One of the simplest investment strategies of legendary investor Warren Buffett is to “be fearful when others are greedy and to be greedy only when others are fearful.” Simplified further, it would imply “buy low and sell high.”
Investors therefore need to figure out strategies or indicators that can help them identify cheap stocks. Be it top-down analysis or bottom-up analysis to find stocks — it ultimately boils down to valuation ratios.
Some relatively complex methods to value companies include the discounted cash flow model and Gordon Growth model. However, there are simple, yet effective methods, to find and invest in cheap stocks.
One of the most commonly used valuation ratios is the price-earnings ratio. In simple terms, the ratio gives the dollars investors are willing to pay in the market for every dollar of the company’s earnings.
Simple, no doubt, but if investors have few tricks up their sleeves,