How cheap are stocks?
By one important measure, they're as cheap as they have been since 1985. They're 20 percent less expensive than they have been, on average, over the past 100 years. And yet they still may have a ways to fall.
The standard measure of the cost of stocks is the price-earnings ratio: the current price of stocks divided by some measure of annual earnings. Wall Street often likes to use the past year's earnings or the forecasted earnings over the next year. But I find the first of these measures to be too volatile and the second to be too -- shall we say -- optimistic. So I prefer a p-e ratio based on the average corporate earnings over the past 5 or 10 years. It's fair to assume that Warren Buffett also has some sympathy for this measure.