While many investors rely on the stock market for information, the reality is that information is never 100% accurate. Markets can only convey information via the movement of prices and, as we've seen time and time again, prices can get distorted from rationality. But to understand what could happen to those prices in the future, one has to often peel back the onion and look beyond markets.
The conundrum faced by investors today is that stocks, generally speaking, are not cheap today; however, they not expensive ether. Of course, there are outliers on both sides: nosebleed valuations for hyped up names like Facebook (FB) and attractive opportunities for boring names like General Motors (GM).
This weekend, I came across some rather pertinent data that likely will have some negative ramifications for stocks in the short run, but serve to benefit investors who will be around for the long term. There has been a growing retreat from the stock market by investors, which has continued over the past couple of years -- despite the fact the S&P 500 is up over 30% since 2009.
The percentage of Americans invested in the stock market is today at its lowest level since 1998, when the first Gallup poll began gathering the information. Currently, about 53% of those surveyed are invested in the stock market, down from nearly 70% in 2002 and 65% in 2007 before the credit crisis hit home. Despite record low interest rates, a recent survey by Bankrate indicated that 17% of those surveyed would invest in stocks. Facebook's IPO did not help this sentiment one bit. In fact, the Facebook IPO actually brought back a lot of investors who had abandoned the stock market and so far, the disappointing performance of the IPO has rekindled that market skepticism.
As a value investor, I see this skepticism very favorably with respect to what it means for stocks. Facebook's terrible IPO has nothing to do with a distrust for equities and everything to do with a nosebleed IPO valuation. Even if the IPO had been priced at $32 instead of $38, the valuation was still distorted. You can't blame the markets because an overly hyped, over-valued IPO wasn't a home run. This is 2012, not 1997. In fact, I take comfort that today's market is being swayed by hype.
In addition, those who have "permanently" abandoned equities are either sitting on cash, buying bonds or, to a lesser extent, buying real estate. When interest rates start to go up, the bond market will suffer and some of that cash will naturally find its way back into equities. And, of course, continued investment in real estate is a plus for the overall economy, which is good for corporate profits and, thus, good for equities.
So, investors with time and who buy at good prices have a decent shot at doing reasonably well going forward. A sticky stock such as IBM (IBM), whose customers face high switching costs, is likely going to generate immense cash flows over the future which renders the equity better than a bond. Plus, the 2% yield will likely go up over time. For example, a food-related stock like Mosaic (MOS), which is now trading near a 52-week low, offer a chance to own a debt-free, first-class fertilizer business that has a pattern of giving back some of its cash to shareholders.
With fewer people in equities, the overly bearish sentiment is a positive contrarian indicator going forward. But it is going to require investors to focus on a longer-term holding period and buying when the scent of pessimism is strongest.