Margin of Safety
Buy well below your estimate of value so being a little wrong does not cost you.
Since every valuationEstimating what an asset is worth. is an estimate that could be wrong, the wise investor builds in a buffer: only buy when the price is well below your estimate of value. That gapA jump between one bar’s close and the next bar’s open. is the margin of safetyBuying well below your estimate of value to allow for being wrong..
AnalogyIf you build a bridge to carry 10-tonne trucks, you engineer it for 15 tonnes — the extra 5 is your margin of safetyBuying well below your estimate of value to allow for being wrong. against bad weather, wear, and your own miscalculations. Investing deserves the same humility: buy a ₹100-value business for ₹65, not ₹98.
The margin of safetyBuying well below your estimate of value to allow for being wrong. is the central pillar of value investingSystematically buying cheap stocks. — Benjamin Graham’s three most important words. It does two jobs at once: it protects you when your analysis is wrong (and it sometimes willArranging how your wealth passes on after death. be), and it boosts your return when you’re right. Buy with a big enough discount and you don’t need to be a genius to do well.
Key takeawayMargin of safetyBuying well below your estimate of value to allow for being wrong. = buying well below your estimated value. The discount cushions errors and amplifies returns — the core discipline of value investingSystematically buying cheap stocks..
FAQs
How big should the margin of safety be?
It depends on how confident and predictable the business is — a stable, easy-to-value company might justify a 20–30% discount, while an uncertain one demands much more (40%+). The less sure you are of the value, the bigger the buffer you should insist on.