
guest, economist David Rosenberg wrote recently, the phrase “consumer confidence is an oxymoron.”
As you can see from his chart consumer confidence is “mired in recession territory.” As
Rosenberg points out “we are supposedly in the third year of a recovery, but confidence
is below the level that would be consistent with economic contraction.” As he noted,
he is “noticing a certain degree of despair these days, just as I am getting enthusiastic
about the future.”
Then there are investor views of the stock markets. According to next week’s guest,
strategist Francois Trahan, one survey of Wall Street strategists shows their recommended
allocation to stocks is the lowest it’s been since 2009 during the worst of the financial
crisis, while much of the economic data is much improved from where it was. Which evidence
is more compelling?
Several of our recent Great Investor and Financial Thought Leader guests are asking themselves
the same questions and uniformly are reaching the same conclusions: that investor pessimism,
particularly in the U.S., is way overdone and that the most contrarian action you can
take is to buy some stocks for long term portfolios.
This week’s guest is no exception. Bob Doll is a widely followed strategist and portfolio
manager, an unusual combination at major Wall Street firms, who has excelled in both disciplines.
Now a consultant to Blackrock, until recently he was Chief Equity Strategist, head of the
U.S. Large Cap Series Equity team and lead portfolio manager for the Large Cap Core,
Value and Growth mutual funds, which he also ran while at Merrill Lynch Investment Managers,
where he was President and Chief Investment Officer. I began the interview by asking Bob
to step way back from the noise of the day and share his longer term views of where we
are and where we are heading. My first question was why, after the worst decade since the
1930’s, he is predicting that stock returns in this decade will be in the high single
BOB DOLL: So you know the long-term return for the U.S. stock market is about 11% per
annum. We’re guessing eight. So starting below the long-term norm. We went through
the horrible decade you just referred to, Consuelo, where earnings went straight up,
but PEs came straight down and the market went basically nowhere, indicating we started
a decade ago expensive. We’re starting now at a much cheaper price. And to get eight,
we’re assuming we stay cheap. Get six percent from earnings, and two percent from dividends,
and there’s eight.
The six percent from earnings, to fine-tune it a little bit, is four to six from the domestic
portion of the U.S. stock market, and six to eight from the non-U.S. piece of the stock
market in the United States, emerging market, faster growth, et cetera. That’s how we
get to eight.
CONSUELO MACK: And you’re assuming that the dividends are like 1.9 percent or under
two percent?
CONSUELO MACK: And that is assuming that, even with the possibility in the U.S. that
if President Obama is reelected, that supposedly that tax rates on dividends are going to go
way up, and you’re not worried about companies shifting their strategy, or that dividends
might be emphasized less or… ?
BOB DOLL: Actually, companies are increasing their dividends already at this decade at
a pace faster than we thought. They have so much cash and cash flow. Might they, in light
of what you just said, the Obama administration, do a little more share buy-backs and a little
less dividend increases? Yes, probably, but not enough to jeopardize the two-ish percent
from dividends.
CONSUELO MACK: So eight percent total return from stocks?
BOB DOLL: From U.S. stocks, that’s right.
CONSUELO MACK: From U.S. stocks. So where does that put U.S. stocks in a competitive
position to other asset classes?
BOB DOLL: I believe we’re in a decade where we will slowly heal. Some bumps, but some
forward progress, as we’ve done. The credit system is doing a little better here in the
U.S., mortgages are slowly continuing, and I think that continues. It won’t be a straight
line. If that’s true, interest rates at some point will start to normalize a bit.
Short-term rates, the Fed will start bringing rates up, not any time soon, and the yield
curve moves up, which means returns on bonds are not a very great place to be.
CONSUELO MACK: So you talked about it kind of irregularly, that we’re going to see
interest rates start moving up, even though so far we have not seen them moving up in
the U.S.?
BOB DOLL: That’s correct. And the reason we haven’t seen them move up recently is
the consternation about Europe. And all the uncertainties in Europe and the concern “will
Europe fall apart? Will we have, I’ll use the word, a depression?” Et cetera. And
I think ten-year treasuries at 1.7 are beginning to say yeah, there’s some probability of
that. I’m willing to bet against that. So I think it’s a decade where we slowly heal,
and therefore have slow growth.
