Cheap vs. Value: Stock Investors Sometimes Get What They Pay For

Digging through the stock bargain bin can be rewarding, but also disappointing.


"At some point, if you believe that the price of stocks is ultimately based upon the potential for earnings growth, [then] this combination of rising earnings and declining multiples cannot last. Such a belief implies strong potential growth in the price of stocks in the future, which can also be phrased as 'stocks are cheap,'" he writes. Green prefers trailing PEs for measuring index performance.

The average PE for the S&P 500-stock index is near 16. The 10-year inflation-adjusted PE ratio for the S&P 500 is closer to 23.

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But the market's odd behavior may help the other side's case: Stocks aren't cheap; they're fairly priced. "After all, during the Internet bubble, we frequently stated that 'just because stocks are overpriced does not mean they can't go higher.' Today, it seems equally reasonable to state, 'just because stocks are very cheap does not mean they can't go lower,'" Green writes.

You go first. Some investors and advisors think it's best to let someone else take the first plunge into the bargain bin.

"No matter how 'cheap' a stock or ETF may look, it can always fall 100% from where you started," wrote Ron Rowland, an ETF advisor and editor of the International ETF Trader newsletter, in a commentary.

"Many investors make the mistake of thinking that since it only cost $3.50 the most they can lose is $3.50. However, that is still a 100 percent loss—it's not the price, it's the percentage that matters," he writes.

Rowland takes a "price momentum" approach to investing. He believes the odds of further upward movement are better when upward movement is already happening. "I like to buy ETFs that are already moving higher in price. I've found this approach works much better than looking for 'value' in weak market segments," he writes.

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