The Concept Of Margin Of Safety
Benjamin Graham tells us that investment policy can be reduced to three simple words: "Margin of Safety" - the price at which a share investment can be bought with minimal downside risk.The important point here is that the margin of safety price is not the same as the price that an investor calculates a share to be intrinsically worth.
The intrinsic value of a share
An investor may calculate the intrinsic value of a share by differing methods and will eventually come up with a price that he or she believes represents good buying value. Graham had his methods of calculating intrinsic value, Warren Buffett has his, other successful investors have theirs.
Graham acknowledges, however, that calculations may be wrong, or that external events may take place to affect the value of the share. These cannot be predicted. For these reasons, the investor must have a margin of safety, an inbuilt factor that allows for these possibilities.
"How To Think Like Benjamin Graham & Invest Like Warren Buffett" By Lawrence A. Cunningham
