Buying the most expensive stock markets can wreak havoc on a portfolio, so buying the cheapest markets is a much wiser decision.

But how to know which is which?

The first factor in determining whether a stock market is "cheap" or "expensive" is its valuation.

One way to measure value is to look at the price-earnings ratio. To calculate the P/E ratio for an individual stock, divide the company's share price by its earnings per share. 

Imagine a company that has shares trading at $100 and is earning $5 a share. It would have a P/E ratio of 20.

That means that an investor would be "paid back" in full on an investment in 20 years.

If the share price of a stock increases while its earnings remain the same, the P/E ratio would also increase. And if the earnings go up but the share price remains constant, the P/E ratio would decrease.

A lower P/E ratio indicates that a stock is cheaper.

The P/E ratio can be used to measure the value not just of stocks but of markets, too. This involves calculating the weighted average P/E ratio of all the stocks that are constituents of the market index.

The P/E ratio of big companies will have a larger impact in the overall market valuation than small companies because of their larger share within the index pie.

The P/E ratio is just one way to value a stock. The price-book value ratio is another.

The P/BV compares the price of an individual company share with its book value -- the value of a company's assets minus its liabilities -- per share.

However, indicators such as the P/E and P/BV don't tell the whole story.

The economic cycle can also affect a company, earnings or market in any year. If a big company has a bad year, it could disrupt the whole market's P/E ratio.

Outside factors such as elections, war and even the weather could harm some companies' earnings and decrease the value of the whole market. Commodities cycles could also have a big effect on different commodity companies and so on.

So, while the P/E ratio is useful, it can also be misleading.

Looking at the market over a whole cycle, adjusted for inflation, can give a more complete picture. Instead of measuring the value of a market over 12 months, the cyclically adjusted P/E ratio calculates average earnings over a decade.

The CAPE is tougher to calculate, but it is a more thorough measure of market value than the P/E ratio as it irons out short-term fluctuations.

Investing in stock markets with a high CAPE, on average, results in worse returns than investing in those with a low CAPE. The same is true for stocks.

All things being equal, which they rarely are, the chances of making money increase when an investor buys a cheap stock, rather than a more expensive one.

Stock market returns last year reflected this. The chart below shows the returns, on a CAPE basis, in dollars for the 10 cheapest stock markets at the end of 2015.

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The chart above shows that the cheapest markets earned an average return of 19% last year. This is shown in more detail below.

The range goes from 69% in Brazil to negative 22% in Egypt.

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The most expensive markets, by comparison, posted an average return of negative 1%. The U.S. performed the best, rising 12%, and the world's most expensive market, Denmark, was the worst, falling 13%.

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The world's cheapest developing markets per CAPE calculations are Russia, Hong Kong's H-share market and the Czech Republic. In terms of developed markets, the cheapest are Portugal, Singapore and Spain. 

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Cheap markets or those with a low CAPE, won't necessarily stay cheap, become cheaper or do well. As of the end of 2015, for example, Singapore was one of the cheapest markets in the world, but then its benchmark Strait Times Index returned just 2% last year.

Likewise, if a market is expensive, it doesn't mean that it won't become more expensive or that shares won't grow.

For example, at the end of 2015, the U.S market had the fourth-highest CAPE in the world. It then went on to post a very solid return last year.

Investors consider many factors when buying shares or a market. Valuation is just one of them, and it is a good place to start.

Exchange-traded funds for Russia trade under the symbol RSX in New York, 3027 in Hong Kong and RUS in Singapore. Note that ETFs don't always directly imitate the index.

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For an approach to earning great market returns in another cheap market, please click here to understand more about our "Project H" research.

This article is commentary by an independent contributor.

Kim Iskyan is the founder of Truewealth Publishing, an independent investment research company based in Singapore. Click here to sign up to receive the Truewealth Asian Investment Daily in your inbox every day, for free.