THE FIVE GREATEST STOCK MARKET MYTHS MYTH #1: PRICE TO EARNINGS RATIOS TELL YOU WHETHER STOCKS ARE CHEAP OR EXPENSIVE. P/E ratios are easy to find. Just about every newspaper, magazine and stock report publishes P/E ratios. Everybody seems to talk about them when they're discussing stocks. So P/E ratios must be a great way to compare stocks. Right? Wrong! If you were told that Fly-By-Nite Inds. had a P/E of 7, and Fantastic Plastics Inc. had a P/E of 14, would you buy Fly-By-Nite Inds. instead of Fantastic Plastic Inc.? You might, but you wouldn't be comfortable making that decision. Why? Because you need more information. You'd like to know a whole lot of things before you decide which stock to buy. One of the most important things you'd like to know is the worth of each stock based upon its earnings, profitability and other key financial data. In other words, you'd like to have a sense of the stock's intrinsic value. P/E ratios don't tell you anything about a stock's value! What investors need is a Value to Price ratio. With a value to Price ratio, investors would know immediately whether a stock is cheap, expensive or fairly priced. But this means we have to have a way of computing value. Of course, there are theories and formulas for computing intrinsic value.   >> Read More