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Margin of safety

Margin of Safety

Margin of safety is a principle of investing where an investor purchases securities at a price significantly below their intrinsic value, providing a cushion against potential losses if the market moves against the investment. The concept was popularized by Benjamin Graham and is central to value investing. By purchasing securities with a margin of safety, investors aim to protect themselves from downside risk while still having the potential for upside gains.

Example

An investor believes a stock is worth $100 based on fundamental analysis but buys it at $70, providing a 30% margin of safety against potential market downturns.

Key points

• A principle of investing that involves buying securities at prices below their intrinsic value to reduce downside risk.

• Popularized by Benjamin Graham and used in value investing.

• Provides a cushion against potential losses if the market moves against the investment.

Quick Answers to Curious Questions

What is the purpose of a margin of safety in investing?

It protects investors from downside risk by ensuring they purchase securities at a price below their estimated intrinsic value.

How is the margin of safety calculated?

It is calculated by comparing the market price of a security to its intrinsic value, with the difference representing the margin of safety.

Why is margin of safety important in value investing?

It allows value investors to reduce risk while maintaining the potential for upside returns if the market corrects toward the intrinsic value.

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