Today I was listening to investor David Dredge on a podcast. He's based in Singapore and deals in somewhat exotic investments but considers himself a value investor. He said something (see here) that grabbed me: “Low doesn’t mean cheap.”

Just because something has a low price, that doesn’t automatically mean it’s a cheap price. Price is the amount you pay for something. Value is what the thing is worth. The two concepts are often confused, but they’re different. And price alone can’t tell you the cheapness of something.

The key element that many miss is value. Once you calculate an item’s value, you can determine whether it’s cheap or not by comparing value to the price it’s being offered at. If the price is less than the value you’ve determined, it’s priced cheaply and is likely a deal. If the price has also been reduced, the item is low-priced and cheap.

Conversely, if an item has been reduced in price but is still selling for more than the value you’ve determined, it’s priced lower, but it’s also overpriced (i.e., not cheap).

For a long time, I looked for bargains. If something was on sale, I’d think it was a deal. That was a naive way of looking at things, and it led me to overpay for things (most notably my first residence). I now think much differently. I no longer start with price or how much the price has gone down. Instead, I try to first figure out the value of something (this isn’t always easy). Then, after I feel comfortable with the value I’ve determined, I look at the price. If the value exceeds the price, I feel confident about pulling the trigger because I’m getting more value than I’m paying for.