What Does Value Investing Look Like?

When I think about a good deal, it's the quality/price relationship that's most important to me. Really, it's hard to find someone who doesn't want a quality item at a low price. And this is especially true when we're motivated to give our savings a boost.

I recently went on a mission to find my perfect pillow. Before purchasing, however, I spent a great deal of time researching the quality of pillows, which taught me a lot about different types and brands. I studied specifications, made comparisons....and while I felt more empowered when it finally came time to buy, I still wondered if the quality justified the $180 price tag.

I looked hard at my need for quality sleep and consulted with both in-store experts and friends before deciding what was the right fit for me. But still, my mother's early words of advice remained in the back of my mind. "Wait for a sale," she always insisted. So, exercising patience, I waited until I finally spotted my pillow at a discount, and made my "good value" purchase.

When it comes to the stock market, the concept of value investing is not dissimilar to my mother's advice. It's based on the belief that buying stocks at a discount can be a sensible approach to growing wealth. The idea is that built-in savings could help ride out bumpy stock movements, and over time the belief is that the market price will move up to its fair value price.

But just like doing research on pillows to determine if the value of those department-store bargains checks out, it's also good to do research to determine an investment's value.

In fact, the value-investing concept was developed in the 1920s when Columbia Business School finance professor Benjamin Graham (often referred to as the "father of value investing") decided that a stock's true value could be determined through research. He and fellow professor David Dodd wrote Security Analysis, covering principles for identifying and buying undervalued stocks. Fun fact: Investing legend Warren Buffett, who has described his style as 85 per cent Graham, wrote the foreword for the sixth edition of Graham and Dodd's influential finance book, which has sold more than one million copies since first being published in 1934.

In the stock market, investment professionals turn to two types of analysis — fundamental and technical — to determine whether an investment is overpriced, fairly priced or underpriced. Fundamental analysis, described further below, digs deep to gather as much information as possible to understand a company. Technical analysis looks at a company's trading history, focusing on past movements and volumes to attempt to predict the future.

In pillow-shopping terms, the two types might play out something like this:

• Fundamental: Is the pillow well made? Is it a well-known brand? Have there been returns? Is this a new pillow technology? Did [insert celebrity of choice] personally endorse this pillow?
• Technical: When should I buy the pillow? Is this pillow always on sale? How much was it last time? How much are other stores selling it for?

To help you gain more insight into a stock's value, the fundamental tab on a Detailed Quote can be useful to find metrics such as price-to-earnings ratio (P/E), price-to-book ratio (P/B), free cash flow and return on equity. Characteristics of value stocks can include a low P/E, low P/B and high dividend yields, among others.

When I put my mind to finding the perfect pillow, I tried not to get mesmerized by those flashy 50%-off signs. I did my research and turned to online reviews to find out what others were sharing or thinking. (Yes, I wanted to know about someone's best sleep ever on the latest down-filled/memory foam/hypoallergenic pillow out there.) Word-of-mouth is also one of my favourite tools. My friends all know I'm a pillow-talker!

Before you plop down your money for any investment, it can be wise to take a moment to consider your purchase's value yesterday, today and tomorrow. Savvy shoppers — and keen investors — know that value can be more interesting than the price tag.