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Margin of Safety

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updated 19 Jan 2023

In investing, a "margin of safety" refers to the difference between the intrinsic value of an investment and its market price. It is a concept that was developed by Benjamin Graham and is widely used by value investors.

The idea behind a margin of safety is that investors should only invest in companies that are undervalued by the market and have a safety net in case things go wrong. By purchasing a stock at a price that is lower than its intrinsic value, an investor is essentially buying a "margin of safety" in case the company's performance does not meet expectations.

For example, if an investor believes that a company is worth $100 per share and is currently trading at $80 per share, there is a $20 "margin of safety" built into the stock. This means that if the company's performance does not meet expectations and the stock drops to $60 per share, the investor will still have a 20% cushion before losing money.

The margin of safety concept is also used in bond investing, where an investor can purchase a bond with a higher yield than its peers, creating a margin of safety in case the issuer defaults.

A margin of safety is important because it helps to protect investors from downside risk. It allows investors to invest in companies that have solid fundamentals and good long-term prospects, while also providing a buffer against short-term market fluctuations.

In summary, a margin of safety is the difference between the intrinsic value of an investment and its market price, it's an important concept that is widely used by value investors, it helps to protect investors from downside risk by providing a buffer against short-term market fluctuations and allows investors to invest in companies that have solid fundamentals and good long-term prospects.

Other Resources

Warren Buffet and Charlie Munger on Margin of Safety