Are stocks cheap or expensive?

Weekend reading from Barry Ritholtz on how to tell if stocks are cheap or expensive.  Basically, valuing stocks involves the price-to-earnings ratio (P/E Ratio), so you need price and future profits.  Price is known, future profits are “estimated”.

As far as safe investing goes, the best line of the whole article is towards the end:

Investing is about making probabilistic decisions with limited information about an unknowable future.

Basically, you’ll never be right 100% of the time.  You’re goal is to make money when you are correct, and lose the smallest amount possible when you’re wrong.  Over time, this is the winning formula.  And it’s only possible if you view investing as a process.

Are Stocks Cheap or Not? How to Tell
Barry Ritholtz
Washington Post, March 23, 2014

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