What is the Margin of Safety
โ๐๐๐ ๐ฉ๐๐ง๐๐ ๐ข๐ค๐จ๐ฉ ๐๐ข๐ฅ๐ค๐ง๐ฉ๐๐ฃ๐ฉ ๐ฌ๐ค๐ง๐๐จ ๐๐ฃ ๐๐ฃ๐ซ๐๐จ๐ฉ๐๐ฃ๐ ๐๐จ ๐ฉ๐๐ ๐ข๐๐ง๐๐๐ฃ ๐ค๐ ๐จ๐๐๐๐ฉ๐ฎ.โ
- ๐๐๐ง๐ง๐๐ฃ ๐ฝ๐ช๐๐๐๐ฉ๐ฉ.
What exactly is the margin of safety?
If a company has an intrinsic value of $100 million with a market cap of $90 million. It might look undervalued. But you always need to take a margin of safety. If that margin of safety is 20%, you will only invest if the companyโs market cap falls to $80 million.
The margin of safety is calculated based on the following factors:
1. You will make mistakes - you are going to make mistakes as an investor and you take a margin of safety to protect you from these mistakes.
2. Macroeconomic risks - Since it is impossible to predict what will happen to the economy and markets, you take a margin of safety to account for price fluctuations
How much of a margin of safety should you take?
It all depends on you and the way you understand the business. The margin of safety can also be binary (yes or no). For example, I saw Qurate Retail $QRTEA as an undervalued stock but because of its debt, I did not invest in it. The debt was a good enough reason for me not to invest.
Watch the full video on YouTube:
https://www.youtube.com/watch?v=R1QK2Q-fLTE&list=UUPO3uUyoXSaFWG-Ldq1mqEQ
Full analysis of Qurate Retail:
https://ishfaaqpeerally.teachable.com/courses/662813/lectures/36565633
More on my website:
www.ishfaaqpeerally.com