How do you know when a stereo sounds good?

Ataraxia, Yes

+1 Larsman

Cindyment, Magic fuses, over priced cable, & AC noise isolators will help widen the soundstage

Anyone heard a stereo system they thought sounded bad?

I have. First one was a guy who bought only used Stereophile Class A components. Never in my life saw a more prestigious looking system sound so bad. I don’t mean not good either. I mean bad. His wife when they came over one time snuck up to me and said, "I could listen to this all night!" She was shocked a high end system could actually sound good.

The next one was one of those guys who loves to rant about all cables being overpriced ripoffs and so he had a whole bench devoted to DIY cables. His stereo sounded so bad it actually gave me a headache. Couple times over the years he would buy something like a Tim DiParavincini preamp that was so good it made his system sound pretty good. Not all harsh and etched and analytical but actually like music. But he would "fix" that and the next time it would be headaches all over again.

The third one was mine only it took me a long time to figure it out. This was 1980’s with Kenwood integrated, JBL L7, Magnavox CDB650, lamp cord, patch cords, black freebie rubber power cords. Worse, the thin lamp cord that passed for power cords back then. Only after buying some nice Linaeum speakers and a McCormack DNA1 amp when I hooked the JBL up to sell them it was like an ice pick in my ears.

So people can get used to really bad sound, even convince themselves it is good. It happens. All these guys thought they had the bomb. Me too. For a while. Long, long ago....

As a relative newcomer to audiophile the most important characteristic to me is imaging, starting with strong center image. Next is clarity, I believe neutral tad warm.

I'm working on understanding tone and timbre from midrange up to treble. I enjoy my Yamaha A2080 AVR to R3's and Ryhtmik sub but I believe the treble of the A2080 although clean and clear, may not be butter smooth. Sparkly with edges maybe, but it images well which is my primary attribute for good stereo. 

It seems my desktop electronics may have a slightly smoother treble, it being PC Tidal FLAC > USB input to Schiit Modi 3+ > Emotiva BassX A-100 > LS50 Meta (and I have tried the R3's there also).

I believe stereo is ultimately subjective, but how could an audiophile enjoy stereo if it did not begin with some semblance of quality imaging?  It could be cold neutral imaging, to warm side of neutral imaging.  But must have imaging.  

I had about a ten year period about 25 years back or so where I made impulse purchases without doing proper homework and my system sound quality suffered. Learned my lesson. I am pretty good at resisting impulse buys these days but the urge is always there to just go nuts sometimes so who knows what the future holds.

The worst sounding system I ever heard as far as expensive gear that sounded bad as opposed to the cheap stuff that is typically more suspect was in a very high end NY shop. Luxman driving Peak Consult. Uggh. It was not good. Something probably awry but the salesman was happy to demo it. In another room there was a VAC/Magico setup that was the bees knees. Go figure! Different strokes?