Definition
Popularized by Benjamin Graham and central to value investing, margin of safety represents the discount at which you buy relative to estimated intrinsic value. A 30-40% margin of safety provides protection against valuation errors, unforeseen business deterioration, and market volatility. The greater the uncertainty, the larger the margin of safety should be.
functions Formula
Margin of Safety = (Intrinsic Value − Market Price) / Intrinsic Value × 100%
lightbulb Example
DCF estimates intrinsic value of $80 per share. Stock trades at $55. Margin of safety = ($80-$55)/$80 = 31.3%. This buffer protects against estimation errors.
Pro Tip
Warren Buffett's "Rule #1: Never lose money" is fundamentally about maintaining adequate margin of safety.
verified_user Key Points
- Core principle of value investing
- Larger margin required for uncertain situations
- Protection against analytical errors and unforeseen risks
- Typically seek 25-40% margin