Remember, eight’s a lot below the long-term 11. So it’s not a great decade relative
to history, but relative to the alternatives: Cash, zero. Treasuries, less than two at a
ten-year level. And you can get some corporate and high-yields at a higher number. So I think
stocks win the race, just the pace of the race is a lot slower.
CONSUELO MACK: So let me ask you about something that you just mentioned. There are a lot of
other concerns out there, and I wondered what I should pay attention to as an investor,
and what’s going to affect me as an investor, and what I can ignore? So we do have the euro
crisis. We have a fiscal cliff possibility in the United States, as they’re calling
it. We have global central bank stimulus, which eventually could be withdrawn, or could
be inflationary. I don't know, you take your pick: China slow-down, Arab spring, Iran,
the U.S. election. So what does this all do for us in the markets, and as investors?
BOB DOLL: I think, Consuelo, you worry about all of them. You just gave a list, and my
guess is the viewers would make a similar list, meaning markets know this. That’s
why markets are selling the way they are. When you can have common stocks giving a higher
yield than a ten-year treasury, that’s unusual, and I use the word, it’s a gift. It means
that markets are expecting a lot of really bad news, and we’ll get some bad news. That
was an ominous list you just went through. We’ll get some bad news. But is it in the
price, is part of what I’m trying to say. And if people have the time horizon they should
have for owning equities- which is not today, tomorrow or the next day, but it’s multiple
years- I think they’ll do just fine. It may be bumpy, you may need your seat belt
and your shoulder harness, but I think at these starting levels, people will be generally
The one I worry about the most in that list is Europe. All the other ones are generally
about a slowdown in growth. We can deal with that. But Europe is… will the system hang
together? It’s about financial integrity. And our guess is the policymakers there, as
they did in the fourth quarter, if necessary, will come and do what they need to do, hopefully
before too much rioting in the market takes place.
CONSUELO MACK: Some other predictions that you’ve made for the next decade, for this
decade and on: Recessions are going to occur more frequently than they have in the past.
As if they haven’t occurred frequently enough? So get used to even more cyclical ups and
BOB DOLL: Well, if you look at the last 100 years, recessions, on average, occurred every
3.8 years.
CONSUELO MACK: Forgot that.
BOB DOLL: Yes, and that’s what most of us learned in school, but if you go since 1990,
recessions have averaged every eight years. Now for some, it’s felt like there’s been
a recession non-stop, I get that. But actual recessions have been far fewer, for a host
of reasons. Synchronized global growth, an easing in the markets, liquidity build-up,
leveraging that’s taken place. And our assertion is we’re just going back to normal. What
we’ve been through in the last couple of decades is what’s not normal. We’re going
back to something normal. Meaning, recessions are every once in a while, every few years.
Call it every four or five years.
CONSUELO MACK: Could that mean, therefore, that they’ll be less severe?
BOB DOLL: Ah, I think you’re onto it. I think that’s right. Particularly in a post-credit
bubble burst, which we’ve been in, there are these rolling recessions. As I said a
minute ago, a lot of people said, “I feel like I’m still in a recession,” and slow
growth does give you that feeling. So there will be periods we look back, was that a recession,
was it not a recession? I think there will be a lot of question marks as we have unusual
periods of slow growth, then not so much growth, post this credit bust, as we, to use my phrase
before, continue to heal.
CONSUELO MACK: U.S. election. How much attention are you paying to that?
BOB DOLL: A bunch. Elections always matter. This one seems to matter a bunch more, because
as you said at the beginning of the show, the fiscal cliff. This election I think will
be about the deficit and the debt and how we begin to dig out of that hole we’ve dug
for ourselves. The fiscal cliff? Look, Congress does not want a recession the day they walk
into office. Between the expiration of the Bush tax cuts, the expiration of the temporary
payroll and unemployment incentives, and the beginning of the sequestration spending cuts
from the budget circus of last August, that’s roughly $600 billion of fiscal cliff that
we hit on January 1st.
My guess is some portion of that, at some point, gets pushed back in time so that we
don’t hit that wall. Not much chance before the election. Depending on the outcome of
the election, but I would argue probably not a lot of chance of much in the lame duck session,
which takes us sloppily into the new year, after these things already hit, and some things
will become retroactive. So that, and more importantly, what do we do to begin to reform
the problem that we have? On the campaign trail and looking at the platforms, if it’s
a re-elected President Obama, it’s likely to be a bunch of tax increases and some spending
cuts. If it’s a President Romney, it’s likely to be fewer tax increases and more
spending cuts. So either way, I think we have a shot at two and a half to three trillion
of reduction in the deficit, or I should say a slow-down in the rate of increase in the
deficit, over the next ten years. Let’s hope we go there.
