Margin Of Safety

Value investing emphasizes buying stocks that are underpriced. Margin of safety is the gap between a stocks true value and its market price. The bigger the margin, the more room for error. for example, if you think a stock is worth $100 but buy it for $70, you can be off by 42% and still make money. if the stock is $95, you can only be wrong by 5.26%.

Investing using the margin of safety principle means only buying securities when their market price is much lower than their intrinsic value. a 0% margin of safety means the market price is equal to the intrinsic value, while a 100% margin of safety means the value of future cashflows is double the current market price.

Benjamin Graham, the father of value investing, introduced the concept of margin of safety in his 1949 book "The Intelligent Investor." investing with a wide margin of safety is complex and requires predicting a companys future cash flow and its level of risk, including market, industry and individual investor risk. Margin of safety accounts for all of these possibilities.

To determine the margin of safety for a stock, subtract the current market price from the intrinsic value, then multiply by 100. for example, if the stock is valued at $50, but priced at $30, the margin of safety is 40%.

Your margin of safety as an investor depends on your risk tolerance and approach. If you prioritize minimizing risk, aim for 20% or more. if growth is your main focus, a smaller margin may be suitable.