InvestmentFinancial Glossary
Margin of Safety
Definition
A principle from value investing that recommends buying securities at a significant discount to their estimated intrinsic value. If you calculate a stock's intrinsic value as Rs 500, buying it at Rs 350 gives you a 30% margin of safety. This buffer protects against errors in your valuation assumptions and unexpected adverse events.
Why It Matters
Margin of safety is the single most important concept in value investing. Even the best analyst can miscalculate intrinsic value by 20-30%. A margin of safety ensures that even if your valuation is somewhat wrong, you still do not lose money. Benjamin Graham, the father of value investing, considered it the central concept of sound investment.