CONSUELO MACK: Now gold, the currency alternative, you think it’s actually, the price is going
to remain elevated for the foreseeable future. What’s elevated and why?
BOB DOLL: So why has gold done well? I think it’s because the dollar has done poorly.
I’m talking about the last bunch of years. People just don’t trust the dollar, the
yen and the euro. And if you’re a country with a lot of reserves, trying to figure out
where am I going to put them? And you have enough of those three currencies, what are
you going to do?
CONSUELO MACK: Right, and a person with a lot of paper.
BOB DOLL: Bingo. And I think therefore, people have said ah, gold, the world’s fourth currency.
And so they’ve parked money there. That’s why gold has done incredibly well. Now we’re
in a period where the dollar is doing a little better, and so gold has kind of flattened
out in a volatile sort of way, as a lot of commodities do. I think there’s more of
that to come, because I think the dollar does do a bit better. So I think the easy money
this cycle’s been made in gold, but I’m not convinced we’ve seen the high.
Back to where you started: How are we going to get all of this repaired? There’s going
to be some printing at the printing press, which generally depreciates a currency, not
just the dollar, but the yen and the euro, and therefore, elevates the alternative, which
is gold. So I think gold has better days ahead, but maybe a bumpy ride in between.
CONSUELO MACK: Also, you watch the international markets, you have been a big proponent of
emerging markets, as well, because they, until recently, have out-performed the U.S. markets
during certain periods of time. So your view of the emerging markets, and what place emerging
market stocks have in our portfolio, as well?
BOB DOLL: So emerging market countries have a lot of issues. The good news is they’ve
got growth. Faster-growing populations, growth in the consumption class, growth in the middle
class. A decade from now, when we look back, if the world has grown, it will be the emerging
market countries that give us that growth. But they also have issues. There are little
credit bubbles here and there. How do you deal with those? How do the central banks
deal with those? Many of them are immature economies, that means a bumpy ride, as a teenager
experiences difficulty to get to adulthood. So I put that all together and I said that’s
still a lot healthier than Europe, which is in secular decline. So in my view, if you
force me, or give me the luxury of locking up money for ten years, I want to be overweight
the U.S., because we’re going to contribute to world growth, and I want to be overweight
the emerging markets, knowing in the emerging markets I’m going to have a bumpy ride.
And when they’re down, I want to add to them, and when they’re up, I’ll let a
little go, if I’m smart.
CONSUELO MACK: As you know, investors, both institutional and individual, have been fleeing
stocks now for several years. And they’ve been withdrawing funds from stock, mutual
funds, for instance, and putting it into bond funds. So do you think that we are erring
in our risk aversion approach?
BOB DOLL: So for starters, doing what you just said has generally, until now, been the
right thing to do. So it’s hard to fault people. Bonds have done just fine, and stocks
have been a rocky ride, even though they have doubled since the low of ’09, just three
years ago. So I think that that’s the first point to make. In my judgment, people have
to look to the future. We’re so conditioned to look in the rear view mirror to figure
out what’s going to happen tomorrow, and my judgment is to lean against the crowd.
When people are way overweight an asset class, as people generally are in cash or fixed income,
I get a little nervous because everybody is a potential seller; things that people aren’t
interested in at all, and are underweight, everybody’s a potential buyer, and that’s
where stocks fit. And then I would put the post-script: and corporations are buying their
own stock like we’ve never seen before. The net shrinkage of common stock because
corporations are not issuing as much and buying back a bunch more I think is a very interesting
CONSUELO MACK: So risk aversion and risk management techniques, what do I do to avoid risk?
BOB DOLL: I think it comes back to your objectives, Consuelo. What is the purpose of this investment
that you have in front of you? And so the biggest risk is not achieving your objective,
which gets into time frame and discipline, and trying to minimize the noise a little
CONSUELO MACK: And actually, in a prior conversation, you had told me that’s it’s knowing what
your liabilities are, to match your investment strategy, which is a very simple approach,
but it makes a lot of sense. So your liabilities are what are your expenses going to be, your
BOB DOLL: Correct. Let’s suppose it’s your retirement, as an example. Well, how
long is it until I retire? And a lot of people think well, I’m 55, 65 is only ten years
away. Yes, but your life’s not going to end then. A couple who is 65 today, the actuarial
tables say at least one of them will live past 92.
