I have been making the cast that stocks are dirt cheap.  Or at least they were 22% ago.

Some of the uber-bears are arguing that the market is going to get even cheaper.

The uber-bears may be correct.  However, I believe that reaching even lower multiples is a low probability event, and betting on such an outcome in size is not prudent.  Rather, I scale into investment positions based on valuation.  The lower we go and the cheaper stocks become, I buy and I do not worry about the ultimate bottom.

News to U(se) has a good article on waiting for ultra-low valuations.

• Using historical absolute PE lows to assess the potential downside to the S&P 500 Index is simplistic and based on superficial, non-rigorous analysis. The absolute historical lows used by the bears, while strictly accurate, were attained in high inflation periods, not comparable to the present.
• Using the Rule of 20 to assess PE multiples takes into account the inflation environment and is thus a better tool to value equities in general.
• Using this method, and assuming inflation rates in the 0-2% range, trough PE multiples should be 12-14 times trailing earnings.
• The current financial crisis is substantially distorting S&P 500 earnings, both reported and operating, in an unprecedented way. Using trailing earnings, reported and operating, can result in a meaningful underestimation of Index earnings in the present environment.
• Macro earnings estimates are more appropriate in the current exceptional circumstances. Goldman Sachs’ $63 estimate for 2009 appears conservative in light of historical evidence. A low probability worst case scenario would take earnings down to the $43 level.
• Trough valuation analysis shows trough S&P 500 Index levels at 720 using 2009 estimates (which are lower than trailing), with a low probability downside risk to between 516 and 602.

Pop on over and read the entire post if you have the time.