Cheap is relative. Either the company is doing well now and for the foreseeable future and has good earnings & dividend yield or it has good future prospects and the forward earnings & dividend yields look promising. Obviously dividends might not be paid if they company is investing for future growth. The trick of course is that everyone wants these companies that are doing well or poised to do better in the future which causes them to bid up the prices (and decrease the yield). To actually get companies at attractive yields / ratios you need to either be able to spot the undiscovered prospects before everyone else or be a contrarian. Both involve lots of (research) work and nerves of steel but can result in large gains over time. Perhaps people are focusing on the gain part and not so much on the work part.
Simon, I have an untested theory that value investing is the cheapest form of investing. The premise being that a diversified portfolio costs money, whereas buffet would advocate stick to a few stocks and don't over diversify. A value investor first and foremost looks for scenarios where the downside risk is as low as possible, and the upside is implied not so much by immediate prospects, but rather by the quality of the company and the industry it operates in
Mutooni and Muller (2006) reckoned that timing your style switches based on growth vs value stocks could bring superior returns. The Value index has outperformed the Growth index for the past two quarters ie you should have been in value stocks for the last 120 days to maximise returns. Knowing when the market is going to switch from value to growth is the trick. Anybody who can tell me how to do this probably won't.
Well I am here and I am well and truly a momentum trader... time is all we have..if in doubt ask anyone dead!!! active trading is about snatching periods of significant outperformance...with value investing.. you have to get two things right..WhHich share..MIGHT over time outperform and then WAIT costing time... if you buy what is already showing signes of movement all you have to do is buy and sell..tis simple...and ***** tax its there to stop smart okes outperforming the asset management business thats all!!!
Don't get technical Simon. Cheap is cheap, you just know when you see it. Like the 40+ bawd we saw on a street corner at night in Picalle, Paris. So cheap you don't want to touch it with a swimming pole. So cheap, it's just damn right ugly. Blue chips never get this cheap.
My idea: I dont buy shares to sell them, but rather to build a income generating portfolio, the idea is to generate an income from the portfolio once its big enough... I dont think think buying cheap shares is the answer, they must be 'attractive' this could be cheap or not, it is relative to the performance of the company, its earnings and/or dividends. People like to buy the cheapest priced shares, but sometimes they're cheap for a reason, not a cool investment and going downhill, etc... I base all my acquisitions on a calculation I've developed that uses current assets, earnings and a projected earnings forecast to get to a value and then discount this - my strategy is a value/growth combo actually. so some of my investments are not cheap shares but rather ones that will outperform (not in share price growth) but in earnings and dividends, fundamentals and business-wise. -- Simon is right, buying cheap shares only because they're cheap can really case serious trouble!
... having said that,this view is a simplistic one based on historic earnings of a company and really it is the potential future earnings growth that investors envisage ,that will drive the price up and hence the P/E multiple.A lot of guess work you might say albeit educated guesswork.