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Chapter 15. Ten Lessons for Investors > Lesson 5: Most stocks that look cheap a...

Lesson 5: Most stocks that look cheap are cheap for a reason

In every investment story in this book, a group of companies is identified as cheap. Early in this book, for instance, companies were categorized as cheap because they traded at low multiples of earnings or below book value. At the risk of sounding like professional naysayers, we should note that most of these companies only looked cheap. There was generally at least one good reason, and in many cases more than one, why these stocks traded at low prices. You saw, for instance, that many stocks that traded at below book value did so because of their poor earning power and high risk and that stocks that traded at low PE ratios did so because of anemic growth prospects.

Proposition 5: Cheap companies are not always good bargains.


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