What Does Margin Of Safety Mean?
A principle of investing in which an investor only purchases securities when the market price is significantly below its intrinsic value. In other words, when market price is significantly below your estimation of the intrinsic value, the difference is the margin of safety. This difference allows an investment to be made with minimal downside risk. The term was popularized by Benjamin Graham (known as “the father of value investing”) and his followers, most notably Warren Buffett. Margin of safety doesn’t guarantee a successful investment, but it does provide room for error in an analyst’s judgment. Determining a company’s “true” worth (its intrinsic value) is highly subjective. Each investor has a different way of calculating intrinsic value which may or may not be correct. Plus, it’s notoriously difficult to predict a company’s earnings. Margin of safety provides a cushion against errors in calculation.