BOB DOLL: That’s a lot of years of life when you have to think about what are my expenses
going to be? Will I have an income? Am I working to produce an income? Or is just the investment
portfolio I’ve got to rely on? A whole host of variables, but time frames and time horizons,
I think tend to be a lot longer than we think, and we get so myopic.
And then I meet other people who say, you know, I have an obligation at the end of the
year. What should I do with my stocks? If your time horizon is the end of the year,
no one has a clue about the stock market. We all have a guess. I wouldn’t have so
much in equities. You need a little more protection. What’s your time frame? That’s more than
half the risk question.
CONSUELO MACK: We talked about income streams. Where can we find them? People want return
of their money, not just their return on their money? So income streams, for retirees, especially,
where can we find income streams?
BOB DOLL: You can still find some, but at lower levels from reasonable quality corporate
and high-yield portfolios. And I would not shy away from that. I think the creative way
actually is the old-fashioned way. That is to say if you really believe the world is
healing and that equities are going to do a bit better, why not say I have the total
return out of my equity portfolio. I’m going to take the piece that I need for, quote,
income to live. And maybe that’s four and I’m only getting two from stocks. I’m
going to take two out of the capital appreciation, if I really believe eight, and I’m going
to have some reinvestment. I think the total return of that kind of portfolio is going
to be more interesting than clawing for the income but losing it on the capital side,
as interest rates normalize.
CONSUELO MACK: So you’ve run a series of large cap mutual funds for years. So what
are the names that come to mind when you’re thinking of the new high quality companies
for income and appreciation?
BOB DOLL: Healthcare, which is a defensive sector that I like: United Healthcare. Even
some of the pharmaceuticals, you’ll get a higher starting dividend, not so big dividend
growth, but a Lilly, a Pfizer fit that bill. In technology, we’re starting to see some
of these big cap technology stocks that have a lot of cash starting to pay a dividend.
I think they will have fancy dividend growth rates. Apple just started, great fundamental
prospects and not an expensive stock. Microsoft started with a dividend not long ago. Cisco
seems to be getting their act back together, and so you can get free cash flow there. The
energy names, a lot of free cash flow there. Chevron, Apache in the gas world are the kinds
of names I think will fit in this portfolio, and you might actually get some capital appreciation,
CONSUELO MACK: So those are the three sectors that, healthcare and I guess technology, and
also energy, that you would overweight now, in your portfolio?
CONSUELO MACK: And why those three?
BOB DOLL: So I think in this environment of slow start-stop growth, you need diversification.
So my favorite defensive sector is healthcare, especially healthcare services, and I just
gave you a few names that fit that.
CONSUELO MACK: Even with all of the problems that we know about healthcare, much more government
regulation and possible price caps?
BOB DOLL: I would say, Consuelo, in part because of those very things. It’s in the price,
in my judgment. Now I could be wrong, but I think this cheapness comes because of all
those issues, and these companies will fight their way and have reasonable growth. But
I think you also need some cyclicals in the portfolio, because the world’s not rolling
over and dying. And the technology space and the energy space fit that bill. Energy, of
course, more of a commodity and more directly related to global growth, which has had a
difficult period of late, creating cheapness, and I think a buying opportunity.
I like U.S. technology because the U.S. is the technology leader of the world, and we’re
still gaining market share here, there and lots of other places. So those companies will
have faster growth rates than the overall U.S. economy.
CONSUELO MACK: And is there one stock that has been beaten down that you think, a company
that you know well, that you’ve invested in, in the past, that you think is a very
attractive company right now, that’s been beaten way down?
BOB DOLL: I come back to Cisco. I hinted that I think there’s a turnaround there. That
was a dominant company. It’s had some operating problems. They seem to be fixing some of them,
and the risk/reward tells me if I get it wrong, I don't think I get punished horribly, and
if things go a little bit right, I think we’ll be okay. So I’d do that foremost in that
CONSUELO MACK: Take off your professional hat for a minute, and put on your personal
hat. As far as, what are you doing with your personal portfolio as you approach middle
age, Bob Doll?
