Cheap or Expensive? Decision Matrix

What You’ll Learn

A 4-column decision matrix to evaluate whether a stock is cheap or expensive.

Content

Don’t decide on one metric. “Cheap” is what passes 4 different tests. Don’t jump in just because P/E is low — run the matrix.

Column 1: P/E ratio. Compare to sector average. JPM P/E 12, banking avg 10 → mid-high. NVDA P/E 60, tech avg 30 → mid-high.

Column 2: Historical P/E. What’s the company’s 5-year P/E range? Where does the current value sit? Top 25% of range = expensive side. Bottom 25% = relatively cheap.

Column 3: P/B ratio (Price/ Book). Critical for banks, insurers, REITs. P/B = 1 means buying at book value. <1 is generally a cheap signal. JPM P/B ~1.5 typical.

Column 4: Growth expectation. Last 3-year revenue growth? Forward analyst estimates? High growth → high P/E makes sense. Low growth → low P/E expected.

4-column evaluation:

• All 4 say “cheap” → strong cheap signal.
• 2-3 say cheap → moderate.
• 1 or 0 → expensive or uncertain. 80% of investor errors come from fixating on one metric.

After the decision matrix:

1. Read the financials (revenue, profit, debt trend).
2. Sector trend.
3. Management quality.
4. Does the volatility match your tolerance? Modules 3-5 deepen valuation.

Being cheap isn’t enough. Some stocks are cheap for good reason: sector decline, weak management, structural issue. The “value trap.” You want cheap + an improvement signal, not cheap alone.

Quiz

Question 1: How many columns in the cheap/expensive evaluation?

• A) 1 (P/E only)
• B) 4 (P/E + historical + P/B + growth) (Correct)
• C) 10
• D) Countless

Question 2: Where is P/B ratio most important?

• A) Tech
• B) Banking, insurance, REIT (Correct)
• C) Biotech
• D) Retail

Question 3: What’s a value trap?

• A) A cheap-looking stock that’s actually heading for trouble (Correct)
• B) An expensive stock
• C) Only bonds
• D) A pricing scheme

Question 4: Important step after the decision matrix?

• A) Buy immediately
• B) Read financials + sector + management + tolerance (Correct)
• C) Just look at the stock price
• D) Track news only

Action

Module 1 complete — congratulations. Pick 1 US stock now. Run the 4-column matrix. P/E + historical + P/B + growth. Write your conclusion: cheap or expensive. Then move to Module 2 to start building a portfolio.