investing

margin of safety

The discount between a stock's intrinsic value and its market price — the larger the margin, the lower the risk of permanent capital loss if analysis proves wrong.

Example

“Buying the stock at $50 with an estimated intrinsic value of $100 provided a 50% margin of safety.”

Memory Tip

MARGIN OF SAFETY = buy below intrinsic value. The bigger the discount, the safer the investment.

Why It Matters

Understanding margin of safety helps you avoid overpaying for investments and protects your savings from significant losses. By buying stocks at a discount to their true value, you create a cushion that allows your analysis to be somewhat wrong without destroying your wealth.

Common Misconception

Many people think margin of safety means buying any stock that has dropped in price recently. In reality, a stock that fell 30 percent might be cheap for good reasons, so a true margin of safety requires calculating the actual intrinsic value first.

In Practice

Suppose you determine that a company stock has an intrinsic value of 100 dollars per share based on cash flows and earnings. If the current market price is 60 dollars, you have a 40 percent margin of safety, meaning your analysis could be wrong by up to 40 percent before you lose money on the investment.

Etymology

MARGIN (buffer, gap) OF SAFETY (protection from risk). A MARGIN (buffer) providing SAFETY in investments.

Common Misspellings

margin of-safetymargin of saftymargine of safety

Related Terms

intrinsic value value investing

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