BOB DOLL: Thank you, kindly. More equity-oriented than I’ve been.
BOB DOLL: See, I come back to, how many times in my career have I been able to buy common
stocks, S&P 500, let’s say, and get a higher yield than the bond market? It just doesn’t
happen. It tells me how scared people are, and how negative the investment world is,
which creates opportunity. If we hadn’t been through the horrible period we’ve been,
stocks wouldn’t be this cheap. So I think there’s a lot of bad news in them. So I
have fewer bonds and more stocks than I did before. Probably bigger overweighting in the
U.S. than quite some time, as well. Now that’s worked for a while, so to be careful not to
overstay that, but I don't know really where else to have a big bet, so good old U.S. common
stocks I think are a pretty good place to be.
CONSUELO MACK: How have you changed, or have you changed, since coming through the financial
crisis? Were there lessons kind of learned for you personally that you’ve applied to
your personal portfolio?
BOB DOLL: Yes. I guess I’d say two things. One, respect for the balance sheet. I mean,
as an investor, professionally and personally, I’ve always looked at balance sheets. It’s
just as important as the income statement. Most of us, in our honest moments, wouldn’t
say that ten years ago. So that’s a change.
The second point I would make is the volatility around a growth rate that’s a lower number
means there’s more opportunity for rebalancing. If markets go up like this, they’re not
very volatile, rebalancing means less. But if they’re not going up as fast, and you
get more volatility, the lows and the highs become more interesting. So buying into the
weakness through a forced rebalancing, selling into the strength really works.
CONSUELO MACK: So are you doing that, or have you been doing it, on a much more regular
BOB DOLL: I do it quarterly, and I think that’s the right thing…
CONSUELO MACK: You do it quarterly?
BOB DOLL: Once a quarter.
CONSUELO MACK: As a discipline?
BOB DOLL: As a discipline. And you know what? There are times my gut would say, do I really
have to do that? And the harder my gut’s been to do it, usually the better the decision
has been. So have the discipline, Consuelo.
CONSUELO MACK: That’s really interesting. So the One Investment for a long-term diversified
portfolio, Bob Doll?
BOB DOLL: I’ve already hinted at it. It’s U.S. companies with great cash flow. I think
they’re the companies in this slow growth decade that are going to make the difference.
They’re the ones that have freedom and flexibility. I can buy back my stock, I can raise my dividend,
I can buy the company down the street, I can hire a worker, I can modernize a plant. If
I don’t have that cash flow, I don’t have that freedom and flexibility. I think that’s
the asset of choice.
CONSUELO MACK: So is there a basket? Can you give us a list? I mean, are there ten stocks
you’d buy? Are there 20? Would you buy the S&P 100?
BOB DOLL: S&P 100 is better than most other benchmarks for that. We just talked about
ten names a few minutes ago. They all have that positive free cash flow characteristic
that I think is important in this environment.
CONSUELO MACK: So that’s a basket, and for long-term, you think…
BOB DOLL: You can put that basket away and I think sleep reasonably well at night. You
won’t get them all right, but I think you’ll get more than most.
CONSUELO MACK: So Bob Doll, so great to have you on WealthTrack. It’s great to have you
BOB DOLL: Thank you, Consuelo.
CONSUELO MACK: At the conclusion of every WealthTrack, we try to leave you with one
suggestion to help you build and protect your wealth over the long term. This week’s Action
Point picks up on Bob Doll’s suggestion: match your investment strategy with your obligations.
Instead of focusing on short term performance to determine your asset allocation, consider
the expenses you want to cover and in what time frame. For near term liabilities, you
will need a certain amount of stable, less risky investments- short term bonds for instance.
For long term obligations, such as retirement, you will need some allocation to more risky
assets, such as stocks, because they provide growth over a longer time frame. Investing
in stocks is a strategy most investors are not comfortable with right now- all the more
reason to seriously consider it.
I hope you can join us next week. We are going to sit down with one of the street’s top
investment strategists. Wolfe Trahan’s Francois Trahan will explain why he thinks the market
is poised for a sustainable rally. We’ll find out what he is looking for that will
make the difference. In the meantime, to watch this program again, please go to our website It will be available as streaming video or a podcast no later than Sunday night.
And that concludes this edition of WealthTrack. Thank you for watching and make the week ahead
a profitable and a productive one.
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