What is the Margin of Safety
“𝙏𝙝𝙚 𝙩𝙝𝙧𝙚𝙚 𝙢𝙤𝙨𝙩 𝙞𝙢𝙥𝙤𝙧𝙩𝙖𝙣𝙩 𝙬𝙤𝙧𝙙𝙨 𝙞𝙣 𝙞𝙣𝙫𝙚𝙨𝙩𝙞𝙣𝙜 𝙞𝙨 𝙩𝙝𝙚 𝙢𝙖𝙧𝙜𝙞𝙣 𝙤𝙛 𝙨𝙖𝙛𝙚𝙩𝙮.”
- 𝙒𝙖𝙧𝙧𝙚𝙣 𝘽𝙪𝙛𝙛𝙚𝙩𝙩.
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 company’s 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.
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